A Fight to the Finish. Like Shakespeare’s famous two-backed beast, Detroit’s efforts to propose a path to get out of bankruptcy this week went on in closed-door negotiations (closed not just to the public, but also to the elected leaders of Detroit) in New York, but also in a federal courtroom in Cincinnati. As Detroit Emergency Manager Kevyn Orr races to put together a plan of adjustment to submit to U.S. Bankruptcy Judge Steven Rhodes by next week, a prerequisite to exiting municipal bankruptcy that is intended to represent an equitable allocation of “haircuts” amongst the Motor City’s 100,000+ creditors, key creditors hoped to complete negotiations in New York City, while—at the same time—Detroit’s General Retirement System and Police and Fire Retirement System late Wednesday filed a motion with the 6th U.S. Circuit Court of Appeals in Cincinnati for an expedited appeal of the bankruptcy court’s decision last month finding the city eligible for municipal bankruptcy—and, the city’s new leadership—not invited to New York, got off to an uneven start with the Motor City’s newly elected City Council President Pro Tem George Cushingberry claiming he was mistreated by Detroit police officers during a traffic stop, which ended in a citation for not using his turn signal―but involves reports now under investigation that he was driving with marijuana and an open intoxicant in his car, when he was stopped, with an empty rum bottle, left over from a party about a week earlier, in his backseat, and a passenger who is a medical marijuana patient and caregiver who had marijuana on him. The juxtaposition of events in Detroit and New York City—to which newly elected Detroit Mayor Mike Duggan was not invited, nor to which any party responsible for the future economic revival and sustainability of the city was a party, demonstrate the exceptional challenges ahead. The bi-city dramas in Gotham and the Motor City also came as Emergency Manager Kevyn Orr has reached his self-imposed deadline to present an initial plan of adjustment to the city’s creditors by early this month. Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, yesterday, moreover, clarified still another hurdle: “We are strongly opposed to any notion that the mediation process should interfere with the request for an immediate appeal,” even as at the General Retirement System’s board meeting Wednesday morning in Detroit, pension fund officials reported that progress was being made in the negotiation sessions and that the meetings would continue through today in New York City. In its filing, the unions wrote: “The city’s transparent effort to avoid any appellate review of the critically important eligibility question is legally unjustified and breathtakingly unfair to the tens of thousands of workers and retirees who devoted their lives to public service to Detroit and now depend on their accrued pension benefits, as well as employees and retirees across the state and nation who may be affected by this ruling.” In the city’s response brief filed with the court, the Motor City’s attorneys stated they were optimistic the mediation sessions could result in a “consensual plan,” providing some indications that the city’s pensions might be spared from the type of deep cuts Mr. Orr had proposed last June: “This court should not speed its review of the city’s eligibility just to avoid problems that may never materialize,” the city’s attorneys wrote. In their reply brief, the pension fund’s attorneys said the city was seeking to stall creditors from getting a higher court’s review of Judge Rhodes’ ruling. “The city contends that a direct appeal might interfere with the ongoing mediation, but, like the bankruptcy court below, offers no explanation why or how that is so…Indeed, the city’s opposition to an appeal now is transparently designed to avoid any appeal ever, in the hope the parties will settle or the city’s implementation of a plan (of adjustment) will equitably moot the issue.”
The New York, closed-door sessions, which have been taking place at two locations in Gotham, involved major creditors, including not only the city’s two unions, but also holders of Detroit’s nearly $6 billion of water and sewer bonds, holders and insurers of its unlimited-tax and limited-tax general obligation bonds and water and sewer bonds. The negotiations did not include leaders of other jurisdictions of the Detroit metropolitan region who have their own concerns with regard to Mr. Orr’s proposed spinoff of the Detroit Water and Sewer Department to make it a metropolitan authority. Mr. Orr has been hoping the water and sewer bondholders would agree to give up their call protections, allowing for a current refinancing of the bonds to achieve savings―threatening otherwise to use the federal municipal bankruptcy law to impose a new—and lower—interest rate on the bondholders. The $5.7 billion of water and sewer revenue bonds is considered Detroit’s most secure debt. Thus, the closed-door negotiations with the bondholders and insurers over the Motor City’s plan to lease the massive water and sewer operation to a new authority that would be run by Detroit’s three adjacent counties―with the hope of generating $70 million a year for the city’s general fund, has been a key issue. Parties to the water and sewer mediation included bond trustee US Bank NA; bond insurers Assured Guaranty Municipal Corp., Financial Guaranty Corp., and Berkshire Hathaway Reinsurance Group; and bondholders Black Rock Financial Management, Fidelity Management and Research Co., Eaton Vance Management and Nuveen Investments, according to court filings. Parties to mediation on the city’s unlimited-tax GO bondholders were National Public Finance Guarantee Corp., Assured Guarantee Municipal Corp., Ambac Assurance Corp., Syncora Capital Assurance Corp. and Syncora Guarantee Inc.
Puerto Rico Bankruptcy? One of my favorite analysts and writers has inquired about the eBlog’s silence with regard to the fiscal crisis bedeviling Puerto Rico, the U.S. Commonwealth created by the Jones-Shafroth Act (yes, you read that correctly…), Public Law 64–368, which has a population just about five times that of Detroit and a public debt of about $70 billion—just under four times larger than Detroit’s $18 billion. Like the Motor City, Puerto Rico is losing citizens: 54,000 residents — 1.5 percent of its population — between 2010 and 2012 alone. Since recession struck in 2006, the population has shrunk by more than 138,000 to 3.7 million, with the vast majority of the outflow headed to the mainland. The island is paying nearly 10% on its municipal bonds, and some credit-rating analysts are warning Puerto Rico’s bonds may soon get a downgrade. The economy here has been in recession for nearly eight years, savaging tax revenues and pushing the jobless rate to nearly 15%, and the Commonwealth is burdened by staggering debt, forcing lawmakers to severely slash pensions, cut government jobs and raise taxes in a furious effort to avert default. Credit rating agency Fitch warned that Puerto Rico’s general obligation bonds could be downgraded to junk status because of concerns that the Commonwealth would be unable to return to the market anytime soon to borrow more at a reasonable cost. When it placed Puerto Rico’s general obligation and other bonds on review for a downgrade on last month, Moody’s cited the growing inability to refinance certain lines in the long-term market. Puerto Rico’s debt load is bigger than that of any state except California and New York. The implications are serious for Americans outside Puerto Rico both because a taxpayer bailout would be expensive; a default would be far more disruptive than Detroit’s record bankruptcy filing; and filing for municipal bankruptcy protection is not an option. Officials in San Juan and Washington are adamant that a federal bailout is not on the table, but the situation is being closely monitored by the White House, which has named an advisory team to help Puerto Rican officials navigate the crisis. The brutal combination of a long recession, a shrinking population, and overwhelming debt has left Puerto Rico’s political leaders struggling, but without a tool to put a judicial halt to put its fiscal house in order, or, as Governor Alejandro Javier Garcia Padilla puts it: “Sometimes, you are between the wall and sword.” Like states, the Commonwealth of Puerto Rico cannot file for bankruptcy. In addition, Puerto Rico’s constitution offers bondholders strong guarantees that they would be paid before pensioners and public workers if the government were to default. Puerto Rico’s expansive web of debt includes standard government bonds as well as those floated by public corporations, including authorities for water and sewer, highways and electric power. Together, those bills have nearly tripled since 2000, as successive administrations turned to the bond market to plug gaping budget deficits. In addition to the $70 billion in government debt, the government also faces $37 billion in unfunded pension obligations, according to Morningstar.
The island’s potential default has led some to inquire why Puerto Rico could not file, like Jefferson County or Detroit, for federal bankruptcy protection. The key difference is that with regard to Chapter 9 bankruptcies, federal law provides that an entity may be eligible as a debtor under Chapter 9 municipal bankruptcy only as such an entity is specifically authorized in its capacity as a municipality. The chapter of the Bankruptcy Code provides for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts). The chapter does not provide for territories. In effect, Puerto Rico falls into Rod Serling’s Twilight Zone: it is neither a state, nor a municipality. Last year, when the Commonwealth of the Northern Mariana Islands (CNMI) sought bankruptcy protection for its pension plan, its request was rejected, because the plan would not qualify as a municipality. Chapter 9 is limited to municipalities. Moreover, when the U.S. House Judiciary in 2011 held hearings in contemplation of drafting federal legislation for state bankruptcies, the Committee learned to its seeming consternation that the U.S. Constitution provides, as a threshold matter, that the dual sovereignty of the Federal Government and the States precludes the Federal Government from imposing a mandatory bankruptcy procedure on states. In the case of Puerto Rico, like the No. Marianas, the Commonwealth is neither a state, nor a municipality; it lacks any mechanism under federal law to achieve the kinds of protections provided—if authorized by a state—to achieve a time out to reorganize its debts.
On the Road to Recovery. Newly sworn-in Harrisburg Mayor Eric Papenfuse today will announce the appointment of former Lebanon, Pa., Mayor Jackie Parker to head up the city’s economic development team, where Ms. Parker will take on the challenge of implementing the city’s recovery plan―a plan put together outside of and instead of going through chapter 9 municipal bankruptcy. The Herculean task will create the challenge of putting into effect the Harrisburg financial recovery team’s proposed plan to eliminate the capitol city’s $600 million of debt and restore its access to the capital markets. The key to the city’s exit from virtual bankruptcy was the sale of the city’s incinerator to the Lancaster County Solid Waste Management Authority, as well as a long-term lease of parking assets from Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority. Ms. Parker, who was the executive director of the Chester Economic Development Authority, will supervise a team that includes Roy Christ as director of building and housing, and Lenwood Sloan as director of arts, culture and tourism. In addition, after being sworn in this week, Mayor Papenfuse announced key members of his cabinet, including former City Council attorney and Debt Watch Harrisburg co-founder Neil Grover as city solicitor; former councilman Bruce Weber as finance director; Karl Singleton as senior advisor for education and youth; Catherine Stetler as special assistant to the mayor; and Joyce Davis as communications director.