05.01.14

One More Lap.  Dexia Credit Local, Erste Europaische Pfandfrief- und Kommunalkreditbank Aktiengesellschaft, FMS Wertmanagement, Hypothekenbank Frankfurt AG, and Hypothekenbank Frankfurt International SA ― the mouthful of banks that hold $1.4 billion of Detroit’s pension certificates ―have filed an appeal of Judge Steven Rhodes’ swaps ruling to the U.S. District Court for the Eastern District of Michigan, Southern Division.  The appeal parallels Syncora’s, the bond insurer that insures the Motor City’s swaps and some of the pension certificates.

Wolverine Politics. Michigan Governor Rick Snyder yesterday hinted he believes the legislature can shepherd through the state’s $350 million appropriation package – to partner with foundations and the Detroit Institute of Art – without getting entangled in the efforts of some Michigan state legislators to amend the state’s current emergency management law to impose additional oversight and preemption of local authority. Some state legislators are proposing additional oversight of the Motor City after it emerges from bankruptcy and Emergency Manager Kevyn Orr leaves town as early as next October. In addition, some legislators have indicated that they want professional oversight of how the city’s pension funds invest the state’s contribution to a $816 million pension rescue fund as part of a package of ten bills they are assembling for introduction as early as next week.

The Governor, in contrast, yesterday indicated the legislature’s desired oversight could be accomplished through a post-bankruptcy consent agreement with Detroit elected officials instead of amending the emergency manager law, Public Act 436, noting: “I’m not sure that’s really required in all of this process…The main context (amending the law) would be in its potentially looking at doing good financial oversight on an on-going basis, and I think there’s more than one way to get that done.” The discussions occurred as Detroit Emergency Manager Kevyn Orr spent his second consecutive day in Lansing meeting with Wolverine lawmakers. Mr. Orr is scheduled to come back next week to meet with individual lawmakers, as well as speak to the House Republican caucus. Part of what Mr. Orr is doing is intended to help translate and explain the complex provisions of the amended plan of adjustment filed in the U.S. Bankruptcy Court last Friday, including the provisions which would provide for the creation of two seven-member committees that would help oversee all investments made by Detroit’s Police and Fire Retirement System and General Retirement System. Under the plan, those committees could be in place for 20 years and include five independent members and two or more members who could be city workers or retirees. The independent members, as a prerequisite, would be required to hold a minimum level of expertise in managing or advising pension funds — a requirement designed to address concerns about mismanagement and past alleged corruption. Under the current PA 436, the governor is authorized to appoint a transition advisory board with veto power over budgets and contracts; Governor Snyder has indicated a Motown transition advisory board in Detroit could be modeled after the New York State Financial Control Board—something which would now be enhanced by Judge Rhodes’ appointment of former New York Lieutenant Governor Richard Ravitch to serve as an advisor to Judge Rhodes.

The Michigan House is expected to introduce a 10-bill grand bargain $350 million package, as early as next week, with State Rep. John Walsh, R-Livonia, yesterday saying that legislators believe they could receive critical input from U.S. Bankruptcy Judge Steven Rhodes by tomorrow. The package would include the form of the so-called “grand bargain” $350 million payment, expected to come from the state’s tobacco settlement funds, but also provisions for professional management of the pensions and state oversight of the city’s financial operations going forward, with the governance piece will be modeled after similar laws in New York City, Baltimore, Pittsburgh and Washington, D.C. Rep. Walsh noted Michigan voters and taxpayers will want assurances the state money for Detroit will be spent the way it was intended and that the only way to do that is with some form of oversight, adding: “The oversight committee is going to have power.” In addition, Rep. Walsh said a separate discussion is revolving around a post-bankruptcy plan for new city employees ― whether they would be placed into a defined contribution plan or a hybrid defined benefit plan, making clear that state lawmakers are not involved in those negotiations, but also noting that the outcome of those discussions will impact the final language in the bills they are drafting—adding: “Our laws have to be consistent with that plan.” He said the 10 bills will originate in the House and then be sent to the Senate upon passage, and the bills will have bipartisan sponsors. Still complicating action, however, is the demand by House Speaker Jase Bolger (R-Marshall) that unions contribute financially to the package. Speaker Bolger said after his meeting with Mr. Orr this week, however, that the issue of his demand was not raised, adding, nevertheless, that even if his demand is neither hard, nor fast; nevertheless, if the unions do not contribute, “Their absence will be a glaring omission in that picture that would make it very difficult to move forward.”

Challenging State Emergency Manager Laws. The state Attorney General’s Office today will urge a federal judge to dismiss a legal challenge that seeks to strike down Michigan’s emergency manager law on claims it dilutes the right to vote, advising the court that with more communities and school districts “teetering on the brink of financial catastrophe,” additional flexibility and tools were justified. The suit, filed by nearly two dozen plaintiffs, was filed last year as Public Act 436 went into effect and gave state-appointed emergency managers the power to amend budgets, change contracts, and consolidate or eliminate departments. The filers claim the law violates federal collective bargaining rights, due process and voting rights, and is unequally applied in minority communities. In its response, the state argues the plaintiffs failed to demonstrate any harm to voting rights. Currently, emergency managers are running Allen Park, Detroit, Flint, and Hamtramck, as well as school districts in Detroit, Highland Park, and Muskegon Heights. State oversight remains in Ecorse, Inkster, Benton Harbor, River Rouge, and Pontiac. In the wake of the law’s enactment, communities or school districts in financial emergencies can choose an emergency manager, negotiate a consent agreement with the state, seek mediation, or file for federal bankruptcy protection. In its response, Attorney General Bill Schuette notes that the suit “contains no … alternative solutions to the financial problems that have plagued many communities,” and argues the suit did not identify specific instances showing constitutional violations and all plaintiffs lack the standing to sue.

Trouble in River County. Michigan state officials yesterday rejected a draft of a sweeping plan to cut more than $175 million of Wayne County, Michigan’s debt, increasing the likelihood the state could appoint an emergency manager. The draft plan proposes wage cuts and layoffs, as well as changes to the county’s pension and retiree health care benefits programs. The county, of which Detroit is the seat, is the 18th most populous county in the United States and home to 43 distinct communities. Its large tax base is one of its strengths, and Detroit’s bankruptcy is expected to have limited impact on the county credit, ratings analysts said. But the county has suffered major deterioration in its fiscal position since 2010. Terry Stanton, a spokesman for Michigan Treasurer Kevin Clinton, said Wayne has yet to get approval from the county commission, the county treasurer, or its unions, a prerequisite to any approval by the state. Wayne County has until the end of June to achieve approval from the commission and the state on its debt-elimination plan, or it runs the risk of a state takeover. According to staff from Wayne County Executive Robert Ficano’s office, the plan would eliminate financial and structural deficiencies to return the county to solvency by accomplishing several things, including: Spinning off the county’s wastewater treatment facilities for an expected profit of $121 million; Moving about $81 million in the delinquent tax revolving fund into the general fund; and changing the configuration of employee health care and pension benefits. The $825-million system is currently less than 50% funded. Moreover, a majority of commissioners have indicated they do not support the plan.  Wayne County has experienced a significant revenue decline over the past few years as property taxes and population have ebbed. According to County Executive Ficano’s staff, county officials have been reaching out to residents, municipalities, and unions with hopes to get people on board with the plan, noting that a deficit-elimination plan is due to the state 90 days after the county files its comprehensive annual financial report, which in this case was on March 31st. The county commission has held five meetings specifically on the plan since it was introduced on Feb. 11 by Chief Financial Officer Mark Abbo; to date there has been no vote. Officials from the state treasurer’s office said the department is in contact and working with the county as they work their way through the deficit-elimination process.

After its general fund first fell into deficit in 2010, Wayne now faces a $175 million deficit—a deficit projected to grow to $236 million in the next two years, according to the county. Chief Financial Officer Mark Abbo presented the deficit plan — required under state law — to commissioners in February. The proposal would cut $175 million from the deficit and eliminate the structural operating shortfall, according to Mr. Abbo. The plan relies on selling the county’s wastewater treatment system for $121 million. Officials proposed create a new authority to take over the system and issue bonds for the upfront cash payment. Wayne County also proposed transferring another $81 million into the general fund from the delinquent tax revolving fund. Officials want to bring down the annual structural deficit by cutting pension and retiree health care benefits, increasing employee contributions, lay off employees, a 5% wage cuts, and lease some county-owned facilities. CFO Abbo noted in his introduction of the plan that “the role the county itself may have played in the situation it now finds itself,” adding that the recession, continuous population loss, and declining property values exposed serious flaws in the government finance model: “While municipalities struggle, the state has scaled back revenue sharing, while maintaining and sometimes increasing mandates upon local government.”

Motor City’s Tomorrow. The White House yesterday today issued recommendations intended to assist the Motor City transform its outdated computing and information technology systems—changes the administration believes would assist the city in improving the delivery of essential public services. The recommendations were developed by a “tech” team composed of five top-level municipal government technology officials from around the country, based upon  a broad list of initial observations about the strategy the city should consider adopting to update its systems. It was among the efforts the White House said it could offer to help Detroit, albeit far different than the previous White House’s response to the Detroit bankruptcies of Ford and General Motors. The focus areas are:

• Establishing a Chief Information Officer: Establish a cabinet-level position within city government charged with leveraging technology and innovation to improve the delivery of government services;

• Evaluating IT Infrastructure: Identify opportunities for streamlining government processes and realizing cost-savings in city spending, including areas such as standardizing software applications and consolidating data centers and servers;

• Promoting Civic Innovation in Detroit: Leverage the knowledge and expertise of Detroit’s lively, diverse civic innovation ecosystem of social and civic entrepreneurs, foundations, and business owners to develop tools and technologies to benefit the City and local residents.

• Opening Government Data: Make freely available government data more open and accessible to fuel entrepreneurship, innovation, and economic growth while ensuring privacy and security;

• Creating a 311 System: Create a 311 system to improve citizen-relationship management and decrease non-emergency related service requests to emergency lines such as 911;

• Improving Enterprise Geographic Information System (GIS): Facilitate the build-out of citywide enterprise Geographic Information System.

• Enabling Online Permitting: Develop and provide the capability for local residents to apply and pay for business, safety, building, and other permits online.

School Distress. The Michigan Emergency Loan Board has approved two emergency loans to help a pair of distressed local school districts cover payroll, providing the Pontiac School District a $10 million loan (The district is already under emergency management, and is in Pontiac, which recently emerged from eight years of state control). The district missed a May 1, 2013 debt payment, making it one of the few public school districts in the nation to default. The district faces a nearly $52 million deficit. The board also gave a $1.4 million loan to the Muskegon Heights school district, with half the loan proceeds to pay a debt owed to the private charter operator that runs the district. In addition, the state board determined that the Benton Harbor school district faces fiscal stress, a finding that follows the Michigan Department of Education’s preliminary review.

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