11.25.13

Rogue Pension System? Former City of Detroit Finance Director Sean Werdlow late last week at a municipal bankruptcy symposium defended a controversial 2005 pension agreement that increased the city’s long-term debt load, likely accelerating the city’s path into insolvency, but Mr. Werdlow, instead, asserted that without the agreement to issue pension bonds, Detroit would have filed for bankruptcy years ago. Under the agreement, the city issued $1.44 billion in debt to shore up Detroit’s two municipal pension funds, the General Retirement System and the Police & Fire Retirement System―each of which confronted significant underfunding, so that Detroit had been obligated to make up for the gap with direct contributions from the city’s general fund. Mr. Werdlow indicated then-Mayor Kwame Kilpatrick had advised that absent the pension obligation debt, he would have had to lay off 2,000 city workers if forced to pay the entire obligation. Thereupon, the Motor City issued the debt, put the proceeds into the two pension funds, and initiated a swap agreement intended to lock in favorable interest rates. But, as with Jefferson County, the swaps deal backfired. Detroit’s pension-swaps related debt soared to $2.8 billion for principal, interest, and insurance payments over the next 22 years. In one sense, the fix was in. To Mr. Werdlow, the lesson learned was that a “rogue pension board accountable to no one” is the single biggest contributor to fiscal distress in many cities, noting that neither of the city’s two pension boards “takes orders. They don’t listen to the City Council. They don’t listen to the mayor. They’re completely on their own.” His comments drew swift rejections from the city’s pension boards, stating that Detroit’s retirement benefits are set not by the pension boards, but in contract talks between the city and its unions.

Taking Stock in Exiting Bankruptcy. With U.S. Bankruptcy Judge Christopher Klein’s March 5th hearing wherein Stockton will either approve—as Judge Bennett has just done in Jefferson County’s case, or reject the city’s plan of adjustment; Stockton has one last hurdle to try to clear. Franklin Advisers Inc. is still fighting over about $35 million of the city’s lease revenue bonds. Franklin, together with Franklin High Yield Tax-Free Income and Franklin California High Yield Municipal Fund, owns bonds that would recover less than 20 cents on the dollar under the city’s proposed plan of adjustment―so, absent an agreement, could be expected to object to the federal bankruptcy court’s approval.  At least one commentator has noted that without impairing pension benefits, Stockton does not have sufficient cash flow to perform under the plan during a reasonable time period―keeping in mind that unlike either Detroit, Central Falls, or San Bernardino―Stockton has specially chosen not to seek any contributions or reductions in benefits with the California Public Employees’ Retirement System, although its plan of adjustment would impair post-retirement health care benefits. Municipal bankruptcy expert Jim Spiotto notes: “In bankruptcy court and especially in Chapter 9 bankruptcy, many times even with or without objections, things get resolved…So, hopefully, they will find a way to a solution and get everybody on board.” The city’s next step is to send its plan of adjustment to those creditors entitled to vote on it: the city’s plan of adjustment, disclosure statement, ballots, and related documents must be transmitted to creditors no later than Dec. 13th, with the completed ballots due back on or before February 10th in order to be counted. If Judge Klein approves the plan, the city will exit bankruptcy on an effective date the court will determine. To date, Stockton has negotiated with 18 sets of creditors and bondholders before releasing its plan of adjustment, including its employee unions, as well as other debt stakeholders Dexia Credit Local, Union Bank, and the U.S. Department of Housing and Urban Development. In addition, the city has reached an agreement with Assured Guaranty to restructure over $155 million of insured bonds, including a plan to pay off more than $120 million of unsecured pension obligation bonds over a longer period of time. In addition, the city has agreed with National Public Finance Guarantee to resume lease payments on $45.1 million of insured obligations for the city’s sports arena, and $43.7 million of debt secured by parking garages. A keystone, of course, was voter approval earlier this month of the referendum to increase the municipality’s sales tax three quarters of a cent effective on New Year’s Day. An exit from municipal bankruptcy, as we are learning from Desert Hot Spring’s likely re-entry into chapter 9, is but one critical hurdle. As Mr. Spiotto warns: “The debt adjustment plan is just a step toward sustainability and affordability…There needs to be a recovery plan so that the city will be sustainable and affordable, and that it has the infrastructure and essential services at an acceptable level that will attract business, or grow business.”

Motor City Water Fight. The Detroit Water and Sewerage Department Friday filed suit in U.S. District Court against neighboring, encircled Highland Park―a city which the Michigan Local Emergency Financial Assistance Board last month determined is in financial distress—likely triggering Governor Rick Snyder to appoint a review team―claiming the city owes the Motor City utility nearly $17.7 million for unpaid sewage services and water. The suit claims Highland Park has had a “chronic problem” paying sewage treatment services, with the Department claiming Highland Park owes $16.9 million for unpaid sewage service and another $805,000 for potable water. Some fear the suit could tip Highland Park, which has already tripped triggers in the state’s Public Act 436 for failing to make pension payments and violating the state’s approved deficit elimination plans—in addition to experiencing what the Michigan State Treasurer’s office determined to be fiscal irregularities―could be disastrous for Highland Park. Highland Park Mayor Deandre Windom last Friday said: “It’s no secret the city has had financial issues…We still struggle with those issues. We’ve been trying to see how we can come to some type of agreement to work on this extremely large balance that we have.”  Highland Park does have its own water treatment plant, but Michigan Department of Environmental Quality closed the facility, leading to Detroit’s utility assuming the responsibility to provide water to the city effective last January, so that its water and sewer department (DWSD) is also looking to recoup costs and attorney fees associated with the lawsuit. Highland Park, which takes up about 3 square miles, is landlocked ― like Hamtramck―by Detroit. Highland Park is a municipality of about 11,800, according to the 2010 census, a drop of nearly 30% since the 2000 census.

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