04.01.14

One More Lap.  Detroit Emergency Manager Kevyn Orr late yesterday proposed a 235-page revised plan of adjustment and a revised disclosure plan with the U.S. Bankruptcy Court that proposes steeper cuts to retirees unless they support a restructuring plan that includes money to shield the Detroit Institute of Arts from creditors. The plan revises how the Motor City is seeking to allocate its debts amongst its 170,000 creditors—and to preserve about $1.5 billion to invest in its future. In its filings, the Motor City made clear it expects to make further revisions in each of the documents—both hundreds of pages long—between now and Judge Steven Rhodes’ April 14th hearing  when creditors expect to challenge the completeness of the respective documents. The updated versions filed last night include new information with regard to what has been termed the $816 million “grand bargain” proposed by Michigan Governor Rick Snyder and bipartisan state leaders and foundations to preserve the Detroit Institute of Art. That innovative proposal, which was originated from the artful conception of U.S. Chief Judge Rosen as an extraordinary resource to address retirees’ pensions which might otherwise cast some of the city’s retirees into poverty, nevertheless must gain the support of the city’s two public pension systems. Notwithstanding the changes, yesterday’s revisions appear unlikely to overcome many of the most antagonistic opponents.  The 235-page restructuring plan increases pension cuts facing retired police and firefighters if they balk at an $816 million plan to bolster pensions and shield the DIA collection from a fire sale. Instead of a 10 percent proposed cut, as the city proposed in February, first responders would lose 14 percent of their monthly pension if they refuse to settle; those cuts, however, could be modified if retirees vote in support of the revised plan and agree to drop an appeal of Judge Rhodes’ ruling last December finding the city eligible for federal bankruptcy. (The 6th U.S. Circuit Court of Appeals has agreed to take the case, but has not scheduled any dates.) In a statement, Kevyn D. Orr, the city’s emergency manager, suggested that negotiations were proceeding. “The city continues to make progress with its creditors and retirees and hopes to reach agreement in the near term on a number of outstanding issues,” he said. “We believe that the plan we have proposed, and continue to refine, is feasible and allows the city to reduce its staggering $18 billion in debt and live within its means. The plan puts the focus back on providing essential public services to the city’s nearly 700,000 residents.” U.S. Bankruptcy Judge Steven Rhodes has set a Thursday deadline for creditors to file objections to the nearly disclosure statement.Key components of yesterday’s filings include:

  • Pensions & Retirees. In the new plan, if city police and fire department workers reject the city’s proposal for the unusual deal for state and foundation funds, Detroit will make deeper cuts to their pensions than had been initially suggested. In February, those retirees were expected to see pension cuts as steep as 10 percent, but the cuts could reach about 14 percent under the revised plan. In addition, the new plan suggests paying some general obligation bondholders less than what was expected earlier: about 15 cents on the dollar instead of 20 cents. The updated plan sheds light on a new class of impaired creditors. The new class is for creditors with claims relating to retiree health, dental, vision and death benefits. The revised plan, which added new details about reinvesting in aging city services and a possible sale of the city Water Department, proposes cuts to pensions for retired non-uniform city workers of as much as 34 percent. In return for supporting Orr’s plan, police and fire retirees would see a 6 percent cut and lose cost-of-living adjustments. General retiree pensions would be cut 26 percent along with eliminating cost-of-living adjustments. Retired police and firefighters have a better-funded pension plan, but are ineligible for Social Security benefits. Pension fund officials say the reductions would be exacerbated by the Motor City’s proposed 10-year elimination of cost-of-living increases for pension checks, which is currently 2.25 percent. Emergency Manager Kevyn Orr’s spokesperson Bill Nowling yesterday said potential cuts to police and firefighter pensions increased in the amended plan, because the previous version took into account only a portion of the money pledged toward the DIA rescue fund, explaining that under the revised version, a “no” vote is tied to the entire $816 million pledged toward that fund by foundations, the state and the DIA. Under Orr’s plan, cost-of-living increases would be prohibited for 10 years. Pension benefits, including annual increases, could be restored after July 2023 if the pension funds are at least 80 percent funded based on a 6.5 percent conservative annual investment rate of return. But the amended disclosure statement contains a warning to retirees in bold lettering: “Restoration of benefits, particularly until 2023, cannot be assured…After 2023, restoration of certain benefits may be possible, but it cannot be predicted at this time whether or when any restoration will occur.” The city included the unsigned trust agreements in a revised plan of adjustment it filed in U.S. Bankruptcy Court late Monday. The agreements would create new funds to hold pension assets and two new trustee boards, each with seven total members, noting in its proposed trust agreement: “In order for the retirement system to receive funding from the State of Michigan…the city is required to establish an irrevocable trust pursuant to which assets currently held under the retirement system and future contributions to the retirement system, together with earnings and losses thereon, are to be transferred to and held by an independent board of trustees,” the city says in the proposed trust agreements. According to the proposed agreements, both new boards would include five voting members with an annual stipend of $36,000 and two non-voting members and a CEO. The board members must have financial expertise and cannot be employees of the city or affiliated with any of its unions. It’s not clear who would appoint the trustees.
  • Swaps. The recast plan lays out an $85 million termination agreement with financial institutions over a so-called swaps deal the city made in 2005.
  • Reinvesting in Detroit’s Future. The revised plan calls for reinvesting $1.5 billion to upgrade services after cutting creditors and restructuring city operations, including $520 million to address blight, almost $464 million on police, fire and EMS, and $44 million on transportation―including $25 million for a transit security force, which would address security concerns among bus drivers and passengers.The plan describes the innovative plan (please see below The Art of Municipal Bankruptcy), highly unusual in a municipal bankruptcy, to spare the city’s world class art collection from sale and avoid deeper cuts to pensions with funds from foundations and the state, still not yet secured from the State Legislature.
  • Bondholders. Detroit’s amended reorganization plan also inflicts more fiscal pain on the investors of $375 million in unlimited tax general-obligation bonds. The original plan offered 20 cents on the dollar in new bonds, while the new plan cuts that to 15 percent. The new offer would reduce the value of the new bonds by another $19 million, leaving investors with just $56 million, and forcing bond insurers to cover most of the $319 million shortfall.
  • The bankruptcy plan includes an $85 million settlement of a disastrous pension-related debt deal involving Detroit and two banks. UBS AG and Bank of America’s Merrill Lynch Capital Services have agreed to the payout but the settlement must be approved by U.S. Bankruptcy Judge Steven Rhodes. The banks have agreed to support the city’s debt-cutting plan as long as the settlement is included in the city’s restructuring blueprint. The proposed settlement would let the city continue to collect $15 million a month in casino revenue — money that could be used to restore city services.
  • The plan shed new light on behind-the-scenes discussions involving spinning off the Detroit Water and Sewerage Department. Orr wanted to create a new regional water authority but talks have broken down with surrounding counties. On Monday, Orr revealed the city has been in contact with 41 parties interested in operating and managing the utility.

Out of Sync with Syncora. Detroit yesterday responded to one of its creditors, Syncora, in a filing before Judge Rhodes, writing that Syncora will have “more than 72 hours” to object to any new details in the disclosure statement, which was originally filed Feb. 21st, asking Judge Rhodes to deny Syncora’s motion to delay the bankruptcy proceedings at tomorrow’s hearing, adding: “This would fall under the kitchen sink strategy that they’re deploying here,” and accusing the firm of deploying a “scorched earth litigation strategy” to try to delay Detroit’s attempts to exit bankruptcy: “Although it dresses up its request for relief as a plea for the preservation of due process, Syncora merely seeks more disruption and delay,” Detroit bankruptcy attorney Heather Lennox wrote, “…Syncora’s argument that the potential for relatively modest revisions to objections that parties have had nearly 40 days to prepare constitutes a deprivation of due process is not credible and generates far more heat than light.” Syncora Guarantee and Syncora Capital Assurance, which insure or have exposure to $620 million in Detroit debt, have petitioned for two more weeks to review the amended disclosure statement the city filed last night. Judge Rhodes has set a Thursday deadline for creditors to file objections to the nearly 602-page disclosure statement. In its Friday evening filing with the federal court, Syncora attorney Ryan Blaine Bennett wrote that the bond insurer and other creditors would have “only have 48 hours to digest and object to the amended disclosure statement.” Syncora’s request for a two-week delay, if granted, would jeopardize Judge Rhodes’ scheduled April 14 hearing on the adequacy of the disclosure statement and an April 28th deadline for the city to mail the reorganization plan to creditors.

The Art of Municipal Bankruptcy. State legislators are working on drafting about a dozen bills that will be ready to go when and if the City of Detroit comes up with agreements from pensioners and other creditors in its municipal bankruptcy case. Gov. Rick Snyder has proposed using $350 million from the state’s tobacco settlement money to help ease the proposed cuts in pension payments to the city’s retirees, although details of the bills remain to be definitive—making clear that any state money, which must be approved by the Legislature, would be conditional on a final settlement signed off on by retirees and city employee unions. The legislation could, however, deal with everything from creating the mechanism to allow for $350 million to go from the state to the city, to greater state oversight of the city’s pension boards.Rep. John Walsh (R-Livonia) yesterday noted: “A few more things have to become final with the mediator, the bankruptcy judge, and with the emergency manager.” Rep. Walsh is taking the lead on the package for House Republicans. He added: “We’re trying to anticipate what possibly might be required. We have at least a dozen or more bills being drafted. Some may apply directly to the bankruptcy, some won’t.” Gov. Snyder has proposed adding $350 million over 20 years from the state’s tobacco settlement fund to about $465 million pledged by foundations and the Detroit Institute of Arts as part of the grand bargain pledge intended to minimize the impact of the bankruptcy on pensioners while preventing a sell-off of DIA artwork.State Rep. Thomas Stallworth (D-Detroit) yesterday, prior to last evening’s filing, that the governance issue may not be the deal breaker that many Detroiters predicted early in the bankruptcy case: “Once we’re confident that parties to the agreement — especially the pensioners —are supportive, then we’ll be supportive…We’ve voiced some concerns about the governance issue. On its face, any arbitrary movement of governance would be inappropriate. But we’ll be open to talk about how we can manage that process.”

Puerto Rican Statehood? The Government Accountability Office (GAO) yesterday released a GAO report projecting the Commonwealth of Puerto Rico would receive billions of additional federal dollars were it to become a state, estimating that federal spending on many programs would increase by hundreds of millions or billions of dollars were Puerto Rico to become the 51st state. Such an influx could be invaluable in helping the island to confront its debt issues: its bonds have been downgraded to speculative grade by all three major rating agencies. The GAO study did not produce specific figures, but projects possible spending ranges for various categories, but found that many of the most significant changes would likely involve social welfare spending. According to GAO, Medicare spending could increase by as much as $1.5 billion annually under statehood, while Medicaid spending could increase from about $400 million to about $1.5 billion per year. SSI could increase by as much as 600%, from its current $24 million annually to between $1.5 billion and $1.8 billion. The report estimated the federal government would get some of that back: Puerto Ricans would owe additional $2 billion annually in federal income taxes, and the U.S. Treasury could realize as much as $700 million to $5 billion in additional corporate income tax revenues. Under special multi-year agreements with Puerto Rico, some of these corporations pay corporate income tax rates far below the commonwealth’s maximum rate of 39%. The issue of statehood has long been divisive in Puerto Rico, which has held four internal votes on the issue since the late 1960s. Puerto Rico resident commissioner Pedro Pierluisi, a member of Congress with limited voting powers and a staunch supporter of statehood, yesterday stated: “As GAO expressly observes, ‘statehood could eliminate any risk associated with Puerto Rico’s uncertain political status and any related deterrent to business investment…It must be emphasized that investment in Alaska and Hawaii increased substantially once they became states.”

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