05.21.14

Motor City Recovery & Future. After adjourning its hearing yesterday, the Michigan House Committee on Detroit’s Recovery and Michigan’s Future could act as early as today to report its pending 11-bill package, including an amendment by which the Detroit City Council president would have a seat on a state commission with broad oversight of the city’s finances. The sense of momentum, moreover, was bolstered yesterday with the announcement by U.S. Judge Gerald Rosen, appointed by Judge Steven Rhodes to act as chief mediator in Detroit’s Chapter 9 case, announced that the Michigan Building and Construction Trades Council has pledged $3 million to $5 million to the city’s retire health care benefits. The move comes in the wake of House Speaker Jase Bolger’s demand that Detroit’s unions pledge money to the grand bargain.The committee intends to take initial action committing $195 million in state funding to protect city retirees from steep pension cuts through authorizing a $195 million state contribution to the Motor City’s pension funds. The announcements came in the wake of yesterday’s hearing, at which former New York Lt. Gov. Richard Ravitch, who is serving as an unpaid advisor to U.S. Bankruptcy Judge Steven Rhodes and who played a key role in New York City’s recovery from its fiscal crisis in the 1970s, testified yesterday―where he warned that accounting practices are one of the most important criteria for Detroit as it exits state and court oversight: “Detroit is the most egregious example of a city in severe financial difficulty that I’ve seen.” Telling the committee that the eyes of the nation are watching this case, he added that “the most important piece of this legislation is that the city be required to budget according to generally accepted accounting practices. There can be no more borrowing to cover deficits.”

The City’s Role & Authority. At yesterday’s hearing, Detroit Mayor Mike Duggan also testified: Mayor Duggan pressed for two amendments to the pending package, urging the committee to clarify the criteria the Motor City would need to meet in order to gain independence from a proposed oversight committee, and proposed that the oversight panel go “dormant” if the city meets certain financial targets, including balanced budgets and access to the capital markets, for three consecutive years: “We want to have a clear path in and out of financial control periods…I think the three-year standard in New York is a fair standard. Even when you’re in a non-control period, the existence of that financial oversight board….reinforces the culture of accountability for years to come.” He vowed that the city’s need for state aid for pensioners would be a one-time request: “We’re not going to be coming back in six years, eight years…We’re going to solve this once.” During the hearing, Rep. Harvey Santana (D-Detroit) focused on questions about the power and longevity of the state oversight commission, focusing on the role of the chief financial officer required under the state oversight legislation. “This to me is a closet emergency manager,” Rep. Santana said. But Mayor Duggan responded: “It does not remotely resemble an emergency manager…Nobody is more aware of the controls of an emergency manager than I am.”

In addition, Mayor Duggan successfully urged that Detroit City Council be permitted to appoint one additional member to the proposed oversight board—a change from the pending proposal under which the state would name six of the seven appointees, and the Mayor of Detroit would pick the seventh member. Motor City Council President Brenda Jones also urged the committee to strip out a requirement that junk-rated Detroit maintain a bond rating of at least A-minus before it can come out of state oversight, reminding the members that that rating has not been held by the city since the 1960s. In its current draft, the committee package incorporates provisions which include: hiring a chief financial officer, implementing certain pension and health care reforms, and creating an investment committee to advise the city’s two pension funds. No other changes were proposed to the series of preconditions in the pending bills, including a series of conditions to be met for the city to escape state oversight mandating three consecutive years of “deficit-free budgets,” while adhering to generally accepted accounting principles; certification by the state treasurer and city’s chief financial officer that Detroit can borrow money; adherence to a court-approved bankruptcy plan of adjustment and reorganization plan, and earning an A-minus bond rating from at least one national credit rating agency—the last of which drew an objection from Rep. Harvey Santana (D-Detroit), who termed it a nearly “insurmountable task.” His concern was echoed by Detroit City Council President Jones, who testified that the Motor City had not held an A- rating “since the 1960s.”

Stepping up. JPMorgan Chase, the nation’s largest bank, is scheduled to announce this a.m. that it will invest $100 million in the Motor City over the next five years to strengthen the city’s redevelopment efforts, speed up blight removal, help train city residents for new jobs, and make mortgage credit available for home loans—with approximately half the assistance in grants and the remainder in loans. Gov. Rick Snyder and Mayor Duggan are expected to make the formal announcement today at a luncheon with JPMorgan Chase Chairman and CEO Jamie Dimon, as well as local foundation leaders and business executives including Dan Gilbert, founder and chair of Quicken Loans—an announcement that could well provide an additional juke to the pending package of 11 bills in the legislature in Lansing. Mr. Dimon yesterday told the Detroit Free Press that the idea started last fall when Detroit — where Chase and its predecessor banks have done business going back to the old National Bank of Detroit in the 1930s — was going through its painful bankruptcy: “I got together some of our senior people and said what can we do that’s really neat, that could be really creative… When you’re in a town, you try to be a great citizen there and we happen to be a big player in Detroit.” For his part, Gov. Snyder noted that today’s announcement might help the legislature to move the special 11-bill package under which the state would commit the equivalent of $350 million over 20 years toward a so-called “grand bargain” to shore up Detroit pensions and protect artwork at the Detroit Institute for Arts from sale: “I view it as a very positive statement to make…that private organizations are seeing value in Detroit and really want also to help this equation. So hopefully that will be further encouragement for legislators to vote to support the package.” As planned, the Chase commitment of $100 million would be channeled through multiple partners already active in the city who promote real estate development, provide assistance to small businesses and entrepreneurs, and train residents for new jobs. Among the specific beneficiaries will be the M-1 Rail streetcar project, Eastern Market, Focus: Hope, and a variety of workforce training and entrepreneurship programs—with Dave Blaszkiewicz, president of the civic group Downtown Detroit Partnership and head of the Invest Detroit fund for local development projects, noting the investments would be critical to the success of advancing Detroit’s revitalization efforts. For Chase, the bank yesterday noted:  “What’s in it for Chase is the long term success of Detroit…If it’s good for the economy it’s good for our business….” Adding that the bank is also concerned with finding solutions for all the other cities around the world where it does business in some 60 nations: “So to the extent that we can begin to find solutions in a place like Detroit, our hope is that those solutions will be applicable in other places around the country and frankly around the world.”
Getting Ready for the Future. Even as settlement talks continue behind closed doors overseen by U.S. Bankruptcy Judge Meredith Jury in San Bernardino, municipal officials there are scheduled today to discuss steep cuts to several departments as part of their effort to balance the bankrupt municipality’s city’s budget at a workshop. The workshop will offer citizens and employees an outline of the city’s proposed FY2015 budget―an outline under which there is an estimated ending fund balance of zero — compared to a deficit of $22 million in the preliminary 2015 budget — and $14.4 million in unbudgeted liabilities. The outline does not include the expected service losses associated with the cuts, which reportedly include the possible closure of the Rowe Branch Library.  The Public Works Department’s budget would shrink from $9 million as of the midpoint of the 2014-15 fiscal year to $5 million. The budget proposes nearly a one third cut in “general government” — from $12.4 million to $8.7 million; about a 7.5% cut in the Fire Department ($30.4 million in mid-2014 to a proposed $28.1 million for 2015-16, which is a substantial change from the preliminary 2015 budget of $35.7 million). While the police budget would decline from $56.7 million in 2014 to $56.2 million, other departments would grow, including the city manager’s office. That office had a budget of $645,282 in 2013 and just over $1 million in 2014, and would be more than $1.3 million in 2015 under the proposal. The city has three more budget workshops planned for next week.

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