One More Lap. Despite still another Polar Vortex visit to the Motor City, this will be a frantic week in U.S. Bankruptcy Judge Steven Rhodes’s courthouse: The Motor City intends to file a new or revised plan of adjustment and disclosure statement today in an effort to address a number of complaints from some of its 100,000+ creditors of insufficient information, promising it will provide updated agreements as a result of ongoing negotiations; Judge Rhodes also agreed on Friday that he would make a decision Wednesday in response to a request from some of Detroit’s creditors for a delay in the SWAPs hearing scheduled for Thursday; Detroit Emergency Manager Kevyn Orr is scheduled to be deposed today; and Judge Rhodes will now have to deal with Syncora’s request Friday to subpoena to the Detroit Institute of Art (DIA), as well as Christie’s auction house, and the State of Michigan for dozens of documents—with Syncora and others of the city’s creditors claiming the art collection may be worth far more that Christie’s has estimated. Finally (tired yet?), Judge Rhodes will also hear a dispute on Detroit’s debtor-in-possession or proposed $120 million DIP loan with Barclays at the Wednesday hearing. Continue reading
Celebrate Chocolateville! Moody’s yesterday reported that Central Falls, R.I., also known by some of its citizens as Chocolateville—where we commenced this Center’s efforts to look at municipal fiscal distress two years ago, is reporting a $1.6 million surplus—less than two years after exiting municipal bankruptcy. Central Falls, only one square mile in size, filed for Chapter 9 bankruptcy protection on Aug. 1, 2011. Unsurprisingly, Moody’s terms its exit a credit positive. On the hot Spring day when we met at City Hall with Central Falls’ bankruptcy receiver, former Rhode Island Supreme Court Justice Robert Flanders, the small, former mill city was plagued with problems contributing to its insolvency: low civic engagement, a small tax base, and the departure of business. Its old industrial base was gone. It was unclear whether a community of one square mile could actually have a sufficient economic base to recover. The key to the Central Falls story included signs of financial distress—signs which had already become apparent in 1991— but, absent political will, had engendered no changes. Continue reading
Getting to the Checkered Flag. Detroit Emergency Manager Kevyn Orr yesterday urged the city’s unions to reach an agreement on bankruptcy terms soon or risk the loss of millions in funding pledged toward pensions.Speaking at the University of Michigan, after a presentation jointly with Governor Rick Snyder in New York City Monday, Mr. Orr said he hopes to secure enough support “within the next couple of weeks” to achieve a consensual resolution to the Chapter 9 bankruptcy, but warned that time is running out. Continue reading
Readying an Exit Strategy. Amid uncertain negotiations with its neighboring jurisdictions over the creation of a regional water and sewer authority—negotiations which appear to be making little headway, the Detroit Water and Sewerage Department has made public plans to issue $150 million in sewer bonds this June in order to access capital to finance improvements. The move comes not only amid the on-again, off-again discussions with the city’s neighbors, but also as Detroit contemplates restructuring the water and sewer system’s $4 billion in outstanding debt, because of its municipal bankruptcy proceedings. It remains unclear whether the decision might help re-open regional discussions, which ruptured amid disputes over lack of information provided by the city to its suburban neighbors, capital costs, uncollected bills, and other disagreements. Continue reading
Readying An Exit Strategy.The Motor City hopes to accelerate a process to solicit votes from some 32,000 of its retirees and beneficiaries on a blueprint for restructuring the city’s debt—a process in which U.S. Bankruptcy Judge Steven Rhodes has instructed the city’s attorneys, they must take great care to ensure the retirees have a very clear understanding about what impact such proposed cuts would have on their pensions and health care benefits, according to the Detroit News. Under the draft schedule, Detroit will send a ballot and copy of the city’s proposal to reduce its $18 billion debt to its retirees by the end of April—providing these retirees and other creditors until June 30th to submit their votes. Continue reading
Motor City Public Pension Plans. The funded level of the Detroit’s two pension plans is projected to have dropped, a result tied in part to the city’s failure to contribute millions owed last year, actuaries for the boards say. The city’s Police and Fire Retirement System learned during a presentation Thursday that its funded level of 96.1 percent is projected to have fallen to 89 percent as of June 30, 2013. Continue reading
Tempus Fugit.Even as this week’s filings before the U.S. Bankruptcy court in Detroit have threatened significant new costs and delays, Michigan Governor Rick Snyder yesterday warned that a critical component of any final agreement – the state contribution of $350 million, paired with $465 million from funds pledged by foundations and the Detroit Institute of Arts―could be in jeopardy, unless the legislature acts by May. The Governor made clear he believes legislators in Lansing are awaiting progress from negotiations between retirees, unions, and the city to reach some kind of preliminary agreement. Gov. Snyder viewed such an agreement as a critical one that could be key to enabling any funding package to gain approval from the Legislature. The Governor’s bipartisan proposal would divert $350 million over the next two decades from the state’s tobacco settlement fund, which together with the DIA $465 million, would be focused upon minimizing the impact of the bankruptcy on the Motor City’s lowest income retirees, as well as obviating a sale of the DIA artwork, noting that any Michigan funding would be contingent on a final settlement signed off on by retirees and city employee unions: “In many ways, to move forward in terms of what the state needs to do is to see if there is a conclusion or settlements going on between the retirees, the unions and the city itself…I’m really looking to them to take the point on this in terms of saying, can they come to some agreement?…If there’s an agreement, then it would be a much better process to get through the legislative process.” However, he warned, if there remains little significant progress by May, then “it becomes extremely difficult” for the Legislature to act before it breaks for the summer. The Governor made clear that absent action before the summer recess, it would “make it extremely difficult, period.”
Back to School. Reduced federal aid, but sharply escalating operating costs are combining to impose a double whammy on the Motor City’s public schools. The Detroit Public Schools, which have now been under state control for five years, are experiencing a soaring budget deficit―it has risen from $38.8 million in the past three months, to a projected $120 million, even as the system has declined by 37,000 students, closed 100 school buildings, and eliminated 5,000 positions. Annual budgets have been slashed by $500 million in five years, but debts have risen. The system attributes some of the surge in debt this year to shortfalls of $10.7 million this year in property tax revenue and $21 million in Title I federal aid. The system had budgeted $130 million in Title I money for 2013-14, but now expects only $109 million; it had projected $68.4 million in property tax revenue, but now says it will receive just $57.7 million. Collection rates have fallen. On the opposite of the ledger, however, the system reports that operating costs are rising, including some $19 million in extra maintenance and operations spending after the city’s never-ending Polar Vortex winter. A spokesperson for the District said the district’s chief financial officer is “closely reviewing” the Title I cut, which the person said was made by the state, and reported that DPS cut its property tax collection rate to match the city’s rate, because new Mayor Mike Duggan reduced residential property assessments. The system’s state-appointed Emergency Manager, Jack Martin, whose term is scheduled to end next January, yesterday opined the district is two to three years from resolving its deficit, telling the media: “I’ve always said I would like to be the last emergency manager. There will have to be something in place that, if not an emergency manager, something that maybe looks like or functions with emergency manager powers.” Moreover, it is not just in the fiscal area where the system is experiencing low grades, but also academics: DPS students have made minimal progress and remain in the bottom for state and national test scores. In 2009, DPS students earned historically low math and reading scores on a test given to urban districts — the worst in the exam’s 40 years. Four years later, DPS scored the lowest in the nation in math and tied for lowest in reading. Dan Varner, chief executive officer of Excellent Schools Detroit and Secretary of the State Board of Education, said public education at DPS and other city schools has not improved. “I remain disappointed with the lack of progress and think the situation is as urgent as it was five years ago… kids in Detroit are still getting a mediocre education.”
More Small Community Fiscal Distress? Michigan Governor Gov. Rick Snyder yesterday confirmed a financial emergency for Royal Oak Township, pushing the Oakland County community closer toward an emergency manager to oversee its finances. Royal Oak is a charter township of Oakland County, a suburb of Detroit; it is part of the Metro Detroit area. As of the 2010 census, the population was 2,419. With the decision, elected officials in the half-square-mile township will have one week within which to select one of four options for moving forward, as prescribed by Michigan’s Public Act 436: Officials could choose between: 1) a state-appointed emergency manager, 2) a financial consent agreement with the state, 3) a neutral mediation with the township’s creditors, or 4) Chapter 9 municipal bankruptcy. The township board has until close of business next Tuesday to pass a resolution selecting one of the four options. At the end of January, the governor announced the financial emergency for Royal Oak Township, a process that allowed township leaders a hearing before state Treasurer Kevin Clinton. During that hearing, convened last month on the 12th, township officials argued they could continue governing without state intervention. They did not dispute their state review team’s findings, but blamed the township’s shrinking tax base and decisions by past officials for its financial woes. The Oakland County Sheriff’s Office terminated policing services to the township in November after officials failed to pay the bills.The state’s Royal Oak team found that, among other things, audit reports for the last three years showed variances between revenues and expenditures, with actual general fund revenues coming in short for two of the three years. Township officials also failed to adopt a budget for the current fiscal year that began on Jan. 1, 2014, according to the Michigan Treasury Department. The state had appointed the review team early last December, after a preliminary analysis showed that “probable financial stress” existed in the township. Counting Royal Oak, Michigan now has appointed or taken effective responsibility in the Motor City metropolitan area for: Detroit, Allen Park, Flint, Hamtramck and Pontiac, as well as several school districts, including the Detroit Public Schools. In addition, the Governor has also declared a financial emergency in Highland Park, although that Detroit suburb has not yet entered the stage of selecting one of the four options, and is currently assessing the finances of Lincoln Park, located just outside Detroit in Wayne County.
The Motor City Upcoming Calendar
April 3: Hearing on approval of $85-million swaps settlement.
April 14: Hearing to determine if the city’s disclosure statement offers sufficient information for its 170,000 creditors.
April 28: Hearing on legal issues related to Detroit’s proposed plan of adjustment.
June 11: Pretrial hearing to discuss logistical issues associated with the plan of adjustment confirmation hearing.
June 16, 17-20, 23-27: Hearing to determine whether Detroit’s plan of adjustment should be approved.
June 30: Deadline for retirees and bondholders to object to the plan of adjustment.
July 16: Beginning of confirmation hearing for plan of adjustment.
Sept. 14: Date on which the Detroit City Council could vote to reassume control of the city from Emergency Manager Kevyn Orr.
? : Hearing by the 6th U.S. Circuit Court of Appeals on challenge to the U.S. Bankruptcy Court’s December decision finding the Motor City eligible for chapter 9 federal bankruptcy protection.
Playing for Swaps. Syncora Guarantee Inc. yesterday filed a motion, seeking to have U.S. Bankruptcy Judge Steven Rhodes reject the Motor City’s $85 million agreement with its interest-rate swap counterparties—potentially a breakthrough settlement that could pave the way for Detroit to achieve its goal of getting its plan for debt adjustment approved and to exit municipal bankruptcy sooner than later. Syncora’s challenge is to the only settlement the city has so far made in its Chapter 9 bankruptcy. The new filing came just one day after Monday’s suit filed by bond insurer Financial Guaranty Insurance Corp. in opposition to Detroit’s lawsuit seeking to invalidate the city’s certificates of participation, or COPs. (Under such an arrangement, the insurer [FGIC in this case] wraps a chunk of the pension certificates of participation that the swaps hedge, as well as the swaps themselves. Note: there will be a quiz on this later for readers.) Continue reading
Playing for Swaps. Financial Guaranty Insurance Co., or FGIC, yesterday, along with Detroit’s two pension funds, filed objections in U.S. Bankruptcy Court to Detroit’s proposed plan to end a troubled pension-related debt, challenging a Motor City lawsuit that attempts to repudiate $1.4 billion of pension certificate debt. The challenge involves the proceeds from the issuance in 2005 of so-called certificates of participation or COPs, issued to fund Detroit’s two pension systems. FGIC noted that if the city were successful in overturning the debt, it could expose the pension systems to claims of “unjust enrichment,” which, it wrote to the court, would raise “significant questions about the city’s future, including the feasibility of the city’s existing proposed Chapter 9 plan.” FGIC insures $1.1 billion of the pension debt; Syncora Guarantee Inc. insures $329 million. Continue reading
More on Judge Rhodes’ Docket. The Detroit City Council voted 6-3 late last Friday to beat still another snowstorm and approve a $120-million loan from Barclays in an effort to accelerate its investment in essential public services, such as police, fire and public lighting. The loan, which Kevyn Orr requested approval for earlier this month from U.S. Bankruptcy Judge Steven Rhodes, would be backed by the city’s pledge of its income tax revenue and the proceeds from the future sales of assets, except for Detroit Institute of Arts property. Continue reading