05.07.14

Looking for the Checkered Flag. Michigan House Speaker Jase Bolger yesterday introduced House Resolution 353 to establish a Committee on Detroit’s Recovery and Michigan’s Future—a special committee to coordinate issues related to the Motor City’s emergence from federal bankruptcy and to coordinate the package of bills that could be unveiled as soon as tomorrow. The five-member panel is charged with recommending legislation to “repair Detroit’s financial health,” and it will be chaired by State Rep. John Walsh, R-Livonia, focusing, at least initially, on shepherding tomorrow’s 10-bill package that will detail how a proposed state contribution toward Detroit’s pension obligation will be paid and what oversight will be provided through the legislature. Speaker Bolger noted: “As the House considers support to help resolve Detroit’s bankruptcy and secure its recovery, we need to ensure taxpayers statewide are protected and Detroit’s success is ensured…We are putting a strong team in place to resolve this difficult issue today with a vision for a bright future.”

Don’t Stop Thinking about Tomorrow: Thinking about a Post Municipal Bankruptcy Future. San Bernardino’s citizen-based charter review committee met for its fifth time last night before a May 19th deadline to submit recommendations to the City Council with regard to the city’s future form of governance, asking the question, for instance: Why do some charter cities with strong mayors function smoothly while others, such as San Bernardino, display such dysfunction? In our report on San Bernardino (San Bernardino Full Case Study), for instance, we wrote that in “the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” In last night’s session, City Manager Allen Parker appeared reluctant to provide his perspective with regard to what form of municipal governance would work best for the city’s post-bankruptcy future; nevertheless, he noted it is a matter of the people in the elected offices, more so than the form of government: “Oftentimes, what it comes down to is the personalities…It’s not always in the laws.” Even though the Manager did not specifically point to it, many are of the view that the city’s provision for an independently elected city attorney for nearly three decades until his recall last fall was a contributing factor. But maybe the bigger, tougher discussion is whether the city should change to a council-manager form of government, with Mr. Parker noting: “My sense is that it may divert discussion from what we need to focus on the next few years: coming out of bankruptcy.” The issues, indeed, are complex: what about the relationship with the school district? Should municipal elections be switched from odd to even-numbered years? How could rules for ballot measures or recalls be simplified? Are there, in fact, any changes that could address the vast disparities in median incomes between the city and some of its neighbors? The charter committee has just six weeks to overhaul the charter in time for recommended changes to be put on the November ballot.

The Unrelenting Costs of Municipal Bankruptcy. One of the sad ironies of municipal bankruptcy relates to constant meter running on outside experts critical to the process—but costly experts whose bills mount up and take away from resources critical to a sustainable future for a municipality already at a competitive disadvantage with other cities. Yesterday, Robert Fishman, who was appointed by the federal court in Detroit to serve as the fee examiner in the Motor City’s municipal bankruptcy, reported that lawyers and consultants have charged the city’s taxpayers $36.3 million in fees and expenses for six months’ work on Detroit’s chapter 9 bankruptcy case—nearly triple the amount charged over the previous quarter. As court time and increasingly intense negotiations revved up. The Motor City’s bankruptcy firm, Jones Day, collected $16.6 million in fees, plus more than $733,000 in expenses; whilst Conway MacKenzie charged $5,357,640 followed by law firm Dentons US LLP, which billed $4,622,035 while representing the official committee of city retirees fighting pension cuts. Detroit’s investment banking firm, Miller Buckfire & Co., which has taken a lead role in negotiations over a possible spinoff of the Detroit Water and Sewerage Department, billed more than $2.8 million. Mr. Fishman, himself, is earning $600 an hour to examine legal bills and contest charges; nevertheless, he has no authority to order firms to modify or reduce their charges. In his report, he noted: “Clearly, the professional fee expenses incurred during the reporting period were substantial…Due to the magnitude and complexity of the case, the novelty of the legal issues, the extremely tight timeframes imposed by the court and the strong differences in opinion between the various parties about what to do and how to do it, it was (and continues to be) inevitable that the costs associated with the services provided by the various professionals were going to be significant.” Nevertheless, Mr. Fishman reported he had several charges, which in several instances were reduced later by the firms and consultants, and that he had proposed rules against “unreasonable” expenses including charging taxpayers for booze, hotel-room movies, and first-class flights.

The Unpredictability of Municipal Default. Anne Van Praagh, Moody’s managing director and chief credit officer for public finance, has reported that the outcome of municipal default and bankruptcy is unpredictable, and that municipal default rates continue to be elevated, but are still low compared to other sectors, such as corporate finance. Ms. Van Praagh writes that Moody’s will be looking closely at how municipal debt is treated compared to public pensions, and how different types of debt stack up with each other as municipalities exit bankruptcy. According to Moody’s, there were seven Moody’s-rated municipal defaults in 2013, bringing the total number of municipal defaults since the recession began in early 2008 to 30; nevertheless, the rating agency noted that the rate of defaults within one year is very low—averaging just 0.03% for the last five years—although that compared to a 0.01% rate for the 1970-2007 period. According to Moody’s: “The Detroit bankruptcy, by virtue of its scale and the range of credit and related legal issues it poses, is shaping up as a major watershed event, and the evolving bankruptcy cases in Stockton and elsewhere in California also will establish industry benchmarks for ‘service insolvency’ where governments are forced to choose between essential services and honoring debt and other long-term obligations.” The agency expects that there will continue to be few municipal defaults, noting that the outlook for the local government sector was revised to stable from negative in 2013. General governments have been stabilizing despite revenue and spending pressures and sluggish economic recovery. Nevertheless, Moody’s noted some local governments may be further constrained by rising pension costs, adding that several trends the rating agency identified last year appear to be holding true for 2014:

  • stress for local governments is subsiding but pressures, such as those from pensions and other post-employment benefits, remain; and
  • rating changes will often occur in clusters, since groups of related governmental credits are broadly correlated due to financial, economic and functional links.
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