07.03.14

Betwixt Scylla & Charybdis. San Bernardino voted 5-2 to adopt its FY2015 fiscal year budget late Monday night―a budget, which closes the bankrupt city’s $22.8 million deficit, but defers $10.6 million in payments to creditors. The vote came Monday night, three hours before the new fiscal year began, and with complaints from some council members that City Manager Allen Parker and the city’s Finance Director were absent―leaving them to pass the cuts-filled spending plan with some critical questions unanswered. Manager Parker had informed the council when they scheduled Monday’s meeting that he would be on vacation this week, with no objections at the time, but the final vote came amidst apprehension that the city is between a rock and a hard place: failure to have acted could have had grave implications for the city’s efforts to exit municipal bankruptcy―with the city’s attorneys warning that an inability to pass a balanced budget for the full year would have fed into bankruptcy creditors’ arguments to U.S. Bankruptcy Judge Meredith Jury that the city was disorganized and incompetent to act except under an intractable deadline, argued the city’s attorneys. But the cuts necessary could jeopardize the city’s fiscal future. “Approval of the city’s 2014-15 budget…tonight (is) in my view, is a critical and necessary step,” Paul Glassman, the city’s lead bankruptcy attorney, warned: “The city has been in bankruptcy for more than two years. There is a growing sense of urgency. Creditors want the case to move forward, and I’m sure the citizens want the case to move forward.” Yet the city’s the elected leaders feared the kinds of cuts they felt forced to make could augur ill for the city’s sustainable future. Nevertheless, Mayor Carey Davis praised the budget as paving a path out of bankruptcy: “The Council recognized the importance of showing our creditors, voters, and business owners that we are capable of managing the City of San Bernardino within our means…This was a painful budget for many, but this is a major step in making the City a better place to live and work. We thank the people of San Bernardino for trusting this Council to best position us for the future.” Already, the city’s police union had requested Judge Jury to set a deadline by which the city must form a plan of adjustment or lose federal bankruptcy protection. To help close a $22 million deficit, City Manager Allen Parker asked the Fire Department to cut its budget from $30.4 million in mid-2014 to $28.07 million this fiscal year. The Fire Department plan would close a Fire Station and remove one of the units from Station 224, under the plan developed by Interim Fire Chief Paul Drasil. That plan also counts on dramatically reducing the number of non-life-threatening medical calls to which firefighter/paramedics would respond, with the ambulance company AMR picking those up instead. The plan, Chief Drasil said, would have negative impacts on service time, but it was his best recommendation given the budget constraints. The new budget reduces code enforcement by over 60%. The other major savings came from a decision to use funds listed as “Council allocated,” which Administrative Services Director and Finance Director David Cain had told the Mayor and Council was not restricted; however, San Bernardino’s legal staff and a finance official working in the city manager’s office warned against that: “[I]t’s dangerous, because you don’t know what those funds are committed to.” Some of the money shown in that fund — nearly $6.5 million on April 30 — might be for work that’s already been completed since then, City Attorney Gary Saenz added, opening the city up for lawsuits. Michael McKinney, Mayor Davis’ Chief of Staff, told the Council: “I actually did send a note up to the mayor…They (the funds in question) are restricted pursuant to the mitigation fee act. That question had been asked before on the (prior meeting June) 23rd, and he (Councilmember Valdivia) got a direct no.” The City Attorney’s Office also warned against using the allocated money, saying it was “dangerous” to spend money when you’re unsure what it had been allocated to and it might be for services that have already been rendered.

Pension Debt & Municipal Bankruptcy. The Motor City is exploring a legal option that could save it $1.4 billion, with its attorneys issuing subpoenas for records to expose details of former—and now convicted—Mayor Kwame Kilpatrick’s debt deal that played a key role in triggering the most massive municipal bankruptcy in American history. The city’s bankruptcy lawyers have subpoenaed the Bond Buyer and several key players with regard to the details of a complex $1.4-billion borrowing or swap deal involving pension obligation certificates of participation to, at that time, eliminate the city’s unfunded pension liabilities. Detroit’s bankruptcy lawyers are arguing that deal was a “sham,” that it is illegal, and should be wiped out, so they are seeking communications between the former Mayor and his associations about the deal, and demanding the financial newspaper provide records documenting why it gave an award to Mr. Kilpatrick for the 2005 deal, which allowed the city to circumvent Michigan’s municipal borrowing limits to eliminate its unfunded pension liabilities―the Bond Buyer, in 2005, named the former Mayor and Detroit for its Midwest Regional Deal of the Year award in 2005. Detroit also subpoenaed the former Mayor’s Finance Director, Sean Werdlow, to testify and provide records about his role in the award-winning deal. Mr. Werdlow, the architect of the deal, subsequently was hired by the firm, Siebert Brandford Shank & Co., which sold the deal to the Motor City a few months after the transaction was complete. If Detroit is able to convince Judge Rhodes that the transaction was illegal, the city could escape the $1.4 billion debt—in effect imposing a fierce penalty on municipal bond insurers Syncora and Financial Guaranty Insurance Co. — which both backed the deal. Unsurprisingly, both are waging a fierce fight.

U.S. Bankruptcy Judge Steven Rhodes yesterday issued orders granting insurers Assured Guaranty Corp. and National Public Finance Guarantee Corp. rights on a handful of claims, proving them the exclusive right to vote on the city’s bankruptcy exit plan in place of individual bondholders. Judge Rhodes authorized Assured to be the sole party authorized to vote claims on the Assured-insured unlimited-tax general obligation bonds. National now has sole voting power on the Detroit Water and Sewerage Department bonds and ULTGO bonds that it insures; Judge Rhodes has not yet issued an order for Ambac Assurance Corp., which insures some of Detroit’s ULTGOs and has also asked for exclusive voting power. The holders of $1.4 billion of the city’s pension certificates of participation (COPs) have reached a separate agreement with Financial Guaranty Insurance Co. (FGIC), which wraps the bulk of the COPs―an agreement which essentially gives FGIC the main voting right, but only if FGIC votes to reject the plan and with a reservation of bondholders’ right to vote―the very debt (Please see above) on which the Motor City is suing to invalidate, because, it claims, it was issued illegally under the former administration. The current plan of adjustment proposes an alternative settlement, which would mean recovery levels of less than 40%. For its part, FGIC has asked the court for the exclusive voting right on the plan, and COPs holders have challenged the insurer on the issue—albeit the two parties have agreed that resolution of that issue is “unnecessary, as no party hereto intends to vote in favor” of the plan or the city’s settlement offer, according to a court brief filed yesterday. If Detroit, however, proposes a greater recovery or new plan for the COPs, the parties agreed to consult about a new vote. (COP holders include Hypothekenbank Frankfurt AG, Deutsche Bank AG, Dexia Credit Local, and Stone Lion Capital Partners LP, among others.)

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