06.26.14

Motor City Pensions & Bargains: The Twilight Zone. Part of the lugubrious process of fairly determining how to divvy up a municipality’s debt in bankruptcy—or what the court’s determine to be “fair and equitable,” involves judicial assessment of claims against said city. The city, in its filing a year ago, listed $18 billion in debt, including $5.85 billion in special revenue obligations, $6.4 billion in post- employment benefits, $3.5 billion for underfunded pensions, $1.13 billion on secured and unsecured general obligations, and $1.43 billion on pension-related debt. The Motor City’s debt service, alone, consumes 42.5 percent of revenue. The city has 100,000 creditors and 20,000 retirees. So it was that yesterday, U.S. Bankruptcy Judge Steven Rhodes listened to claimants against the Motor City—with Detroit asking the court to disallow claims from creditors who they claim have provided insufficient evidence to support their demands. One such claimant, Albert O’Rourke of Oceanside, California, was seeking the paltry sum of $1 trillion, because, he told the federal court, Detroit had lost or destroyed “Manhattan Project” nuclear research materials housed in property he owns in Detroit. Mr. O’Rourke’s filing claimed that amount was based on the price tag for building various nuclear weapons and devices related to the missing materials. In its objections, Motor City attorneys told the court: “Based on the information in the claim and response, the city cannot even determine what the materials are, whether they exist, where they are located and if they exist, who owns them.” Rickie Allen Holt, on behalf of the Aboriginal Indigenous Peoples, yesterday sought a much smaller amount—a mere $7 billion in damages, Holt claims the City of Detroit failed to secure the peoples’ “expressed permission” to file for Chapter 9 municipal bankruptcy last year; while Ms. Lucinda Darrah—an actual resident and taxpayer of Detroit―claimed the city owes her $150 million for the purchase of garbage trucks so residents can manage their own trash disposal. Ms. Darrah, however, tripled her claim this month, when she submitted a hand-written response to the city’s objection to her claim, upping her demand to $450 million, to compensate her for harmful pollution from a city incinerator. In Ms. Darrah’s case, Judge Rhodes asked her why the City of Detroit owes her $450 million—to which she responded; “I was trying to put a value on my life.” When Judge Rhodes told her that she lacked evidence to support her claim, she asked “What would it take to support it?” One of the larger claims to come before Judge Rhodes yesterday was for $1 trillion—the claimant told the court that Detroit had destroyed nuclear secrets and JFK-related documents, and owes him and others $1 trillion in compensation for the destruction. But not every claimant was rejected: even though the city’s attorneys told the court the city had already settled an eminent domain case, Judge Rhodes determined there may still be unresolved issues, and allowed the case to proceed in state court. Similarly, on a wrongful death suit involving slain stripper Tamara Greene, who was rumored to have danced at a never-proven party at the Manoogian Mansion, Ms. Greene’s family yesterday argued the Motor City owes them $150 million, because it failed to carry out a competent murder investigation; Detroit’s attorneys countered the case had no merit and has already been rejected by a federal judge. Nevertheless, Judge Rhodes said he would take the matter up in October.  Judge Rhodes resumes this a.m. with:

  • an update on the plan of adjustment voting process,
  • a challenge to the City’s proposal to provide a tour of the city for Judge Rhodes, and
  • whether to issue a subpoena that would force Attorney General Bill Schuette to testify.

Protecting State Credit Ratings; Municipal Finance Oversight, & Municipal Classification Reform.  Tennessee Gov. Beshear has signed into law new statutes to protect the Bluegrass state’s credit ratings, strengthening local public financing rules, and reclassifying local governments. As enacted, HB 1398 prohibits expenditure of state funds to pay the public indebtedness of any municipality; but specifies that this prohibition does not preclude any municipality from utilizing its allocation of state-shared taxes for the purpose of paying its public indebtedness—effective July 1st. Effective on that date, municipalities  issuing balloon or back-loaded debt obtain the comptroller’s approval first. The legislation does not prevent a city from using its allocation of state-shared taxes to pay its obligations.

Sponsor Mile Carter stated the “purpose was simply to protect the stellar bond ratings of the state….” noting that if a  municipality defaults or otherwise cannot pay its debt, “then they cannot come to the state and ask to be bailed out as Detroit did.” Tennessee law does not authorize municipalities to file for bankruptcy, but the state allows fiscally distressed local governments to request emergency loan assistance from the Comptroller’s office—a provision that was amended this session to make it clear that the comptroller’s emergency funding program is still in force, though it requires that the distressed local government request assistance before a default occurs.

Sponsor Carter noted that no Tennessee municipality has ever done that, because, in his words, the “state takes over the city…The elected officials lose all authority, and if they are willing to do that, we’re willing to help them.” In addition, the state enacted House Bill 1446, which requires that the comptroller’s office approve the use of “balloon” debt by local governments, which includes incorporated cities and towns, metropolitan governments, counties, and utility districts—legislation which the legislature claims is designed to increase transparency and accountability. The state does not support balloon debt by its municipalities — or back-loading debt service to defer the repayment of principal on bonds beyond a normal amortization schedule — absent compelling reasons, such as the need to borrow after a natural disaster or flood, or other circumstances where back-loading could make sense, such as the structure of outstanding bonds.

Under the new law, “balloon indebtedness” is defined as one or more of the following: municipal debt having a final maturity date 31 or more years after issuance, bonds that delay principal repayment for more than three years after issuance, the use of capitalized interest beyond the construction period, or structuring a deal without substantially level or declining debt service. The (House Bill 331) City Classification Reform law creates two classes of cities based on form of government instead of the current six classes in a repealed section of the Tennessee Constitution that are based on population: 1) First Class Cities – Those cities with the mayor-alderman form government, which is available only to the largest city located within a county containing a population of more than 250,000—including maintaining the current requirements for first class cities without impacting Louisville, which operates as a consolidated local government; 2) Home Rule Cities – All other cities operating under the mayor-council, city manager, and commission form of governments. The bill eliminates the requirement for the General Assembly to enact laws for each separate city to be reclassified. House Bill 331 would allow voters of the city to approve changes in form of government, and, therefore, a change in classification, and it eliminates arbitrary city classification-based statutes that existed prior to home rule. 3) It provides that all cities can select the number of council seats up to a maximum of 12. All cities can now eliminate the primary election if the election is held on a non-partisan basis. Any city may adopt a city civil service system.  The bill reinforces home rule authority by eliminating class distinctions in utility services.  House Bill 331 modernizes and removes inconsistencies between classes in the city property tax collection process by repealing several statutes and putting process for assessment and collection into two sections. The legislation permits cities with a population greater than 1,000 to impose an occupational license tax measured as a percentage of gross earnings (payroll) or net profits. All cities that have previously exercised the authority will be grandfathered in. Cities below 1,000 in population may impose a fee based on a flat annual rate.

Territorial Fiscal Distress. Puerto Rico Governor Alejandro Garcia Padilla yesterday proposed a legislation which could allow the U.S. territory to revamp the debt of some its largest public corporations, which provide vital services like electricity. Gov. Padilla’s actions came as the territory is mulling over fiscal options, because—since it is a territory, not a municipality, it is not authorized to seek federal bankruptcy protection—or, as David Chafey, chairman of the Government Development Bank for Puerto Rico, the island’s fiscal agent, said: “The absence of an orderly process would threaten the Puerto Rico government’s capacity to safeguard the public and promote the general welfare of the people.” Puerto Rico Electric Power Authority — one of the largest of the island’s public utilities, is, reportedly, confronting difficulty renewing credit lines from its banks. Failure could trigger an inability to purchase critical to the provision of electricity for the island’s businesses and 3.6 million citizens—although it remains unclear whether a potential default might be imminent. Puerto Rico currently has one of the highest municipal debt burdens in the U.S.—serious enough that this week, the President of the Federal Reserve Bank of New York warned that Puerto Rico’s persistent budget gaps and increasing debt load had “led to serious concerns about whether the island’s fiscal position is sustainable.” By yesterday, Puerto Rico’s most recently issued general obligation bond was trading at a yield of 9.3%―nearly 10% higher than when it went to market last March. Gov. Padilla’s proposed bill would create an organized process by means of which some debt could be reduced.  As proposed, it would apply to at least $22 billion of debt owed by public corporations―including the electric authority, the aqueduct and sewerage authority, and the highway authority; but it would not apply to the Puerto Rico’s general obligation debt.

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