04.15.14

One More Lap. The Motor City missed its self-imposed midnight deadline last night to file its amended plan of adjustment, as the pace of agreements appeared to accelerate prior to Thursday’s appearance before U.S. Bankruptcy Judge Steven Rhodes. The Detroit News reports that the negotiators, by late last night, appeared to be close to an agreement with at least one of the Motor City’s pension funds—even as negotiations on deriving revenues from the lease of a regional water authority appeared moribund. George Orzech, Chairman of the Detroit Police and Fire Retirement System, told the newspaper he was hopeful there could be a breakthrough as early as today:  “We’re all expecting to come to some kind of understanding tomorrow, I hope…But who knows? I’ve been wrong before.” Mr. Orzech added: “Everybody’s going to be cutting deals now because you’re at the 12th hour…You want this to work. I don’t want to be doing this…again in a few years.” The key issue on which these talks appear to be focused revolve around efforts to agree on some form of a cost-of-living allowance—in effect modifying the city’s proposal to eliminate the 2.25 percent annual pension increase for 10 years—a COLA elimination that the unions estimate would have the effect of increasing the actual cuts in pension benefits to police and firefighters by 18 percent the lifetime of their pensions and devalue general retiree pensions by another 13 percent. The negotiations are also focused on what kinds of health care benefits might be offered were the unions to receive if they were to vote in favor of the cuts to their other post-employment benefits. Under its most recent offer, Mr. Orr has proposed that Detroit would pay 15 percent of a $3.18 billion allowed claim on health insurance benefits owed to the city’s approximately 19,000 retirees; however, of the $477 million recovery for retiree health insurance, Mr. Orr has noticed the retirees he is proposing to deduct an estimated $140 million in health care expenses the Motor City has incurred on behalf of retirees since the city filed for federal bankruptcy last July.

Never a Dull Moment. Michigan Gov. Rick Snyder yesterday declared a financial emergency in still another Detroit suburb, Lincoln Park, a small (5 square miles) municipality of 38,000. Gov. Snyder based his decision on a state-appointed review team’s four-month investigation, citing a trend of overspending from the general fund, a decreasing general fund balance, and increasing general fund deficit. The small city has been experiencing steep drops in property tax revenues over the past few years―assessed property values have declined 31% over the last four years; the city’s general fund revenue dropped to $20.3 million in 2013 from $24.6 million in 2009, according to the state. The city’s property tax revenues constitute 60% of Lincoln Park’s general fund revenue. With the determination, Lincoln Park officials now have seven days to request a hearing before the Michigan State Treasurer—after which the state will either confirm or revoke his determination. Should Governor Rick Snyder confirms his original finding, the city will have four options: sign a consent decree with the state; ask for an emergency manager; ask for a neutral evaluation; or seek to file Chapter 9 bankruptcy. Almost like a quilt, the patter of fiscal distress in the Detroit metropolitan area includes gubernatorial declarations of a fiscal emergency in the Detroit suburb of Royal Oak Township and in Highland Park; the state controls Detroit, Allen Park, Flint, Hamtramck and Pontiac, all located in the Detroit metro area, as well as several school districts.

What Is the Public’s Role in Municipal Bankruptcy? Yesterday, the truly remarkable Juliet Moringiello, a professor at the Widener Law School in Harrisburg, Pa., put together an all-day symposium on municipal bankruptcy (Bankruptcy and Beyond: Solving the Problem of Municipal Financial Distress), in a session that not only included key players from Harrisburg, including both of the city’s former receivers, as well as the federal bankruptcy judge, Judge Mary France, who rejected the city’s request for federal bankruptcy protection, but also U.S. Bankruptcy Judge Thomas Bennett, who presided over Jefferson County’s municipal bankruptcy.  Harrisburg operated under receivership for more than two years, in a state where 21 municipalities currently are in Act 47, the state’s Municipalities Financial Recovery Act program—although Act 47 currently is a state program from which few cities ever emerge—an issue which some key leaders in the legislature anticipate addressing before it adjourns. Two especially critical issues were raised yesterday: David Uncovic, Harrisburg’s first receiver, noted that in severe distress, municipalities “are inadequately protected,” telling us that he had found himself “in an untenable position in the political and ethical crosswinds,” adding that the sheer size of many financial advisory firms and the technocratic leanings of today’s bond lawyers are overwhelming municipal leaders: “Bond lawyers today are busy figuring out the Rubik’s Cube of bond issues, and they tend to have lost the notion of ‘Whom do I represent and what do I have to do to protect them?’” Mr. Unkovic also urged a ban on municipal authority to engage in derivative transactions known as swaps—a sophisticated municipal finance transaction which has been at the heart of huge fiscal losses for Jefferson County, Detroit, and other cities that have been rendered insolvent. He told us: “In western Pennsylvania, a school district entered into a swap in 2008…Their choice was to lose $10 million by paying the early termination fee, or enter into the swap knowing they would lose money. It’s gambling.” But, especially for municipal leaders, an even more important issue was raised by Judge Bennett, who noted that taxpayers have no formal role in municipal bankruptcy. He was querying—in a broader sense—who, in these complex cases (prior to Detroit, Judge Bennett presided over the largest municipal bankruptcy in the nation’s history), represents or advocates for the public of the city or county in bankruptcy?  He noted that while the federal law includes a “best interests of the creditors’ test,” a provision that any final resolution must be “fair and equitable,” and that the final decision “cannot discriminate unfairly;” neither the federal law, nor the legal processes clearly address the best interest of the public—or the citizens and taxpayers of the municipality, noting that in the Detroit case, Judge Steven Rhodes had made clear the Motor City’s taxpayers are not.

Beating the Odds? North Las Vegas, with today its deadline to avoid insolvency in a state in which municipalities are not authorized to file for federal bankruptcy protection, late Thursday reached agreements with the last of its employee unions, enabling the city to balance its budget for the new fiscal year and avoid a fiscal crisis which could have forced the dissolution or disincorporation of the municipality. Although the state law does not provide for municipal bankruptcy, the 11th hour intercession of the state was a key: the firefighters and Teamsters unions announced the key labor agreements after a day of negotiations at Nevada Gov. Brian Sandoval’s Las Vegas office. The critical agreement was the outcome of two days of intense negotiations, which were key to addressing the city’s $18 million budget deficit. Without concessions, the city could have been forced to lay off staff and cut services as early as today. The agreement paves the way for $10.4 million in union concessions, $4.8 million from a hiring freeze, and $2.6 million from budget cuts. A tentative budget was presented to the City Council in a special meeting last Thursday night to reflect the proposed changes. The proverbial fiscal hole appears to have been the outcome of the Great Recession and two major infrastructure projects: the $130 million city hall building and a $300 million wastewater treatment plant, both of which opened in 2011. Notwithstanding the 11th hour gymnastics, North Las Vegas still faces an uncertain future with escalating debt payments.

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