01.23.14

The Fine Art of Negotiating. Gov. Rick Snyder, joined by Senate Majority Leader Randy Richardville (R-Monroe), and House Speaker Jase Bolger (R-Marshall) yesterday afternoon announced consensus on an “incremental commitment to solve a problem,” with Gov. Snyder stating: “After careful analysis and discussions, I recommend we move forward on making an investment of up to $350 million over the next 20 years in Detroit.” The Governor made clear that such a package depended on whether or not there was a settlement, that the resources of the state would be directed to the Motor City’s retirees—especially its low income retirees, and that there be “independent fiduciary management” of the city’s pension funds.” Making crystal clear he was not talking about a bailout, and would not be asking the legislature to appropriate funds from its annual budgets, Gov. Snyder said the state’s bipartisan leadership was focused on the city’s retirees, and protecting the city’s assets so that “we can grow the City of Detroit.” He said that rather than appropriations, he and bipartisan legislative leaders were discussing using tobacco settlement proceeds or proceeds from municipal bonds, so that there would be a long-term commitment that would not draw from ongoing tax revenues and not require annual appropriations, stating: “The answer has to be a thriving Detroit.” While bipartisan leaders in both chambers made clear there was not yet a specific bill to encompass their commitment, the plan nevertheless confronts a tough election-year sell among some other members of both parties who remain doubtful the potential $700 million fund could entice retirees owed as much $3.5 billion in pensions and $5.7 billion in health care to settle their claims with Detroit. The overall funding plan being discussed, which would include the state support and the money pledged by the foundations, is intended to limit cuts to the pensions of Detroit retirees and prevent a sell-off of DIA artwork. It would require the approval of U.S. Bankruptcy Judge Steven Rhodes. Gov. Snyder last week hatched the plan with key legislative leaders under which the state would pledge about $350 million over 20 years to roughly match a $330-million commitment made by foundations under a deal to assist both the DIA and pensioners brokered by Chief U.S. District Judge Gerald Rosen—meeting Tuesday with what’s known in Lansing as “the Quadrant,” Majority Leader Richardville; Senate Minority Leader Gretchen Whitmer, Speaker Bolger, and House Minority Leader Tim Greimel. One factor that appeared to help was recognition that “When you talk about retirees you talk about people who get pensions and health care who worked all their lives in Detroit,” but don’t necessarily still live there anymore, the group grasped that there could be statewide benefits. Asked about strings attached to any such agreement and legislation, Majority Leader Richardville stressed the importance of paying off long-term debts to ensure there would be no repeat financial crisis: “Whatever we can do to help, we will help…But there is no such thing as a bailout, it doesn’t exist in our language. We will look at specific pieces, especially if it has to do with employees who are retired.” In contrast, Sen. Rick Jones (R-Grand Ledge) was more skeptical, telling the Detroit Free Press he was “not prepared to vote for mid-Michigan tax dollars to go to Detroit….I represent mid-Michigan and my taxpayers want money to go to our roads and our schools and our cities and townships…I also worry about setting a precedent. If we do this bailout for part of Detroit’s problems, who’s next?”

Move Ahead. U.S. Bankruptcy Judge Steven Rhodes yesterday—at exactly the same time Governor Snyder was holding his press conference (please see above) in Lansing―denied a request by retiree attorneys to block proposed health care cuts and for a second independent appraisal of the DIA’s collection, rejecting an emotional case against major cuts to retiree health insurance that Emergency Manager Kevyn Orr could impose effective March 1. Christie’s auction house, which Mr. Orr hired last September, had released a valuation of the art collection that estimated the value at between $454 million and $867 million. Ryan Bennett, an attorney for Syncora Guarantee Inc., said the true figure could be four times that estimate. Creditors filing the motion include bond insurers Financial Guaranty Insurance Company, Syncora, and Ambac Assurance Corp. as well as FMS Wertmanagement. The city’s largest union, American Federation of State, County and Municipal Employees, and a committee representing 24,000 Detroit retirees are also part of the motion. The Official Committee of Retirees, the American Federation of State, County and Municipal Employees and two retiree associations are suing the city over Mr. Orr’s plans to end traditional city insurance for retirees. Under his tentative plan to pare down a $5.7 billion unfunded retiree insurance long-term liability, Mr. Orr wants to give retirees younger than 65 a $125 monthly check to use toward purchasing private health insurance. Attorney Sam Alberts, in a plea for an injunction to prevent the city from imposing the new program, stressed to Judge Rhodes: “You are going to have people who are seriously harmed as a result of this….This is more than a breach of contract…For these people who do not get healthcare it’s literally life or death.” The new plan, Mr. Alberts contended, is so extreme that it violates the state constitution. Judge Rhodes interjected, asking Mr. Alberts if the issue could wait and instead become an equitable argument under the city’s anticipated adjustment plan—to which Mr. Alberts immediately responded: “Not if you are dead.” Robert Hamilton, an attorney for the city, said the complaint should be dismissed. He countered that the retiree claims have no merit and Detroit is not attempting to unilaterally modify or eliminate benefits: “The city has determined that it cannot afford to perform those obligations and it must breach those obligations,” arguing that the plaintiff’s assertion that the move is a violation of due process also fails, Hamilton argued. Moving forward with the changes does not restrict the plaintiffs or the city from negotiating in mediation for how the breach of contract claim would be treated in the city’s plan. In his oral opinion yesterday, Judge Rhodes denied creditor attempt to establish independent committee to assess value of the Detroit Institute of Arts, stating the U.S. Bankruptcy Code imposes constraints on his authority to impose upon the city an committee such as the one proposed (the court “lacks the authority to grant the requested relief.”); rather, he ruled, whether the Motor City’s plan of adjustment is in the best interests of creditors should be decided when the plan of adjustment is before the court. With regard to the DIA independent appraisal, Judge Rhodes said Michigan Attorney General Bill Schuette’s argument that DIA art cannot be sold is a “serious argument,” adding, moreover, that while workers’ well-being is important, that art belongs to all in Michigan—not just Detroit. Judge Rhodes devoted his final minutes in court to urge Detroit and creditors to negotiate— not to do additional legal maneuvering: “I can’t implore that to you strongly enough,” warning Detroit and its creditors that “fundamental and profound change” may be required in pensions, health care, and union deals: “Plan feasibility may well require a fundamental and profound change in the city’s pension funds, or in the city’s health care plans, or in the city’s collective bargaining agreements.” Judge Rhodes added: “The city should be fully prepared for this issue at confirmation. And equally importantly, all parties must fully accept this premise in their plan negotiations.” Further, Judge Rhodes made a fundamental point not addressed in the closed-door negotiations behind closed doors earlier this month in New York City: “Feasibility means the city of Detroit must be able to exit bankruptcy with ability to pay bills and reinvest in services.” Thus, he urged the city and creditors to ensure the proposed plan of adjustment is feasible. With regard to the fate of the retiree health care cuts objection, Judge Rhodes said he will issue his ruling at 10 a.m. next Tuesday.

“Whether any of us like it, the art is in play,” said Vince Marriott, an attorney for a group of European banks that owns some of the city’s pension certificates—to which Judge Rhodes responded , “I have to say that that is not altogether clear to me at all…It depends on what you mean by ‘in play.’”

Reaching Out to the White House. Michigan Gov. Rick Snyder is scheduled to unveil a Motor City immigration request to the Obama Administration this morning at the offices of the IDEAL Group, a family-owned manufacturing and construction company in Detroit whose founder is the grandson of Mexican immigrants. Mayor Mike Duggan, city council members, and other community leaders are expected to attend. Gov. Snyder is expected to request that the Obama administration set aside 50,000 work visas over the next five years to entice talented immigrants to live and work in bankrupt Detroit, proposing 50,000 work visas solely for the Motor City over five years. This would be precedent setting, as these work visas are not currently allocated by region or state; they go to legal immigrants with advanced degrees or who show exceptional ability in certain fields. Under the Governor’s innovative proposal, the White House would allocate 25% of the nation’s 40,000 annual EB-2 visas be designated for such immigrants willing to live and work for five years in Detroit. Noting that his proposal does not request any federal financial bailout, the Governor said: “This involves working with immigration rules and visa limits…Here’s a non-cash way to significantly accelerate the comeback of Detroit. Why wouldn’t this be a great thing?” The Governor has long been a proponent of immigration as an economic driver, citing statistics that immigrant entrepreneurs start many small businesses and file patents at twice the rate of U.S.-born citizens, noting that immigrants created nearly one-third of the high-tech businesses in Michigan in the last decade, third in the nation. Under his proposal to the White House, Gov. Snyder is seeking assistance to create flexibility in a waiver that currently allows foreign workers with a master’s degree or higher — or who demonstrate exceptional skills in science, business or art — to come to the U.S. if it is in the “national interest.” The waiver is available if an applicant does not have a job or if a prospective employer cannot show that there are no qualified U.S. citizens to fill the position. The Governor is seeking to broaden the definition of national interest to apply it to the geographic area of downtrodden Detroit — where population likening the concept to one already in place where foreign-born physicians can get a green card after working in an underserved area for five years. Under the plan, Detroit would be allocated 5,000 visas in the first year, 10,000 each of the next three years and 15,000 in the fifth year. The Governor seems especially excited about his hopes to retain foreign students with advanced degrees in science, technology, engineering, or math in Michigan: “A lot of those folks come get their degrees, we give them a world-class education and we tell them to get out.” Last week, in his annual State of the State address, Gov. Snyder announced a plan to join two other states in putting immigration services under a special office and a separate initiative to make Michigan the second state to run a regional EB-5 visa program to attract immigrant investors for development projects.

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