12.5.13

Pit Stops in the Motor City. Long before U.S. Bankruptcy Judge Rhodes issued his written opinion finding the Motor City eligible for federal bankruptcy protection, Detroit’s biggest municipal union, the American Federation of State, County and Municipal Employees requested permission to appeal directly to the Sixth U.S. Court of Appeals, rather than Federal District Court (https://www.documentcloud.org/documents/872873-afscme-notice.html), noting: “The state Constitution represents the people’s will…That will cannot be ignored or subverted because it’s financially convenient to do so.” Moreover, in a demonstration of how Judge Rhodes’ decision was a shot heard round the States, AFSCME leaders are also preparing for legal contests in Stockton, San Bernardino, and other cities and states—including Illinois where the state acted on pension reform legislation Tuesday, paving the way for Chicago Mayor Rahm Emanuel to address critical deficiencies in the Windy City’s pension systems. Sharon Levine, the architect attorney who filed the first appeal within hours of Judge Rhodes’ oral decision Tuesday, warned, according to the New York Times, that his decision would “be a road map for governors across the country to use Chapter 9 to create a self-created emergency.” Moreover, the pension issue’s role in Detroit’s bankruptcy is complicated further by the accretion of debt issued to finance the city’s inability to honor its public pension promises. Eight years ago, Detroit issued $1.4 billion in municipal bonds to raise cash for its pension promises―a debt issuance that required convoluted structuring, because the city had already reached its legal borrowing limit. Then Mayor, now behind bars, Kwame M. Kilpatrick, warned Detroit’s unions that absent their support, his only other option would have been to lay off 2,000 workers, many of them union members. But by last summer, those bonds were the first to go into default, so that the bondholders this Tuesday discovered that they, too, are, as Mary Walsh Williams wrote, “unsecured creditors in bankruptcy — and they, too, thought they had legal protections from the state.”

The Fine Art of Municipal Bankruptcy. Chief U.S. District Judge Gerald Rosen, the federal judge whom U.S. Bankruptcy Judge Rhodes requested to mediate Detroit’s bankruptcy, is exploring whether 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―with a potential goal of as much as $500 million. The discussions could paint a key path to the Motor City’s development of a successful plan of adjustment—key to exiting municipal bankruptcy. The Detroit News noted that sources have claimed Judge Rosen expressed concern in the meeting that the battle over whether to sell the world famous collection to offset the contentious issue of non-full payment of the heretofore state constitutionally-protected pension benefits for city workers could bog down the city’s bankruptcy with years of contentious litigation, slowing approval of the city’s Plan of Adjustment, and stalling foundation and private-sector reinvestment in Detroit―noting the plan would be unprecedented, if the foundations — facilitated by the mediators appointed by Judge Rosen, were to combine to create a private fund designed to both assist Detroit to public pension commitments to its public-sector retirees, as well as to protect the world-renowned Detroit Institute of Art (DIA) and its valuable pieces from liquidation. The collection is conservatively estimated to be worth at least several billion dollars. Neither DIA officials, nor did union or pension fund representatives attended the meeting. Detroit Emergency Manager Kevyn Orr wants the DIA to help answer demands from creditors seeking to turn its world class works into cash. Christie’s, the global auction house, is in the final stages of valuing 3,500 pieces of the DIA’s 65,000-work collection, and Mr. Orr has not ruled out selling key pieces or exploring ways to raise cash for creditors without selling art outright. The discussions, complex as they are, also could raise intergovernmental issues: the operating costs for the DIA come from a tri-county millage that provides $22.6 million a year to operate the DIA. After the meeting, Judge Rosen noted: “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.”

Exiting Municipal Bankruptcy. Jefferson County’s plan of adjustment from chapter 9 municipal bankruptcy went into effect Tuesday―just about the same hour Judge Steven Rhodes issued his opinion giving the green light for the Motor City to begin putting together its plan of adjustment. On Tuesday, Jefferson County closed on $1.8 billion of new sewer warrants earlier that day―a successful sale that served as the cornerstone of the county’s debt adjustment plan, enabling Jefferson County to use the proceeds to pay creditors holding $3.14 billion in sewer debt. Nonetheless, three customers on the Jefferson County sewer system have filed notice with the U.S. District Court in Birmingham that they intend to file a direct appeal of U.S. Bankruptcy Judge Thomas Bennett’s Nov. 22nd plan confirmation order. The appeal is expected to be filed by December 16^th. A second group, known as the Bennett ratepayers, also noted its intent to appeal rejection of its payment claim and the confirmation order―based on what they argue were illegal swap warrants sold by the county in 2002 and 2003. A hearing is scheduled for today to consider a request to lift the automatic stay that prevents suits against the county from going forward. To date, Jefferson County’s municipal bankruptcy case has taken the better (or many would call worse) part of two years at a cost of at least $25 million to adjudicate―not including legal fees for appeals.

Harrisburg Progress. The Pennsylvania Economic Development Financing Authority Pennsylvania state agency yesterday cleared a 40-year, $287 million parking lease deal that is one of two centerpiece transactions to Harrisburg’s financial recovery plan―a plan explicitly put together instead of the city filing for chapter 9 federal bankruptcy protection―clearing the way for the city’s Receiver, General William Lynch to issue the financing related to the lease of its parking assets, as well as bonds to from the sale of the city’s incinerator to the Lancaster County Solid Waste Management Authority―key steps to sharply reduce the capitol city’s more than $600 million of debt, consistent with what has been dubbed the Harrisburg Strong plan. Under the 40-year lease of parking garages, spaces, and street meters to Harrisburg First, a consortium consisting of Guggenheim Securities, Piper Jaffray & Co., Standard Parking Corp. and Trimont Real Estate Advisors, PEDFA would issue $286.9 million of bonds, according to a preliminary official statement posted on the Roxbury News video website. General Lynch hopes to complete the bond sales by the end of this month.