04.08.14

One More Lap.  The American Federation of State, County and Municipal Employees Council 25, Detroit’s largest union, in its objections to the Motor City’s plan of adjustment yesterday warned that Kevyn Orr’s plan to reduce pension payments to the city’s retirees would lead to significant increases in crime and poverty if accepted by the federal court. AFSCME’s comments, filed on the last day comments could be submitted, came even as Emergency Manager Kevyn Orr yesterday confirmed his legal team was still unfinished in its efforts to comply with U.S. Bankruptcy Judge Steven Rhodes’ order that Mr. Orr provide union members and retirees with a document that describes the city’s proposals as they would affect union members and retirees in “plain English.” AFSCME, in its submission, wrote that creditors, including city workers, could get a better deal if the Motor City reneged on tax breaks and land deals proposed to be provided to “the wealthy,” adding: “The city must disclose the risk that its financial projections do not properly take into account the added poverty rolls it may need to support, and further, the effect of such pension cuts on the morale of the AFSCME employees, the likely increase in crime and decaying social atmosphere, and all that comes with the proposed pension cuts.”  Detroit’s revised plan of adjustment proposes reductions in police and firefighter pensions of 6 percent and to non-uniform general retiree pensions of 26 percent, but only if they agree to forgo any legal claim for fully paid pensions and not pursue a sale of the art works from the Detroit Institute of the Arts—with AFSCME noting the full DIA collection could be worth as much as $10 billion. Under the proposed plan, should the unions not accept the offer, it would instead trigger cuts of 14 percent for retired police and firefighters and 34 percent for general city retirees. For its part, the committee representing the Motor City’s retirees late yesterday wrote that the city’s plan offers a “vague hope” to retirees that there could be a restoration of pension benefits in 2023 if the retirement plans are at least 80 percent funded. The committee for the two pension funds also wrote that Mr. Orr’s proposal to establish a hardship fund for pensioners to keep them from falling into poverty lacks sufficient detail with regard to how Motor City pensioners could qualify for assistance and what amount of funding would be available. Among other creditors filing by last night’s deadline, National Public Finance Guarantee Corp. (FGIC) wrote that the City’s disclosure statement was “vague” and “incomplete,” failing to answer two crucial questions for most creditors (and probably most of you readers): “How much am I going to get paid and when?” FGIC, which could be liable for as much as $1.1 billion in Detroit’s pension-related debt, wrote a la Rumsfeld (“the known unknown”) that the value of the so-called “grand bargain” is unknown because the city has failed to disclose the full value of the Detroit Institute of Arts’ vast collection: “How can creditors tell if they are getting a bargain without understanding what they may be giving up and at what cost?” But FGIC also complained, as did Detroit’s suburban neighbors, about what it termed a lack of details about the city’s plans for either spinning off the Detroit Water and Sewerage Department into a regional authority or contracting with a private company to operate the supplier of water to 4 million residents in southeast Michigan.

  • Intergovernmental: Similarly,Macomb and Oakland County filed objections over the Motor City’s proposal in the plan to privatize the Detroit Water & Sewer Department to a private contractor in exchange for $47 million in annual lease payments. The two suburban jurisdictions wrote that the Motor City had not supplied them with enough information about the Department’s operations, debt, and long-term liabilities, noting: “Because these services constitute a public service monopoly, the debtor does not have the unfettered right to transfer operations to anyone it chooses under any terms it prefers to its own economic advantage or otherwise.”

U.S. Bankruptcy Judge Steven Rhodes has set a deadline of next Monday for Mr. Orr and his team to respond to the objections, and set a hearing for April 17th with regard to whether the Plan of Adjustment and Disclosure Statement provide satisfactory information for the Motor City’s 67,000 voting-eligible creditors.
Bait & Switch? It seems clear that Detroit’s other lions and tigers, e.g., those who reside in the city’s zoo rather than its stadia, are potentially affected, but excluded creditors in Motown’s historic municipal bankruptcy. The issue involves the part of Detroit’s plan of adjustment which would recoup special, voter-approved property taxes used currently to pay the interest on some $375 million on municipal bonds the Motor City issued to finance past improvements to the city’s zoo and library, housing development, streetlights, city buses, and other public facilities. (The bonds in question are backed by a series of special, voter-approved taxes between 1999 and 2005. The investors in these general obligation bonds thought the bonds were secured by the dedicated special property taxes so that, even in bankruptcy, they’d continue to receive their payments.) Mr. Orr’s plan would terminate payments to its bondholders, but continue to impose the special assessments currently dedicated to paying them off. The proposal raises federal and state legal issues with regard to the propriety of such diversion—albeit Detroit skipped $9.3 million in payments to bondholders last October, with Mr. Orr’s spokesperson yesterday telling the Detroit News:  “That money was plied back into the city’s general fund to pay for services.” Moreover, on April Fool’s Day, Detroit added another $47.58 million in missed principal and interest to its bondholders. While neither the lions or tigers are likely to sue, Rose Bogaert, chairwoman of the 750-member taxpayer rights group Wayne County Taxpayers Association, yesterday noted: “I think there might be several of us who’d be willing to take this to court because it’s definitely a violation of the state constitution…Those bonds were voted for a special purpose. You can’t just decide, ‘The heck with what the taxpayers say, we’re going to use this money for something else.’ That’s not legal.” The issue before the federal bankruptcy court is whether the bonds are unsecured. But that is the federal issue. Under Michigan law, once the old bonds have been paid off, the tax that secures them is no longer enforceable. Should Judge Rhodes, a federal judge, determine that a dedicated, voter-approved tax can be redirected from paying for its intended purposes, it would raise even more questions about bonds issued in Michigan, if not many other states.

After Motown officials last month said Detroit is paying $32 to issue and process a $30 parking violation, Emergency Manager Kevyn Orr has scheduled a hearing next week over his proposals to increase the cost of parking fines in Detroit, with the order noting it “necessary and appropriate” to revise the city’s parking fine ordinance “to increase funds available to the city….and that such revisions are necessary to safeguard and assure the financial accountability of the city.” The fee changes — the first for Detroit in more than a decade — would ramp up citation amounts from $30, $50 and $80 to $45, $65 and $95, respectively, for parking violations and late fees. The new schedule also eliminates a $20 rate for early payment. Handicapped parking violations would climb from $100 to $150 and the late fees, with payments after 30 days, would rise to $170 for state residents and $200 for non-residents of Michigan. Yesterday’s announcement came as the Emergency Manager awaits an analysis of the city’s parking assets and recommendations with regard to—like Harrisburg, off Municipal Parking, a department that generally breaks even or fails to bring in enough revenue to cover its expenses. The decision came as Detroit Chief Operating Officer Gary Brown has been advocating for rate hike as well as more strict penalties for individuals with three or more unpaid tickets. Brown has said the changes would bring in an additional $6 million per year and $60 million over the 10-year plan of adjustment Orr is proposing for the bankrupt city. COO Brown noted that 70% of the Motor City’s parking fines are written to nonresident offenders. A key part of the parking problem has been self-perpetuating: with nearly 50 percent of Detroit’s parking meters out of commission and reduced staffing, ticketing dropped from 535,000 in FY202 to 323,000 last year. Now

What Really Is Municipal Bankruptcy?Municipalities are defined by each of the nation’s states as corporations. But when a municipal corporation becomes insolvent—whether because of incompetency, a national recession, fraud, disaster, or other cause—the differences with a private corporation may become stark. After all, for the private corporation, tens of thousands of which become insolvent each year and file with federal bankruptcy courts, they can simply cease business and go to a federal bankruptcy court and effectively hand over the keys and ask the court to divvy up whatever proceeds remain amongst the private corporations creditors. Or, if they are a Wall Street bank or, say, General Motors or Ford, the federal government can swoop in and bail them out and divest them of post-bankruptcy post-retirement health care and pension obligations to their retirees. But the option of closing shop is not one available to a city or county, the level of government that bears the greatest responsibility to address emergency health and safety 911 calls. So federal law provides—if, and only if, authorized by the respective state (please see item below on the Nevada Fiscal Twilight Zone), a municipality may file for federal bankruptcy protection, specifically in order to ensure there is no interruption in essential public services. Such a filing neither provides for, nor triggers a dime of federal or state aid—indeed, as U.S. Bankruptcy Judge Thomas Bennett made clear, the State of Alabama was a “precipitating” cause of Jefferson County’s municipal bankruptcy.

 

But, if you think about it, even at the local level, we have a double standard. If an act of God natural disaster devastates a local government—as we have mourned in Oso Washington this month―we understand that, whether it be New Orleans after Katrina, or towns along the Jersey shore, the city or town is overwhelmed and would be irrevocably insolvent without the immediate thrust of state, federal, and adjacent community aid and resources. You might term it human and government bailouts, but that assistance—in the case of Oso involving more than 100 government agencies, coordinated by Snohomish County, was a massive show of fiscal and human support in the aftermath of the March 22 mudslide. Operating under the Washington Mutual Aid Agreement, many of the groups providing assistance came from across the state. Additional groups came from other states. Various groups include: federal agencies; military branches; tribal governments; state agencies; counties; cities; fire districts or departments; police and sheriff departments; and private groups or nonprofits. Local EOCs in every county depend on the Washington State EOC to satisfy the staffing needs and resources that are not available locally. Washington state officials estimate nearly $10 million of property damage from the blanket of earth and rock triggered by last month’s mudslide. (I don’t even need to ask you to imagine what the implications are for the single most critical revenue for these jurisdictions’ property taxes will be.) In Oso, moreover, those with standard property insurance against fire or theft would not have been covered against damages from the mudslide, which has caused 33 known deaths. For some, that could mean losses of hundreds of thousands of dollars, and the prospect of having to continue servicing mortgages on homes destroyed in the March 22 slide. Here, in the wake of the White House designation of the area as a disaster zone, the announcement triggered individual assistance available to homeowners, meaning, at least temporarily, “foreclosures are suspended, the bankruptcy process is placed on hold and collection calls are stopped.”  Homeowners also are hoping for a state buyback of acreage covered by the slide. There appears to be no chance that any municipality in Washington will be forced to seek federal bankruptcy protection in the wake of this tragedy. Contrast the outpouring of federal and state aid to the obverse in Jefferson County, San Bernardino, Stockton, and Vallejo.

 

Rolling the Die in North Las Vegas. The City of North Las Vegas (pop. 222,000), Nev., is running out of aces: the city confronts a large and growing budget deficit and a labor lawsuit that could leave the city, which has about $421 million in outstanding debt, tapped out. The city’s assessed property values have decreased nearly 50 percent from their 2006 levels, precipitating a 58% drop in the tax base between 2009 and 2013, according to Fitch—a drop which the city has temporarily offset by repurposing utility funds for its general fund, laying off 35 percent of its workforce, and declaring a state of fiscal emergency in an effort to avoid wage increases provided for under its union contracts. If anything, the city’s risk of folding was enhanced last January when Clark County Judge Susan H. Johnson ruled that the municipality’s fiscal emergency measures were unconstitutional―a ruling which, unless reversed, could cost the city up to $41 million in back wages and cumulative wage increases. Adding insult to injury, the Nevada Supreme Court two weeks’ ruled against the city in an appeal of a redevelopment case, unanimously finding: “We conclude that substantial evidence supported the district court’s pre-condemnation damages award (of $4,250,000), and its determination was not clearly erroneous.” (City of North Las Vegas v. 5th & Centennial LLC et al, Nevada Supreme Court, #58530, March 21, 2014) Fitch Ratings now concludes there is “no clear plan to address the city’s deficit…”even as all Nevada municipalities are mandated to file a tentative balanced budget with the state by April 15th. Moreover, unlike in California, Rhode Island, Pennsylvania, Alabama, Michigan, or many other states; municipalities in Nevada (as in 17 other states) are not authorized—as required by federal law—under state law to file for federal bankruptcy protection. Indeed, it appears the only option—and “option” is truly the right term here—would be for the State of Nevada to become a receiver for the city. Fitch notes the Nevada Tax Commission could seek a resolution by asking voters to approve disincorporation. North Las Vegas had frozen city workers’ wages for two years through a declaration of emergency, unsurprisingly leading to the city’s unions filing suit for retroactive pay for raises that officials had agreed to before the recession struck—even as the city, mindful of next Tuesday’s deadline, has been negotiating with its four unions to try to negotiate the settlement down from $25 million while dealing with an estimated $18 million general fund budget gap for fiscal 2015. Fitch reports the state has provided some oversight through its Committee on Local Government Finance, but Fitch analysts said the state has not indicated any interest in state receivership. North Las Vegas is seeking to settle the suit filed by the unions using $7.7 million it scraped together from several municipal funds, offering the city’s police union $4.2 million, the fire union $2.1 million, the police supervisors union $143,000, and the Teamsters union $1.2 million; but, to date, no union has accepted the offer. Under Nevada law, there are two criteria for state receivership: 1) the city’s ending balance in its general fund has declined for two consecutive years, and 2) assessed property values have declined more than 10% per year for two years. North Las Vegas, thus, if it cannot draft a balanced budget for FY2015, would become eligible―but being eligible does not trigger acceptance: the state is free to opt not to exercise its limited aid options. North Las Vegas could fall into the fiscal twilight zone.

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