11.20.13

Motor City: With U.S. Bankruptcy Judge Steven Rhodes expected to render his decision with regard to Detroit’s eligibility for bankruptcy any day, all sides are gearing up to appeal. Emergency Manager Kevyn Orr and several groups opposed to federal bankruptcy have lawyered up to immediately file an appeal in either the U.S. District Court in Detroit or the U.S. 6th Circuit Court of Appeals in Cincinnati―on a judicial path that could end with the U.S. Supreme Court. The key federalism challenge would pit the constitutionality of public pensions under Michigan’s constitution against the federal municipal bankruptcy statute. Any appeal would not only impose significant new, unanticipated costs, but also further cloud the transition from the city’s state-appointed emergency manager back to the Mayor-elect and council. An appeal could be a lengthy process. Should Judge Rhodes determine Detroit is eligible for chapter 9, the city will be responsible for working with its more than 100,000 creditors to propose a Plan of Adjustment, or a recovery plan to restructure more than $18 billion in debt. It is assumed this process would proceed apace with any federal appeals process—and, of course, create not only a precedent for every municipality in the U.S., but also potentially reshape federalism in the 21st century. Detroit’s AFSCME Council 25 has already requested that Judge Rhodes allow the labor union to directly appeal his decision to the 6th Circuit, instead of proceeding via the regular process in U.S. District Court in Detroit and a regional bankruptcy appellate panel. The infighting over an appeal appears to be a double parallel with the San Bernardino, where, as we have tracked in the eBlogs, U.S. Bankruptcy Judge Meredith Jury this week rejected the California Public Employees’ Retirement System’s second request to appeal San Bernardino’s bankruptcy eligibility directly to the U.S. 9th Circuit Court of Appeals―the second time she has denied CalPERS’ request in a case that, to date, has consumed 14 months and untold hundreds of thousands of taxpayer dollars that will now forever be unavailable to either finance essential public services or pay public pensions.

Motor City Transition. Detroit Mayor-elect Mike Duggan yesterday reported he is working together with Emergency Manager Kevyn Orr in order to put together a transition plan that would carve out a significant role and transition process for restoring elected leadership to the city. Mayor-elect Duggan said he hopes to persuade Mr. Orr to turn over essential public safety responsibilities to him: “Whether I will ultimately take responsibility for services Jan. 1 or Oct. 1 (when the emergency manager could be removed by a two-thirds vote of the Detroit City Council) is still to be resolved. We’re going see if we can work something out that works for both us.” The two are scheduled to meet again tomorrow. At the conference session yesterday organized by the Detroit News, City Council President Saunteel Jenkins, said the Mayor-elect should be allowed to help run city government because the emergency manager and the four people in his office alone cannot run the city, and the Council President noted the council should be included in the city’s long-term restructuring. Former City Councilwoman Sheila Cockrel, provided, mayhap, the line of the day: “I love the private sector, but running a municipal corporation is not the same as running a private corporation.” At yesterday’s session, Mayor-elect Duggan also began to address the Motor City’s desperate fiscal situation and finances, citing a four-month Detroit News investigation that found Detroit has the highest property taxes among big cities nationwide and relies on seriously inflated assessments — which contribute to nearly half of property owners not paying their tax bills―a finding he said that meant that because the city “has made a decision not to lower the assessments, [means] we have been driving people out of their homes with tax foreclosures.”

A Walk in the Park. The Michigan Local Emergency Financial Assistance Loan Board yesterday approved Michigan Gov. Rick Snyder’s proposal to lease Detroit’s biggest park, Belle Isle, for up to 30 years, effectively rejecting an alternative 10-year lease proposed by the Detroit City Council. The park has fallen into disrepair over the last several years as the bankrupt city’s finances deteriorated. Emergency Manager Kevyn Orr signed the agreement for a 30-year lease six weeks ago, but the city council proposed an alternative plan that would have the state lease it for only a decade and imposed some additional provisions; the three-member loan board, however, voted unanimously in favor of the state’s plan. Nevertheless, the state takeover will transfer operating and maintenance expenses, estimated at $6 million a year, from the city’s to the state’s coffers, and provide for a seven-member advisory committee to advise the state.
For the first time, it will cost money to enter the park―an island in the middle of the Detroit River. The state will require all entering cars have or buy an $11-a-year passport that provides entrance to all state parks. Pedestrians, bikers, and bus riders can still enter for free. Gov. Snyder had first proposed the state take over Belle Isle in 2012, as part of the consent agreement the state entered into with the city before Detroit came under full state control. Mayor Dave Bing approved the lease, but the city council overruled him.

Taking Stock in Stockton. U.S. Bankruptcy Judge Christopher Klein has scheduled a vote for February 10, 2014 by the city of Stockton’s creditors on the city’s Plan of Adjustment or recovery plan to exit bankruptcy for February after approving its notice of agreements the city has struck with nearly all of them. The vote will be followed by a trial and confirmation hearing over the Stockton’s plan to exit bankruptcy beginning on March 5, 2014. Stockton will begin circulating the plan among its creditors next month. The only major creditors continuing to contest Stockton’s plan are the Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund; they will, Judge Klein said, be able to contest it after the vote in a trial in March, which will also serve as the hearing to confirm the city’s plan. Franklin currently holds $35 million in municipal bonds issued by Stockton: the city has proposed to pay $95,000 on the debt as part of its plan to exit bankruptcy. Judge Klein said the city should include in its disclosure of the agreements with its creditors and other moves it has made while in bankruptcy the risk that a tax increase approved by city voters earlier this month may not be renewed after 10 years. That voter-approved sales-tax increase is a keystone to the city’s recovery plan, which also includes the elimination of retiree health insurance for some 1,100 retirees, concessions from employees, and settlements with its bond insurers to help reduce debt payments. The city’s two largest bond insurers had contested the city’s eligibility for municipal bankruptcy, telling the court the city would never be able to repair its finances without tackling its pension liability. Stockton, however, in contrast to its sister city San Bernardino in southern California, but supported―rather than opposed― by its pension fund, CalPERS, ruled that out. The bond insurers recently agreed to settlements with the city and dropped demands that it impair its pensions. To succeed, the city will be required to demonstrate that its plan achieves a “fair and equitable” standard and treats all similar classes of claims alike, with no class receiving property or remuneration before another creditor senior to it does. The city has reached agreements with nearly all of its major creditors, including bond insurers Assured Guaranty and National Public Finance Guarantee. It has not reached an agreement with Franklin Advisers, Inc., Franklin High Yield Tax-Free Income and Franklin California High Yield Municipal Fund, which together own around $35 million of the city’s lease revenue bonds. On its largest debt – more than $120 million of unsecured pension obligation bonds insured by Assured Guaranty – the city reached an agreement to repay the obligation over a longer period of time with what Assured has said is a possibility of eventual full recovery. In the wake of the voter-approved sales tax increase earlier this month, Stockton intends to use the additional revenues to restore the city’s finances. The sales tax will increase by three-quarters of a cent starting January 1 — halfway through the city’s fiscal year.

Sewer Smells. Jefferson County Commission President David Carrington yesterday said the county had successfully sold enough of its $1.7 billion in refinanced sewer warrants to exit bankruptcy—a key step in the county’s plan to exit chapter 9 municipal bankruptcy as early as December 3rd. Mr. Carrington noted: “More than 200 investors placed orders, including international investors located in Europe and Asia,” opening the door for the county’s attorneys this morning to begin confirmation hearings before U.S. Bankruptcy Court Judge Thomas Bennett—where, if Judge Bennett confirms the county’s plan of adjustment— Commissioner Jimmie Stephens  states: “That will drive the final nail into the coffin that has been bankruptcy.” The warrants were sold yesterday to institutional investors with proceeds providing cash to creditors holding $3.14 billion in outstanding, defaulted sewer debt. Creditors erased about $1.5 billion in debt as part of negotiated concessions. Jefferson County’s plan of adjustment, which the court must deem feasible, provides a road map of the county’s future tax and spending decisions; it also is intended to prove to Judge Bennett that the county is not likely to land back in federal bankruptcy court, because the successful sale of the warrants also demonstrates that the plan contains enough financing for the county to pay its projected debts. The plan of adjustment could go into effect the week after next on December 3rd, because that is a likely closing date on the sale of the refinanced sewer warrants. The warrant sale posed a signal challenge for bankers, because of fallout apprehension from the county’s reputation as a municipality that has defaulted on its debt—raising the prospect of a sever interest rate penalty; however, as the Fabulous Matt Fabian of Municipal Market Advisors noted: “I think that it is a unique deal, moving more in the pricing and re-pricing than a typical deal will…It reflects the uniqueness of the investment and the demand from non-traditional investors is harder to anticipate. It stands to reason that the levels are going to be more volatile.” Nevertheless, Mr. Fabian noted that Judge Bennett’s confirmation of the plan and continued jurisdiction will be crucial for Jefferson County: “If the county was trying to sell these bonds without the court’s protection, it would have been even harder.”

Keeping Faith with the General. Pennsylvania Department of Community and Economic Development Secretary C. Alan Walker has filed a petition in Commonwealth Court to extend the expiring term of city receiver General William Lynch for two more years through 2015, noting that “Though much progress has been made during the receivership — most notably the confirmation of the Harrisburg Strong plan — the city remains in a state of fiscal emergency.” That is longer than General Lynch intends to remain, but critical for him to complete the $600 million debt restructuring, contingent on monetization of the capitol city’s parking facilities and incinerator. The bonds being issued to finance the parking lease and incinerator sale are expected to close in a month. General Lynch and regional officials are seeking to finalize the city’s “Harrisburg Strong” recovery plan, which centers around the sale of the city’s incinerator to the Lancaster County Solid Waste Management Authority and a 40-year lease of parking assets to Harrisburg First, a consortium that includes Guggenheim Securities, Piper Jaffray & Co., Standard Parking Corp. and Trimont Real Estate Advisors. The city hopes to price the bonds for both transactions by the middle of next month―the Harrisburg Parking Authority is expected to vote on final approval of the parking agreement next week. Under the petition, remaining initiatives to the recovery plan after the bond pricing include: union negotiations, and operational water, and sewer authority transition. Pennsylvania Commonwealth Court Justice Bonnie Brigance Leadbetter, who approved the recovery plan on Sept. 19th, last week authorized Lynch to sign plan documents that city controller Dan Miller has not signed: “Delays by the city controller in executing documents necessary to the [implementation] of the plan have occurred and any further such delays could threaten the timely consummation and jeopardize the ultimate success of the plan.” As in San Bernardino, Stockton, and Detroit; these recovery efforts are all taking place in the midst of transitions: Eric Papenfuse will be inaugurated as Mayor on New Year’s Day, when the current Mayor, Linda Thompson, steps down.

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