12.16.13

Uh Oh. U.S. District Judge Dolly Gee on Friday agreed to allow the California Public Employees’ Retirement System appeal U.S. Bankruptcy Judge Meredith Jury’s decision finding San Bernardino eligible for municipal bankruptcy to the 9th U.S. Circuit Court of Appeals. If the 9th Circuit agrees to consider the appeal, CalPERS will argue that U.S. Bankruptcy Judge Meredith Jury was wrong when she decided in August that the struggling city qualified for bankruptcy protection. In the meantime, Judge Jury will continue overseeing the bankruptcy case, and U.S Bankruptcy Judge Gregg Zive will continue leading mediation sessions―sessions which, as we have reported, progressing surprisingly smoothly. Nevertheless, Judge Gee’s decision could become a fly in the ointment, because it both adds significant potential new costs to San Bernardino’s taxpayers—undercutting resources critical to recovery, and it could reduce CalPERS’ incentives for negotiating in the closed door sessions under Judge Gee’s oversight. San Bernardino City Attorney Gary Saenz said after the hearing that he was “certainly hopeful” that the appeal would not harm the negotiations, but said he expected the greater harm from the decision would come from spreading thin city resources: “We’ve already expended a great deal, and there’s people from the Finance Department, city attorney’s office, mayor’s office — all concentrating on this case and on mediation before Judge Zive…This is another (burden). It reminds me of the Doublemint commercials — ‘double your pleasure, double your fun’ — but this is double the pain.” The decision to allow CalPERS to appeal in California comes even as a similar appeal is pending in Michigan. 

Pensionary Angst. Even as CalPERS was successful in being permitted to appeal, the agency continued to try to distinguish its case from that of the Detroit pension systems (where an appeal is to be heard this a.m.), noting that in California it is “a criminal act” for an employer that’s part of CalPERS to withhold payments, as San Bernardino did until July of this year when it began making payments again. That is, the respective pension systems are quite distinct—with San Bernardino part of a statewide system and Detroit’s two pensions not so. Gina Ratto, CalPERS’ interim General Counsel, in distinguishing between the two situations, noted: “The first thing I would say is that you should try to keep in context that it was a Detroit bankruptcy decision and it is not binding on any other court…In fact, it is not binding on any other court in Michigan or that district, and it is certainly not binding on any court in California,” before going on to point out that in California, there are remedies for breach of pensions not included in the Michigan law, so that, for instance, CalPERS can enforce a lien against a public agency’s assets if it does not make required payments. In addition, CalPERS can terminate the plan and the participation of the public agency in the event of missed payments, with California law making it a criminal act for cities to make payroll without making payments to CalPERS. Nevertheless, CalPERS has not asked the California Department of Justice to take action against San Bernardino, which owes CalPERS $17 million in missed payments and penalties. Moreover, according to Ms. Ratto, as a state agency, CalPERS has sovereign powers: CalPERS is “an arm of the state, not a city like Detroit, which is a creature of Michigan state,” which, she stated, means that CalPERS receives the same protections as the state under the U.S. Constitution’s 10th and 11th amendments that protect state sovereignty. Finally, Ms. Ratto noted that CalPERS attorneys have been in discussions with the board about filing an amicus, or friend of the court brief supporting Detroit’s pension plans, but a decision has not been made.

Motor City’s Trials & Tribulations. Syncora Guarantee, which stands to lose millions if Detroit is successful in ending a complicated interest rate swap tied to pension debt, and which had requested a delay to gather more city documents and depose individuals involved in the arrangement, has filed suit before U.S. Bankruptcy Judge Steven Rhodes to postpone the hearing he has scheduled on the Motor City’s proposed interest-rate swap settlement and debtor-in-possession financing. Detroit Emergency Manager Kevyn Orr wants Judge Rhodes’ permission to pay UBS AG and Bank of America at least $230 million to terminate the interest rate swaps tied to $1.44 billion in money the city borrowed in 2005-2006 to prop up its underfunded pension funds, and is requesting the judge’s permission to borrow $350 million from the investment bank Barclays to pay the two banks the $230 million termination fee and use the remaining $120 million to pay for city computer technology upgrades and improving city services, such as police and fire. Judge Rhodes has responded by saying he would consider the request at a hearing today―the trial on the swaps settlement and financing is currently set for Wednesday through Friday of next week, with the bankruptcy court’s approval critical to paying off the swap counterparties. The last minute snag has added still another delay–as the parties sought to reach an out-of-court agreement in mediation on the complex financial issue with Syncora, one of several creditors opposing Detroit’s settlement with swap counterparties UBS and Merrill Lynch, as well as the $350 million debtor-in-financing with Barclays. Several bond insurers, unions, and pension funds have joined the legal contretemps, claiming it reeks of overly generous terms for the banks and would decrease overall creditor recoveries. In its brief, Syncora claimed it had not been “given the opportunity to discover the source documents and information underlying the need for, and uses of, the [DIP] financing.”  Thus, even as the city is racing to try to complete its Plan of Adjustment by early January, the legal action ― not to mention the appeal request in San Bernardino―are adding still another level of cost and delay. Moreover, it came just two days after the Motor City filed two omnibus responses to objections to the swap settlement and the DIP financing. Syncora is seeking specific information with regard to the city’s specific uses of the proceeds from a loan it received from Barclays so that Syncora can “evaluate whether the DIP financing is, in fact, necessary, reasonable and in the best interests of creditors.” The suit makes clear Syncora also wants to see the documents referred to by the city  when determining whether the DIP financing was in the best interest of creditors and necessary to enhance the value of the city, according to the brief―and, it wants to depose Barclays, the service corporations that are part of the original pension certificates structure, the City Council, and the swap counterparties, claiming the city has also failed to comply with the limited discovery the court already granted the objectors, according to Syncora. U.S. Bankruptcy Judge Steven Rhodes on Friday denied a request by an insurer of Detroit’s debts to delay next week’s trial over the city’s request to borrow $350 million in bankruptcy and end a pension debt financing arrangement. Detroit City attorney Robert Hamilton argued the Chapter 9 municipal bankruptcy code does not allow Judge Rhodes to judge the city’s spending plans on “how many cruisers the police department should buy and how many bullet proof vests they should buy”―an argument with which Judge Rhodes agreed: “The city’s proposed use of the (loan) proceeds is not a matter for this court’s consideration next week,” Rhodes said in a ruling from the bench. Detroit officials have said swap payments are costing the city at least $45 million annually after past Detroit leaders made a bet with the banks that interest rates would remain high in a complicated swap arrangement. The trial is scheduled to begin tomorrow and could last three days.

Let There Be light. The Motor City Public Lighting Authority reports it has completed the sale of $60 million in bonds to fund the initial phases of its plan to restore reliable streetlights in the city―just a week after U.S. Bankruptcy Judge Steven Rhodes approved the financing arrangement which will permit the authority to move forward with infrastructure repairs. The financing marks the first step in the eventual sale of approximately $150 million in bonds to fund the redesign and re-establishment of the lighting system, according to the authority: “The sale of these bonds means we will be able to continue uninterrupted our work to restore reliable street lights to the City over the next three years.” Judge Rhodes last week granted the city’s request to pledge $12.5 million of annual utility tax revenues toward the authority, which plans to use the money to raise $210 million to replace thousands of broken streetlights across the darkened city through. According to Mr. Orr’s office, Detroit lighting crews and private contractors have replaced 26,000 light bulbs during the past six months; the additional funding will be used to replace the city’s aging electric grid and lighting infrastructure, some of which is eight decades old. The bonds themselves will be issued through the Michigan Finance Authority’s Local Government Loan Program, carrying a floating interest rate—an arrangement which Michigan Governor Rick Snyder says demonstrates the city and state’s commitment to lighting as a top priority for Detroit: “This is an historic day for the citizens of the City of Detroit, who will see tangible, quality-of-life improvements in their neighborhoods.” Mayhap more importantly, according to Michigan State Treasurer Kevin Clinton, who chairs the Michigan Finance Authority: “The structure of this transaction will undoubtedly serve as a template for other municipalities looking to access capital markets for essential projects during difficult financial times.” Detroit PLA Director Jones said the PLA will immediately begin the second phase, which will see the sale of approximately $150 million in bonds. Those bonds will be used to pay off the initial bonds sold last Friday, as well as providing additional funds to finish the street lighting project.  The new issuance, however, has created a ripple effect according to Moody’s. In its Weekly Credit Outlook for Public Finance, the rating agency termed the court’s approval of the loan for lighting a “credit negative” for the city’s existing creditors, because the new debt increases the probability that any operating revenues will be diverted to new creditors, diminishing resources available to pay existing bondholders: “The $60 million loan is backed by a property lien on $12.5 million in annual utility tax revenues that flow to the city’s general fund…Even though they are not used to pay existing debt service on General Obligation Unlimited Tax, General Obligation Limited Tax or Certificates of Participation, these revenues provide support for the city’s general fund, and their loss means that the city’s general fund may have fewer resources with which to pay creditors.” Moreover, in the category of misery loves company, the city’s bond insurers, European banks, and the Motor City’s largest labor union have objected to the tax revenues being dedicated toward streetlight improvements―objecting that the borrowing will divert funds from the city’s creditors, as well as reduce resources necessary to recover from the city’s insolvency. Judge Rhodes sided with the city, expressing apprehensions that any delay could curtail Detroit’s ability to restore light to dangerous and crime-ridden areas. (An October survey found 44% of the 3,194 lights in the east-side pilot area were out; in the west side pilot area, about 45.5% of the 1,745 lights did not work.) Governor Snyder signed legislation in December authorizing creation of the authority. Its five-member board was appointed by members of the Detroit City Council and outgoing Mayor Dave Bing. The terms expire at the end of the month.

What Is the Timetable for Restoration of Local Authority in the Motor City? Detroit has a new Mayor-elect and council, but it is unclear when its own elected officials might actually be vested with any power or authority. While Detroit Emergency Manager Kevyn Orr, a state-appointee, has indicated he intends to step down next September “to return democracy to the citizens of this city,” Michigan officials involved with enforcing Michigan’s emergency manager law have indicated—based upon their experiences in the City of Pontiac―not to make the mistakes of the past, which was lifting state control after the departure of state fiscal overseers in Ecorse, Flint, and Hamtramck, only to see all three backslide into deficits. Thus, when Pontiac’s emergency manager departed last August, he left behind a rigid form of state control without any expiration date―or, as Lee Jones, Pontiac City Council President put it recently: “We’re still in handcuffs here, and we have no idea when it’s going to end.” Rather, Pontiac’s elected leaders are virtually powerless: they must answer to two arms of state power: a Transition Advisory Board that meets monthly and a full-time state-created city administrator, who was appointed to serve as overseer in place of the emergency manager―and has “virtually all of the duties and powers of the emergency manager.” Indeed, a spokesperson for the Michigan Treasury Department noted: “It’s too early to say that Pontiac is the template for future situations” including Detroit, but, he went on, it is inevitable that Detroit, too, would have years of state-orchestrated oversight, or as the Emergency Manager’s office in Detroit put it: “It’s very likely that some type of advisory board will be put in place,” adding that “whether that means there will also be an administrator in Detroit remains to be seen. Kevyn (Orr) points back to the situation that was put in place in New York City, which had (state) oversight there for 33 years after the city emerged from receivership in 1975,”  going on to add: “We’re looking at different models of what will be left in place in Detroit. But safe to say, there will be some form of ongoing oversight once the emergency manager is gone. Our creditors are going to demand it.”

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s