Will the State Pitch In? The White House? Michigan Governor Rick Snyder yesterday, on the eve of his fourth State of the State address, met with legislators on both sides of the aisle in separate meetings to seek bipartisan support for a plan to have the state commit $350 million over the next two decades to leverage—and match—the $330 million that nine private foundations have pledged toward converting the city-owned Detroit Art Institute into a new non-profit public trust and bolstering Detroit’s two pension funds—a plan largely put together by Chief U.S. District Court Judge Gerald Rosen last week after separate discussions with Governor Snyder, Detroit Emergency Manager Kevyn Orr, and foundation presidents from national and local foundations. Reportedly, Gov. Snyder’s plan would propose the use of Michigan’s tobacco settlement funds or capital borrowing—rather than appropriations. In contrast, Vice President Joe Biden, who came to the Motor City yesterday for dinner with Detroit Mayor Mike Duggan and in order to attend a meeting with community and business leaders this morning before touring the North American International Auto Show, yesterday reaffirmed the federal government will not provide a bailout to help the city exit bankruptcy—as it did for the Detroit auto industry. Vice President Biden said the White House will look for ways to help the Motor City, but the that “[T]he city will do it on its own; but there’s no reason why the federal government can’t do what we’re already doing…There are things that the city was entitled to, to begin with, that aren’t new monies, but they are monies that have been reorganized and brought back in at the mayor’s disposal.” The Vice President told the Detroit News that Mayor Duggan did not request any federal dollars, instead Mr. Biden reported: “We talked about strategy.” According to the Vice President: “You’ve got a lot of streetlights going. You’ve got to get the transportation system back up and running and it’s a Herculean task…There’s a lot of raw material here still that upon which you can build and create opportunities for jobs. It’s all about being able to have a job…Whatever help we can be, we want to be.” Vice President Biden plans to be at Cobo Hall this morning to speak to community and business leaders before touring the North American International Auto Show. He was scheduled to attend a Michigan Democratic fundraiser and a dinner last night with Detroit Mayor Mike Duggan and Don Graves, who is the White House’s point person for Detroit.
Biden said he read the bankruptcy judge’s “initial rulings” and other documents in the Detroit bankruptcy case. He declined to say if the Obama administration could aid retirees facing pension cuts. He declined to comment on the initial rulings. “It’s a little bit out of my lane,” Biden said.
U.S. Bankruptcy Judge Steven Rhodes will issue his decision Thursday afternoon over the deal worked out under the oversight of Chief U.S. District Court Judge Gerald Rosen in the closed door negotiations in New York City last week with bond insurers, the Motor City’s pension funds, banks, and others, with regard to whether Detroit can pay UBS and Bank of America $165 million to terminate the interest rate swap–pension debt arrangement that contributed so significantly to the city’s historic municipal bankruptcy. The swap involved some $1.44 billion borrowed during former Mayor Kwame Kilpatrick’s term to prop up Detroit’s pension funds. Under the proposed agreement, the Motor City will pay off the banks from a $285 million loan and dedicate the remaining $120 million to enhancing essential public services and public safety. Resolution of the issue, where protracted negotiations under Judge Rosen were ordered by Judge Rhodes, have held up Detroit Emergency Manager Kevyn Orr’s self-imposed deadline of last week for the filing of his plan of adjustment—as an ok from the U.S. Bankruptcy Court of the proposed swap agreement is a touchstone to finalizing the plan. Motor City attorney Corinne Ball Monday told the court the settlement would eliminate Detroit’s most costly obligation and lead to a “cost-effective” loan—and, she testified, fundamental to “restore services at a level it deems necessary – meaning the city, not its creditors.” However, an attorney for the city’s pension funds testified there was, in fact, no guarantee Detroit would spend the funds improving city services; rather, the attorney warned, there is evidence the city, instead, will use the cash for working capital. Similarly, an attorney for bond insurer Syncora called the Motor City’s proposed borrowing misguided: “The debtor’s focus here and now should be on building consensus around a confirmable Chapter 9 plan…Substantial borrowing and spending may be necessary for the city’s ultimate revitalization, but this case is first and foremost a debt-adjustment process.” The attorney does not believe Detroit will be rehabilitated or improved after borrowing the money.
The Art of Motor City. U.S. Bankruptcy Judge Steven Rhodes appears to have drafted an indefatigable and artistic Chief U.S. District Court Judge Gerald Rosen to serve in a wide variety of critical roles in the Motor City—so it was not a surprise when it was made public yesterday that Judge Rosen—after separate discussions with Michigan Governor Rick Snyder, Emergency Manager Kevyn Orr, and foundation presidents from national and local foundations was able to put together pledges of in excess of $330 million for a fund to protect city-owned art at the Detroit Institute of Arts (see photo to the left) from being auctioned off—an agreement his team of mediators deemed “an extraordinary and unprecedented effort” to preserve the art collection and raise money for Detroit’s underfunded pension funds…As the mediators attempt to achieve a settlement of all claims, it bears emphasis that the foundations’ agreement to participate is specifically conditioned upon all of their funds being committed to the twin goals of helping the city’s recovery from bankruptcy by assisting the funding of the retirees’ pensions and preserving the DIA’s art collection as part of an overall balanced settlement of disputes in the bankruptcy.” The successful announcement yesterday means the city’s Art Institute will be put under the auspices of a new non-profit public trust, so that it will not be subject to an emergency fire sale or “haircuts” as part of Mr. Orr’s proposed plan of adjustment, and the DIA’s works will be protected from unsecured creditors seeking to recover more than $11 billion owed by the Motor City. A committee of foundation presidents from the Ford Foundation, Kresge Foundation, John S. and James L. Knight Foundation, and the Community Foundation for Southeast Michigan is leading the effort, according to the mediators’ statement. Other foundations involved in the fund include the William Davidson Foundation, Fred A. and Barbara M. Erb Family Foundation, Hudson-Webber Foundation, McGregor Fund, and Charles Stewart Mott Foundation. Moreover, the coalition of foundations issued a joint statement making clear their contributions to the fund were “not intended to be the totality of our investment in Detroit now or in the years to come….Helping to protect the hard-earned pensions of city workers while also preserving the DIA’s collection for all the people of southeastern Michigan are worthy components of a balanced overall settlement that will help ignite Detroit’s renewal…As foundations, we recognize the limitations of the role we can play. But helping the leaders of this community put forward workable solutions to vexing issues is something to which we can contribute.”
Take me for a ride in your car, car…It’s almost like a tale of two cities this week in the Motor City where the once bankrupt auto industry—bailed out by the federal government—is resurgent enough to host its annual auto show that, by one estimate, will generate nearly $400 million for the metropolitan region’s economy. The Big 3 Detroit automakers have made billions in the recovery following the Great Recession. Ford expects to post an $8.5 billion profit before taxes for 2013, while GM made $4.8 billion pretax through the first nine months. Chrysler, the smallest and least-profitable of the three, earned $1.4 billion in pretax income through September. All have rolled out strong new cars and trucks to catch the rise in auto sales from a low of 10.4 million in 2009 to 15.6 million last year. General Motors and Chrysler emerged from their own corporate bankruptcies four years ago to become, once again, global leaders. David Sowerby, a portfolio manager and chief market analyst for Loomis Sayles & Co., who authored a study of the Detroit Auto Show’s impact on the regional economy, notes: “Economic activity is strong, the industry itself is stronger, there’s a modest increase in new models and if you talk to hotel or lodging industry, the number of conferences is growing as is business activity and travel.” Motown downtown hotels reported last week that occupancy is at 85% during the press days (yesterday and today) and about 70% from Jan. 18th―Jan 26th, when the show is open to the public. The show is projected to attract an estimated 5,000 journalists and 800,000 visitors. Mr. Sowerby estimates the event’s economic impact at as much as $390 million to the Detroit area, which also includes some suburbs and the Canadian city of Windsor. In contrast, a study performed by an outside research firm for the Detroit Metro Convention & Visitors Bureau in 2006 put the impact of that year’s Super Bowl XL at about $275 million, including pass-along, or spinoff spending by the merchants and others. Mr. Sowerby makes clear the difficulty of specifying the specific benefits to the city of Detroit itself beyond the boost to its downtown elevated rail system and businesses, such as hotels, bars and restaurants, and the prestige of a marquee event at a city-owned convention facility, in part because the Motor City has no local sales tax, nor a hotel tax (dot.com or otherwise). On the plus side, the city does not have to bear additional costs for public safety, since show officials handle their own security.