07.11.14

Motor City Progress. Today marks a key day for the Motor City as some 70,000 its creditors, including employees, retirees, and bondholders’ votes are counted on emergency manager Kevyn Orr’s proposed plan of adjustment to allocate some $7.4 billion in cuts amongst the city’s creditors—and reserve sufficient funds in order to ensure the provision of essential services. Under Mr. Orr’s proposed plan, some of the Motor City’s bondholders would receive as little as 11 percent of what they are owed, but the city would gain approximately $1.4 billion to invest in essential municipal services over the next decade. According to the Detroit Free Press, the plan would permit the Motor City to avoid payment on 74 percent of its unsecured liabilities—albeit at its own steep price: Detroit anticipates a debt to its investment banking firm, Miller Buckfire, of $28 million for the firm’s services in helping it put together its restructuring plan. Even though the counting will commence today, certified voting results are not expected to be released until later this month—in advance of next month’s scheduled trial before U.S. Bankruptcy Judge Steven Rhodes—who has scheduled a hearing for Tuesday for individual creditors who wish to object to the plan, but cannot afford an attorney. According to an internal spreadsheet obtained by the Free Press shows the city has $9.9 billion in unsecured liabilities — including pensions, retiree health care obligations, and losses from a swap deal under the former (and now convicted) Mayor Kwame Kilpatrick administration, but the city proposes to pay only $2.6 billion on those obligations under its plan of adjustment. The documents discovered by the Free Press illustrate that while achieving the protection of municipal bankruptcy can protect a municipality and ensure there are no interruptions in critical services, the legal and financial restructuring services can weigh heavily on that city’s future. The secured documents also demonstrate the dynamic tension between a municipality’s pension promises versus its essential services: According to the Miller Buckfire documents secured by the Free Press, the Motor City expects to reduce its unfunded pension liabilities by 54%, $3.13 billion to $1.45 billion as part of its plan of adjustment—with civilian retirees asked to accept 4.5% monthly pension cuts, the elimination of annual cost-of-living-adjustment (COLA) increases, and a clawback of excessive annuity payments into the city’s employee savings plan. Police and fire retirees are being asked to accept a reduction in COLA with no cut to pension checks. In addition, the plan proposes reducing post-retirement health care obligation by 89%, cutting those future costs by close to 90% from $4.3-billion to $450 million, with the funds paid to two independent trusts that will administer benefits. The other critical savings would come from the proposed elimination of the $1.4 billion swap deal orchestrated by former, and now jailed, Mayor Kwame Kilpatrick in 2005 to eliminate the city’s pension liabilities at the time, with the plan asserting that the pension obligation certificates of participation were illegal. If the process of exiting municipal bankruptcy is to ensure a viable and sustainable fiscal and economic future for a city, Miller Buckfire describes it thusly: “The City’s revitalization plan will also contribute to its ability to access the capital markets going forward…The revitalization efforts are assumed to attract a new tax base for the City. In addition, the City’s revitalization efforts are relatively flexible with respect to timing. Because of the flexible nature of much of the revitalization efforts, the City has increased control of its financial future and has flexibility to meet its reduced debt service obligations going forward.” According to the Miller Buckfire documents to which the Free Press gained access, the proposed plan of adjustment would mean the following key changes in the city’s debts and liabilities:

Before the bankruptcy, Detroit’s unsecured debts and liabilities totaled:

Retiree health care costs: $4.303 billion;

Unfunded pensions: $3.129 billion

Certificate debt issued to fund pensions*: $1.473 billion

General obligation bonds: $552 million

Swaps*: $290 million

Miscellaneous unsecured debt: $184 million

Total unsecured debts: $9.931 billion

Note: Detroit will maintain $6.4 billion in secured water, sewer, general obligation and parking bonds, which legally must be paid 100%.

Total unsecured Detroit debts following bankruptcy cuts:

Retiree health care costs: $450 million (89% cut)

Unfunded pensions: $1.447 billion (54% cut)

Certificate debt issued to fund pensions*: $162 million (89% cut)

General obligation bonds: $397 million (28% cut)

Swaps: $85 million (71% cut)

Miscellaneous unsecured debt: $21 million (89%)

Total unsecured debts: $2.562 billion (74% cut)

 

Inching Forward in San Bernardino. Even as the vote counting that could determine the outcome of Detroit’s efforts to exit bankruptcy are underway in California, a status hearing yesterday in southern California before U.S. Bankruptcy Judge Meredith Jury on the negotiations under federal mediation (behind closed doors creditors before U.S. Bankruptcy Judge Gregg Zive since Nov. 24) have been slower, with the setting of deadlines related to the city’s issues with the police and fire unions as officials work to piece together a plan that will take it out of bankruptcy. The San Bernardino Police Officer’s Association earlier this week decided not to ask Judge Jury to set a deadline for the city to file its proposed plan of adjustment. Last month, attorneys for the city and the California Public Employees’ Retirement system announced they had reached a settlement agreement. Some of the complexity involved includes efforts by the firefighters to argue in state court that benefit cuts imposed upon their members a year ago last January violate San Bernardino’s city charter and the California Public Employee Retirement Law. The police union might try to make the same argument, but first it is continuing to negotiate for a new contract acceptable to its members and the city, or as the union’s attorney notes: “To the credit of the city and the folks who are running the negotiations, absolutely there’s been progress…I guess I’m wanting to discuss with you (referring to Judge Jury) the eventuality where, sadly, we haven’t made a deal, so we’re standing side by side with fire and Mr. Glave (the firefighter union’s attorney, Corey Glave) in evidentiary hearings.” Judge Jury, yesterday at the hearing, responded she would catch up, if need be, so that “police and fire union attorneys presented” their cases together. Paul Glassman, San Bernardino’s bankruptcy attorney, told the court that progress is being made toward a long-term plan: “We are preparing a ‘small p’ plan for implementing the changes in the budget and the changes to the conditions and terms of employment that will become a comprehensive revised proposal to fire.” The closed door negotiations are complicated by both violent crime and federalism complications. CBS in Los Angeles this morning notes: “A recent spike in murders in San Bernardino has residents scared and police trying to get a handle on the violence.” At the same time, both the union and city advised Judge Jury that the current round of negotiations were unproductive: a preliminary hearing on the contract rejection motion is now scheduled for Sept. 11th. Filings are due before that. After considering the motion for contract rejection, Judge Jury said she will hear arguments on relief from the stay that otherwise prevents suing in state court during bankruptcy. Nevertheless, the Judge yesterday reminded those in the courtroom that in earlier stages of this case, she has had “an extreme reluctance to grant relief from stay” such as the one the fire union wants and the police union may soon decide it will seek—instead noting that she hopes the schedule “kind of puts a fire under the city to get whatever you have to get done, done.”

U.S. Territorial Bankruptcy.  As we wrote last year in the case of the U.S. Territory of the No. Marianna Islands, a legal mechanism for a U.S. territory to adjust its debts in order to avoid insolvency and to be able to provide essential—indeed critical and lifesaving—services 24/7―is only available to a municipality—and then only if specifically authorized by a state.  With Puerto Rico confronting severe fiscal challenges, the territory’s lawmakers have acted, and its Resident Commissioner Pedro Pierluisi, the territory’s sole representative in the U.S. House of Representatives, is exploring options to amend the current chapter 9 municipal bankruptcy law to allow government-owned corporations in Puerto Rico to file for bankruptcy.  Last month, Puerto Rico lawmakers adopted a Recovery Act [the Puerto Rico Public Corporation Debt Enforcement and Recovery Act] to permit some public corporations to negotiate with their bondholders—the action appeared to be aimed at helping the Puerto Rico Electric Power Authority, or PREPA, which provides most of the islands electricity—but owes its municipal bondholders $8.6 billion—with authority to, in effect, negotiate. Franklin Templeton, a challenging creditor in Detroit’s chapter 9 bankruptcy, and which holds some $1.7 billion in PREPA bonds, sued: claiming that under the U.S. Constitution, federal bankruptcy courts are the only ones authorized or empowered to impose adjustments upon creditors.  A federal court has given the Governor, Alejandro Garcia Padilla, until July 20th to respond. As a territory—neither a state, nor a municipality, the territory is caught between a rock and a hard place. Now Commissioner Pierluisi is seeking support in Congress to modify chapter 9, the municipal bankruptcy law signed into law by former President Ronald Reagan, to give U.S. territories the authority to restructure their debt: “As Puerto Rico’s only representative in Congress, and a member of the House Judiciary Committee, which has jurisdiction over the U.S. Bankruptcy Code, it is my responsibility to explore whether the process that applies in the states — and that has proven to work — should be available in the territory…That is why I intend to consult closely with leaders in the House and Senate, the White House, and other stakeholders regarding the prospect of federal legislation to eliminate the clause in the Bankruptcy Code that appears to prohibit government-owned corporations in Puerto Rico from filing under Chapter 9.” Current federal bankruptcy law defines “municipality” as a “political subdivision or public agency or instrumentality of a state,” while chapter 9 defines a “state” to include Puerto Rico, “except for the purpose of defining who may be a debtor under Chapter 9.” Congress cannot, under the 10th Amendment, authorize states to file for bankruptcy relief. According to the Bond Buyer, a source reported that Gov. Padilla’s administration sought guidance from the U.S. Treasury on the possibility of altering the federal bankruptcy code to allow Chapter 9 in Puerto Rico, and was told that it would take time. The rating agencies have lowered PREPA bonds to low speculative ratings in the last few weeks. Fitch Ratings has said that PREPA default was probable.

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