Will the third offer do the trick? Detroit yesterday sought approval from the U.S. Bankruptcy Court for its third stab at a proposed agreement to end its interest rate swaps agreement with UBS AG and Merrill Lynch, proposing an offer that would reduce the city’s debt to just $85 million—less than the Motor City’s previous proposals, which had been rejected by Judge Steven Rhodes. In its filing yesterday, attorneys for Detroit claimed the investment banks agreed to vote for Detroit’s plan of adjustment, mayhap helping to convince other creditors of momentum. Under the proposed agreement, Detroit would make quarterly payments until the city emerges from bankruptcy, at which point the remainder of the $85 million would be due―just over half as much as the city’s most recent offer of $165 million—which Judge Rhodes had rejected as being overly generous.
Round II in San Bernardino. The 9th U.S. Circuit Court of Appeals, almost as if in concert with the 6th U.S. Circuit Court of Appeals, has now agreed to hear an appeal of U.S. Bankruptcy Judge Meredith Jury’s decision finding San Bernardino eligible for chapter 9 municipal bankruptcy. The decision is parallel to the appeal before the 6th Circuit with Detroit’s bankruptcy, in addition, because the San Bernardino case also involves a challenge to the lower court’s determination that San Bernardino’s payments to the California Public Employees’ Retirement System (CalPERS) may be reduced, notwithstanding the California state constitution. The 9th Circuit’s acceptance of the case increases the chances the issue involving the conflict of federal law and state constitutions could wend its way to the U.S. Supreme Court in one of the most profound issues of federalism in U.S. history. Nevertheless, even as the 9th Circuit opened its doors to CalPERS’ challenge, there appears to be some optimism that the ongoing negotiations between CalPERS and San Bernardino under the ministrations and mediation of U.S. Bankruptcy Judge Gregg Zive are making such progress that CalPERS could drop its request for the federal appeals court’s intercession. Part of the apprehension on the part of the city of another round of trial before the 9th Circuit is the mounting legal costs of the city’s bankruptcy—with every dollar spent on legal and legal-related fees a dollar less to provide for a sustainable future for the municipality. A mid-year budget report this month shows San Bernardino has already spent $2.6 million this year on legal and consulting costs related to the bankruptcy, and city officials anticipate spending $4.6 million by the end of the fiscal year in June.
Changing Trains. The 9th Circuit’s decision comes at another critical juncture, as San Bernardino Mayor Carey Davis, who has been deeply involved in the municipal bankruptcy mediation sessions overseen by U.S. Judge Zive, assumed office yesterday. Just as Mayor Mike Duggan has taken office in Detroit in the midst of its historic municipal bankruptcy, so too Mayor Davis assumes office constrained by uncertainties about federal court decisions that could weigh heavily on the California city’s future. Outgoing Mayor Pat Morris, who last October in his final State of the City address said the city was going through a nightmare, Friday noted great challenges and great problems remain. Nevertheless, he believes things are looking up: “I leave with a sense of optimism about our city’s future, and arrived the same way…Despite the great meltdown of our last many years and the toxic politics of our city, the landscape is changing. The economy is in recovery and so are we.”