06.20.14

Tentative Agreement. The City ofSan Bernardino yesterday announced it had reached a tentative agreement with the California Public Employees’ Retirement System (CalPERS) with regard to missed payments related to the its municipal bankruptcy filing; however, in keeping with the mediator, U.S. Bankruptcy Judge Gregg Zive’s gag order, details of the agreement have not been released. According to the statement, San Bernardino and CalPERS “entered into an agreement that addresses payments that the city has begun to make to CalPERS on account of prior deferred payments and the currently stayed eligibility appeal.” Rosanna Westmoreland, a CalPERS spokeswoman, said: “All we can say, because of the confidentiality agreement, is that we reached an agreement and it will be the basis of the plan of adjustment…We have been engaged in extensive negotiations and made significant progress.” The federally mediated negotiations involving the city and CalPERS have been ongoing since last November—even as the state pension system has filed an appeal of the federal bankruptcy court’s decision finding the California city eligible for municipal bankruptcy—and filed an amicus brief with the 6th U.S. Court of Appeals in Cincinnati challenging Judge Steven Rhodes’ decision last December finding Detroit eligible for chapter 9 protection—with, in each case, the issue being whether a federal law can trump the respective state constitutions’ protection of contracts. Yesterday’s announcement of a possible breakthrough came as negotiations are continuing with all of San Bernardino’s largest creditors, including for new contracts for unionized employees, according to Michael McKinney, San Bernardino Mayor Carey Davis’ chief of staff. According to the most recent figures on the year the city did not make payments to CalPERS, the deficit equals about $13 million. Mr. McKinney acknowledged that CalPERS has been a major focus of the mediation, but said he could not comment on whether this tentative agreement might mean more focus on other creditors, such as bondholders. Negotiations with the police and fire unions also are ongoing. According to San Bernardino’s most recent audited financial report (2010), the city said it had $223 million of outstanding debt at the end of June 2010, of which $131 million were tax allocation bonds. The city also had $48 million of pension obligation bonds, $12.5 million of revenue bonds, and $31 million of certificates of participation. Mr. McKinney said the Mayor and Council are scheduled to vote Monday on a $131 million balanced budget―a budget, he noted, which will include $10.6 million in payments to creditors. Neither Ms. Westmoreland, nor Mr. McKinney could comment on how much longer it might take before the city releases the plan of adjustment that all creditors will have to agree to before the city can exit bankruptcy.

Motor City Pensions & Bargains. Trustees of Detroit’s pension fund for police and firefighters agreed, 8-3, yesterday to urge workers and retirees to accept pension cuts as part of the Motor City’s plan of adjustment, with the board set to mail letters to its 13,000 members next week urging a “yes” vote on ballots that are due by July 11th. George Orzech, Chairman of the Detroit Police and Fire Retirement System, said he voted to support the city’s plan, because it is the best offer available, although he said he still believes the state constitution protects pensions from being cut, noting that U.S. Bankruptcy Judge Steven Rhodes “made a decision, which I believe is wrong, that pension benefits can be impaired…(but) I can’t do anything about that. All I can do is go forward with how to prevent the impairment as much as possible.” The city’s restructuring plan calls for police and fire pensioners’ cost-of-living adjustments to be reduced by about 55% with no cuts to monthly pension checks. The trustees’ approval, coming just the day before Governor Rick Snyder’s signing today of the so-called “Grand Bargain” legislation—the package of nine bills that would  significantly enhances the growing creditor endorsements for the plan and changes to the Motor City’s pension benefits as part of its overall restructuring plan. Gov. Rick Snyder will be at the Globe building in Detroit this morning to sign a package of nine bills that would include setting up a nine-member state oversight commission with authority over the city’s finances, budgets, and contracts for at least 13 years, set the level of contributions made to city employees’ retirement and health care plans, and appropriate some $194.5 million to help the Motor City emerge from municipal bankruptcy. The state’s proposed one-time contribution — calculated as the equivalent of $350 million over 20 years — would be combined with $366 million pledged from charitable foundations and $100 million from the DIA. At least two union organizations also have pledged unspecified financial support in response to a request from House Speaker Jase Bolger (R-Marshall). And U.S. Judge Gerald Rosen announced Tuesday that the Skillman Foundation had pledged nearly $4 million to the grand bargain, upping the total foundation support to $370 million.

Windy City Blues. The Chicago Civic Federation reports that the Windy Citycurrently has the lowest rated credit of any major city in the country according to Moody’s,” adding the City is at risk of having to pay large liabilities if it is downgraded again. (Chicago Faces Significant Swaps Liabilities if Bond Rating Lowered Again.) Much of the problem appears to be related derivative contracts in the City’s swaps portfolio associated with variable rate bonds which have termination clauses if Moody’s were to lower Chicago’s credit rating below Baa1. A Chicago Sun Times investigative report states that the liability triggered by early termination of the deals could trip liabilities totaling $110.4 million for lowering one notch to Baa2, an additional $60.1 million if lowered to Baa3 and another $28.4 million if lowered to Ba1. Moody’s has maintained a negative outlook on Chicago’s credit, indicating a likelihood of additional downgrades if its financial condition does not improve. The Federation notes that “[A]ccording to the swaps information that is available online[7], as of last fall, the City of Chicago’s total swaps portfolio had a negative value of $397 million.”

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