Motor City: Perhaps taking a page out of CalPERS’ challenge to San Bernardino’s municipal bankruptcy eligibility in San Bernardino, AFSCME has requested U.S. Bankruptcy Judge Steven Rhodes to allow a direct appeal to the 6th U.S. Circuit Court of Appeals, irrespective of whatever ruling Judge Rhodes hands down with regard to the Motor City’s eligibility for Chapter 9 relief. The request came on the same date Judge Rhodes set as a deadline for the parties to file briefs about whether he should consider labor or bankruptcy law standards for good-faith negotiations union cited public interest in the case and the likelihood of a precedent-setting ruling. As with the case in San Bernardino, the AFSCME request raises the possibility of still another, expensive round of federal court proceedings—at great cost not just to the unions, but also the city—thereby further depleting resources critical to the provision of essential services, as well as resources to rebuild the city and meet pension obligations. The AFSCME request, just as with CalPERS’ San Bernardino request, proposes to bypass the U.S. District Court judge and provide for a direct appeal to the U.S. Circuit Court of Appeals.
Attorneys representing unions hammered the city during a nine-day trial that ended Friday for only allowing a 34-day period for negotiations — from June 14, when a restructuring proposal was unveiled by Detroit emergency manager Kevyn Or, to July 18, when the city filed for bankruptcy. AFSCME attorney Sharon Levine noted: “The Governor took more time to interview the consultants than they took to negotiate the restructuring itself.” In its filing yesterday, AFSCME’s claimed “surface bargaining,” or negotiations where one side is only “going through the motions,” does not meet the legal threshold under chapter 9 of good faith negotiations: “Trial testimony demonstrated not only that the city never engaged AFSCME in ‘negotiations’ over retiree benefits at all, but also that it conducted its negotiations….all the while intending to avoid reaching an agreement…Courts recognize that a ‘non-negotiable, take-it-or-leave-it’ proposal by a debtor fails to comply with the duty to negotiate in good faith.” Notwithstanding that Judge Rhodes could hold that the city did not negotiate in good faith, it could well be the judge will concur with the city’s attorney that it had become “impracticable” to negotiate in good faith. Mr. Bennett, last Friday, testified before Judge Rhodes that the Motor City only has to prove negotiations became impossible with one type of creditors for the “impracticability” threshold to trump the requirement for good faith negotiations: “Impracticable with any one class of creditors means that negotiations are impracticable,” he told the court: “Where that leads you is there is no purpose in a delay…because ultimately it leaves you as having to file for Chapter 9 bankruptcy anyway.”
Motor City Emergency Agreement. Even as the different parties await U.S. Bankruptcy Judge Steven Rhodes’ decision whether the Motor City is eligible for chapter 9 bankruptcy, the city needs to provide essential services—the concept of a federal shutdown is not an option. And folks need to be thinking about tomorrow. So it was that yesterday Joseph Barney of the Police Officers Association of Michigan, who is the representative for the EMT union members, announced an out-of-court contract agreement with Emergency Manager Kevyn Orr. Under the five-year pact, which still must be approved by the state, members will receive step increases and a 2% pay increase beginning next year. Mr. Barney explained: “Why not be the first union? We can continue to fight … and let a judge make decisions or arrive at something agreeable. Let’s get this taken care of.” The EMT union’s former collective bargaining agreement was canceled in May 2012; according to Mr. Barney, members have since been working under city employment terms and took a 10% pay cut. Under the new agreement, the starting wage for new hires remains at $13.04 an hour, with members receiving step increases. The prior employment terms had wages frozen. Mr. Barney said the move will aid in job retention, and he advises that a clause in the agreement would allow the EMTs to revisit the deal if other unions in the Fire Department get more favorable agreements with Emergency Manager Orr: “We all have serious issues that need to be addressed within our membership.” In referring to the Emergency Manager’s office, he added: “They understood the human factor in this. We were talking to individuals, not just talking about numbers.”
The Art of Municipal Finance. Chief U.S. District Judge Gerald Rosen, who U.S. Bankruptcy Judge Steven Rhodes asked to serve as a mediator for the city’s retirees who are not represented by unions in Detroit’s bankruptcy, is trying to determine if regional and national foundations could create a fund that would protect the Detroit Institute of Arts’ city-owned collection by helping to support retiree pensions. Judge Rosen met last week with nine foundations, including Kresge, Hudson-Webber, Mott, Knight, and the Ford Foundation of New York, in an effort to seek commitments for as much as $500 million. The fate of the prestigious Detroit Institute of the Arts, located just a short ways from the Detroit branch of the Federal Reserve and Wayne State University looms large in any recovery plan or plan of adjustment the city will have to propose—if Judge Rhodes finds it is eligible for bankruptcy—with many suggesting the city could sell the Institute to satisfy creditors (the collection at the DIA is estimated to be worth several billion dollars), including vested public pensioners. The Detroit News reported that three sources said Judge Rosen expressed concern in the meeting that the issue could bog down the bankruptcy with years of contentious litigation, slowing approval of the city’s Plan of Adjustment and stalling foundation and private-sector reinvestment in Detroit. The so-called “Rosen Landscape” would be unprecedented. The goal would be to create a private fund designed to help the city comply with the state constitution and honor pension commitments, and to protect the DIA and its valuable pieces from liquidation. The collection is conservatively estimated to be worth at least several billion dollars. Judge Rosen is living up to the charge he painted last September at his very first meeting with the city’s creditors: “This is about the future of the city and this region…Open your minds to areas where we can reach agreements.” Christie’s, the global auction house, at Kevyn Orr’s request, is in the final stages of valuing 3,500 pieces of the DIA’s 65,000-work collection—and Emergency Manager Orr retains in his quiver the option of selling key pieces or exploring ways to raise cash for creditors without selling the art outright. Judge Rosen summarized the session: “This bankruptcy is one of the most consequential events in the history of our city and our region…The meeting was intended to give them a perspective — not only on some of the challenges raised by the bankruptcy — but also some of the very real opportunities that the bankruptcy provides for a brighter future.”
Maybe Sipping Bankruptcy in Hot Desert Springs. Notwithstanding the recommendation of staff, the Desert Hot Springs City Council stopped short Tuesday of giving the go ahead for the city to prepare to file for chapter 9 municipal bankruptcy. Staff is warning that the municipality of 26,000 will become insolvent by next March due to burdensome salary and pension costs. Amy Aguer, the interim finance director, warned the council should declare a fiscal emergency, a prerequisite under Golden State law before seeking federal bankruptcy protection, but Mayor-elect Adam Sanchez responded that such a declaration was “too drastic to consider,” noting there was “room in this city budget to make the cuts that are necessary without going bankrupt.” Unlike Stockton and San Bernardino, Desert Hot Springs has some earlier experience: the city filed for bankruptcy in 2001 when it had insufficient funds to pay a legal judgment, emerging three years later in 2004. Refiling, as fabulous Matt Fabian, the managing director of Municipal Market Advisors notes, is not a good alternative: “Cities that file for bankruptcy seem to file for bankruptcy again, more than other cities…That’s a cautionary tale for Detroit as they go through this.” Desert Hot Springs has $18 million in debt: $8 million in certificates of participation and $10 million in bonds to repay the legal judgment that drove the city into municipal bankruptcy 12 years ago. Ms. Aguer, contrasting her city’s fiscal problems with those of Stockton and San Bernardino, said in an interview that Desert Hot Springs’ problems stem less from external factors than from “optimistic” projections by previous city officials. Ms. Aguer believes the shortfall is the result of higher-than-expected pension and salary costs, especially in the police department, and overly optimistic estimates of revenue—or, as Councilmember Russell Betts states: “It’s obvious we can’t continue with salaries and pensions that are in the stratosphere, no matter how much love there is for our police department.” Ms. Aguer said nearly 70%of the city’s budget was consumed by police costs, most of which were spent on salaries and pension payments to CalPERS. An outside consultant’s report earlier this year warned Desert Hot Springs that its pension costs were dangerously high.
Burning the Keystone Late Night Oil. The Harrisburg City Council late Tuesday unanimously approved a $270 million lease of municipal parking facilities—one of two lynchpins to the capitol city’s financial recovery plan, proposing a lease agreement with the Pennsylvania Economic Development Financing Authority. That could pave the way for the city to issue bonds – with receivership officials hoping to submit packages to bond ratings agencies today― although the council legislation includes a 20-day waiting period during which the council could reconsider. Under the parking arrangement, the Keystone state authority would issue tax-exempt municipal bonds to finance a lease of parking assets for up to 40 years to Harrisburg First, a consortium that includes Guggenheim Securities, Piper Jaffray & Co., Standard Parking Corp., and Trimont Real Estate Advisors. Receiver William Lynch is hoping to price the bonds (like Jefferson County) while interest rates remain low and before the city encounters yet another cash-flow problem: “As you know, there’s been upheaval in the municipal bond market…We’ve come back about halfway from that bad hiccup of last summer. And we’re in good shape now, but it changes in an almost daily basis and that’s why there’s some urgency to get out before Christmas time, before January.” The Dauphin County Commissioners two weeks ago approved $170 million in parking revenue bonds.