11.18.13

Motor City: Let There Be Light. The new Detroit Public Lighting Authority has commenced a three-year plan to rebuild Detroit’s street-lighting system and downsize it to a more manageable 46,000 or so fixtures—an effort the bankrupt city plans to finance by borrowing $60 million in a short-term loan, and through the issuance of a $150-million bond issue whose proceeds would repay the loan. The plan also is intended to transition the city out of the business of street lighting. Under the plan, the city will hire a contractor to replace cables, equipment, substations, and old lights. Once crews finish rebuilding a ZIP code area, responsibility for maintaining those lights would transfer to the authority from the lighting department, which would eventually phase out. The authority last week began work on two demonstration projects. The city’s lighting plan also envisions having the Motor City exit the electricity business and hand its customer accounts to DTE Energy. To finance the borrowing, the lighting authority intends to back its bonds with a $12.5-million-a-year portion of the tax collected from Detroit utility customers. The tax, which generates about $40 million annually, has historically gone to hiring and retaining Detroit police officers. Consequently, in order to avoid cuts to public safety, the state Legislature allowed Detroit last year to keep city income taxes at 2.4% for residents and 1.25% for nonresidents, rather than dropping them, as scheduled, by one-tenth of a percent. One potential lender, Citigroup, has asked the authority to obtain an order from U.S. Bankruptcy Judge Steven Rhodes as assurance that the utility tax revenue stream would not be blocked or limited as part of any final approved plan of adjustment. Judge Rhodes has scheduled a hearing for next week.

An Unappealing Choice. U.S. Bankruptcy Judge Meredith Jury has rejected CalPERS request to challenge the city’s eligibility for chapter 9 municipal bankruptcy at the U.S.9th Circuit Court of Appeals. Judge Jury held that granting the request would be “duplicative and not an efficient use of judicial resources.” Her decision, however, is unlikely to end CalPERS’ challenge; indeed, promptly after Judge Jury’s decision, the agency appealed to the U.S. District Court, stating: “Although we disagree with the (bankruptcy) judge’s decision, we will continue to pursue our appeal and uphold our fiduciary duty to guarantee our members receive the public pensions that were bargained with their employer and promised.”  The agency’s efforts not only oppose Judge Jury’s, but also San Bernardino’s—which believes bankruptcy is the proper forum for working out a plan of adjustment with all its creditors, including CalPERS. The City Council last month adopted a tentative plan for repaying creditors; the plan, however, remains confidential while the city’s proposal goes to court-supervised mediation. Lawyers for the city say letting CalPERS’ appeal would interfere with the mediation process. The city currently pays CalPERS $25 million annually; San Bernardino briefly halted payments for several months after filing for bankruptcy last year, but resumed payments when the new fiscal year began in July. Currently, the city’s debt to CalPERS is more than $14 million.

Sewer Smells. Jefferson County attorneys are concerned that the former financial advisor for the County appears to have revealed “privileged and confidential information” in his consulting work for sewer system ratepayers objecting to the county’s plan of adjustment. If so, the information would give the U.S. Bankruptcy Court the authority “to disqualify an expert who seeks to offer testimony against a party with whom the expert formerly had a confidential relationship and from whom the expert received confidential information,” Jefferson County’s attorneys have stated in a court filing: Disqualification could “reach beyond the expert to the lawyer and thus to the entire objection,” said a footnote in the county’s document.  Jefferson County’s filing recited that its bankruptcy exit plan is lawful, proper, reasonable, and allows debt to be sold as a part of the Chapter 9 process; and it methodically rebuts all objections filed by the Wilson group, as well as those filed by a group known as the Bennett Ratepayers that attempted to discredit the county’s issuance of the sewer debt with arguments that it was fatally tainted by corruption and violated Alabama’s constitution. U.S. Bankruptcy Judge Thomas Bennett has scheduled a hearing the day after tomorrow to hear objectors, and the county’s defenses at a hearing. The potential legal fracas comes at a critical time: by the time the hearing is held, the chapter 9 county will have attempted to price $1.7 billion in new sewer warrants to pay creditors holding $3.1 billion of outstanding sewer debt. The offering is integral to the confirmation or Plan of Adjustment for the county to exit municipal bankruptcy.

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