07.09.14

Taking Stock in Stockton. U.S. Bankruptcy Judge Christopher Klein yesterday afternoon ruled that properties which the City of Stockton had put up as collateral for its $35 million loan from its lone remaining holdout creditor, Franklin Templeton Investors, in its municipal bankruptcy were worth between what the city and Franklin Templeton said, settling on $4.052 million—a decision which both puts off any resolution of the federalism challenge with regard to whether the city must comply with the California constitution and make full payment to the state’s public pension system, and complicates the city’s pending plan of adjustment, because the ruling means it will have to re-juggle its proposed allocation of cuts amongst its other creditors. At stake in yesterday’s hearing was the city’s hold on Oak Park (including its ice rink), as well as the Van Buskirk and Swenson golf courses. Franklin is the one bankruptcy creditor with which the city did not reach a pretrial settlement. But Judge Klein declined to rule on whether the Stockton could reduce its pension obligations to CalPERS in bankruptcy; he did intimate he is giving the prospect serious thought. Franklin is the sole creditor with which Stockton was unable to come to an agreement in filing for bankruptcy. Stockton had proposed paying back 1 cent on the dollar, for $350,000, leading Franklin to insist in bankruptcy court for the full amount. On the key issue with regard to the pension payments—an issue pending in both the 6th U.S. Court of Appeals from Detroit and the 9th U.S. Circuit Court of Appeals from San Bernardino, Judge Klein said he wants to hear more from all parties involved in the case before he offers a final opinion with regard to the sanctity of Stockton’s pensions. Nevertheless, he said he “might very well” conclude that Stockton’s contract with CalPERS could be rejected without the city paying a hefty termination fee—a fee which CalPERS has estimated to be as much as $1.6 billion—or more than double Stockton’s annual budget. At the same time, Judge Klein indicated he could possibly confirm Stockton’s current plan to exit bankruptcy—adjusted because of his ruling yesterday, which proposes no reductions or haircuts in contributions to the state system that controls retirement money for municipal workers across California. Franklin Templeton has repeatedly argued that the city’s retirement contributions be reduced to free up money for a $35 million loan repayment. Judge Klein yesterday set an Oct. 1st hearing for further consideration of the pension issue. Yesterday’s decision does mean that Stockton’s municipally-owned recreational facilities safe from creditors—and it means that there might be light at the end of the city’s 27-month tunnel if Judge Klein, next October, approves the city’s modified plan of adjustment, but between now and October, Judge Klein yesterday maintained he wants the city to provide “a somewhat more focused analysis” as to why he should confirm its proposed plan of adjustment, even as he continues to struggle with the equity of whether one creditor, CalPERS, should be held harmless. Yesterday the judge noted that he “might very well conclude the CalPERS contract would be rejected and that the $1.5 billion lien is not enforceable,” adding, however, “but that does not necessarily mean this plan of adjustment is not necessarily confirmable. It might be perfectly well confirmable.” At yesterday’s finish, Judge Klein indicated his goal is to wrap up the case at the October hearing: “Ideally I’d like to be able to make findings that would conclude the matter.” He termed his findings to date as “preliminary,” and said he is taking great care with a final decision because he does not want to make “a boneheaded mistake.” The outcome from yesterday is that Stockton will have to prepare for the final round in October—and it will have to change its plan of adjustment and determine from whence to meet the $4 million payment—with the options being: a lump-sum payment, a payment plan, or handing possession of two golf courses and an ice rink over to Franklin. (Note: Franklin Templeton is separately challenging a new law in the Commonwealth of Puerto Rico allowing some troubled public agencies to restructure their debt, saying it violates the U.S. Constitution.)

Motor City Progress. The city of Detroit reached a tentative contract with its largest police union late yesterday—an agreement achieved in confidential meditation negotiations that could overcome one of the last remaining labor disputes with the Motor  City’s creditors holding up final agreement on a plan of adjustment.  The tentative agreement was reached just three days before this week’s final votes on the city’s proposed plan are due. Under the agreement, according to a statement by U.S. Judge Gerald Rosen, the lead mediator appointed by federal bankruptcy Judge Steven Rhodes, the Detroit Police Officers Union agreed to recommend a “yes” vote on the plan after reaching a multiyear deal on wages, pensions, and health care benefits; in addition, the union and the city agreed to continue negotiations to try to reach a five-year agreement. Summarizing, Judge Rosen noted: “The agreement was reached after intensive negotiating sessions spanning more than nine months, sessions in which the parties’ interests were fully and vigorously represented and all issues robustly negotiated.” With the agreement, Detroit’s firefighters’ union is now the largest remaining labor creditor that has yet to achieve an agreement with the city. According to Judge Rosen, under the agreement, the parties included a pact with regard to “retention payments,” so that, according to Judge Rosen. “[O]nly a few remaining, albeit significant, disputes remain to be addressed between the City and its creditors.”  Under the agreement, police and fire retirees would be permitted to keep their monthly pension checks, but would be required to accept a reduction in annual cost-of-living-adjustment (COLA) increases.

In like Flint? Just 69 miles from Detroit, Darrell Early, the City of Flint’s emergency manager appointed by Michigan Governor Rick Snyder yesterday warned that “If we don’t get any relief in the courts…we are headed over the same cliff as Detroit…We can’t even sustain the budget we have if we have to put more money into health care” for the city’s employees. Flint, the state’s seventh largest city, and the birthplace of General Motors, has seen its population halved and experienced a huge loss in factory employment and surge in property abandonment. It has a deficit of about $12.9 million—and needs to find $5 million—this fiscal year—to meet its promised health care benefits. Now, should the city not prevail in court in its efforts to cut its retiree health care benefits, the city is likely to seek federal bankruptcy protection (Cuts made to retiree health care benefits in Flint in 2012, aimed at saving $8.5 million over two years, are on hold after the U.S. Sixth Circuit Court of Appeals in Cincinnati, Ohio, upheld a preliminary injunction last January that was issued last year against the cuts. Six retirees and the Flint-based United Retired Governmental Employees association filed a lawsuit against the city following a decision in April 2012 by then-emergency manager Michael Brown that would make retirees pay more out of pocket for health coverage. A final determination on the lawsuit protesting the proposed cuts is expected after the suit goes to trial.) Today, empty houses outnumber occupied ones in some residential areas, and Flint officials report that the city’s eroded tax base can no longer support generous public pensions and job benefits approved during better times. The city received a temporary reprieve last week, when a federal judge allowed it to implement cuts for the current fiscal year budget. While city officials expressed relief, “the real fundamental, underlying question about the ability of a municipality to alter retiree health care benefits has not been answered,” according to Mr. Earley’s financial adviser.

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