7.17.14

Fire in the court. The Detroit Fire Fighters Association, the Motor City’s last remaining major labor union that has not reached an agreement over the city’s proposed plan of adjustment, nor agreement on a contract yesterday testified in federal bankruptcy court before Judge Steven Rhodes that the city’s proposed plan violates its members’ collective bargaining rights—telling the court that the new hybrid pension plans that went into effect at the beginning of the month would effectively suspend Michigan’s collective bargaining for the next 10 years and not allow the union to bargain for better pension benefits. (The city has proposed a complex new formula for calculating the value of active pension plans. The city’s largest police union has accepted the proposal, leaving firefighters [DFFA] as the largest remaining Detroit union that has not reached at least a tentative contract with the city.) The new plans require employees to contribute to their retirement accounts. The Association testified that the federal bankruptcy court does not have the authority to permit the city to ignore the State of Michigan’s public employee collective bargaining law: “However noble this court’s intent is, you haven’t been licensed to control wages and benefits for 10 years.” Noting that permitting the union to bargain for better benefits could undercut the Motor City’s ability to stabilize its finances, Detroit attorney Heather Lennox said Detroit’s plan of adjustment relies upon assuming pension costs will remain at a fixed cost for the first 10 years after exiting bankruptcy: “The whole 10-year plan is based on these crucial assumptions…They’re looking at this through a prism of ordinary bargaining and ordinary times. These are extraordinary times in a financial emergency.” Ms. Lennox noted to the court that at the end of the ten year window, unions would, once again, be free to bargain with city management over pensions—and that in the meantime, they were free to bargain over other economic issues: “This,” she testified, “is not a wholesale suspension of bargaining.” The testimony yesterday came as part of two days’ of hearings Judge Rhodes has scheduled this week with regard to questions and issues related to Kevyn Orr’s proposed plan of adjustment. The court was also scheduled to hear from attorneys from the surrounding counties of Oakland, Macomb, and Wayne with regard to their contention that they have legal standing to object to Mr. Orr’s proposed Detroit’s plan of adjustment.

The Fine Art of Municipal Bankruptcy. Some of the Motor City’s largest corporations yesterday pledged nearly $27 million towards the Detroit Institute of Arts effort, with new donors including: Quicken Loans, DTE Energy, Blue Cross Blue Shield of Michigan and Grand Rapids, and grocery retailer Meijer. The new pledges will add to the levels in the so-called grand bargain and the DIA’s pledge to raise $100 million as part of the artistic bargain initiated by U.S. District Court Judge Gerald Rosen, asked by U.S. Bankruptcy Judge Steven Rhodes to serve as a mediator to help the city emerge from bankruptcy quickly, partially make up shortfalls in municipal pensions, and retain—in Detroit, what is considered one of the top art museums in the world intact. With yesterday’s pledges, the DIA this morning has reached nearly 80 percent of its $100 million goal—a goal that, together with the bipartisan state package, will raise the equivalent of more than $800 million to transfer the DIA out of municipal ownership into a nonprofit, while using the proceeds to help ensure that no retiree fall below the federal poverty level. Retaining the DIA within the city has been critical to the city’s economic future and sustainability: a city-commissioned report on the value of its collection last week assessed its entire value at $2.8 billion to $4.6 billion.

Not in Like Flint. Flint, Michigan City Manager Darnell Earley is warning that his city might be forced to seek federal bankruptcy protection if its retirees are unwilling to agree to reductions in their health benefits: “If we have no ability to mitigate the cost of retiree health care, that’s going to make it very difficult for the city to remain financially stable over the next few years.” Without changes, retiree pension and health expenses would consume 32 percent of the $55 million general fund. Flint, a flinty municipality of 100,000, has twice been under state control, as it, like the Motor City, has struggled with loss of population, jobs, and revenue. The city’s population today is half what it was in 1960, and it is one of a growing number of cities where its OPEB or unfunded post-retirement health care costs rival or exceed pension liabilities. In 2011q, Michigan municipalities bore nearly $13 billion in health-care liabilities for retirees, compared with about $3 billion for pensions. Flint is among 17 cities and school districts under some form of state control. Describing the ultimate option, Mr. Earley said: “Bankruptcy is a point in the law, and it’s my duty to explore that if it appears we’re not going to be able to make it any other way…Whether it’s the absolute next step or not, I can’t say. It would have to be explored. It’s in the law for a reason.” Mr. Earley proposed the OPEB cuts in the wake of a decision at the end of last month by U.S. U.S District Judge Arthur Tarnow to permit the city to impose changes in retiree health coverage—changes which the court had previously halted last March, noting that without relief, the city might have to cut public safety. The city has virtually no access to the credit markets, because it has no credit rating. Flint’s accumulated deficit is $12.9 million, though its budget is balanced through June 30, 2016. Mr. Earley notes that allowing higher insurance co-pays and deductibles for retirees would result in annual savings to the city and its taxpayers of $5 million this year—and that the change would make retirees’ coverage equal to that of active employees. The quandary the city confronts is about fiscal sustainability and service insolvency: if a federal court rejects the proposed OPEB changes, the city could be forced to cut its police force by 36 officers to 115, and the fire department 19 positions―notwithstanding a five-year tax increase for public safety that voters approved in 2012.  Or, as Mr. Earley puts it: “You can stabilize things by making sure that you’ve got the best systems in place for delivering services…We haven’t had that in Flint for a number of years. We haven’t had that in Detroit for a number of years.” Mr. Earley, a former city manager in Saginaw, is Flint’s third emergency leader since it was placed under state control in 2011.

Appealing Chapter 9. As appealing as exiting municipal bankruptcy might be, the very process of federal approval of that exit may be appealed. So it is that recently re-elected Jefferson County Commissioner George Bowman said he plans to be in U.S. District Court next Monday to urge the court to void parts of the county’s bankruptcy plan of adjustment, which he had opposed. Similarly, Sheila Tyson, a Birmingham city councilor is supporting efforts appeal that portion of the county’s approved plan of adjustment involving the $1.8 billion of 40-year sewer refunding warrants sold in December to write down $3.1 billion in related debt—although she has been unsuccessful in obtaining financial support for the appeal from the city. Councilmember Tyson is especially concerned about the longer term impacts of the approved bankruptcy plan on some of the poorest districts in Birmingham, where her constituents are already, she fears, feeling the pain of rising water and sewer rates. Some (1,500)—as in Detroit―have had their water turned off because of delinquent payments.  On Monday, the hearing will focus on Jefferson County’s motions for partial dismissal—likely with special focus on U.S. Bankruptcy Judge Thomas Bennett’s approval of a sewer refunding deal and the rate structure to pay the debt and the federal bankruptcy court’s agreement to retain jurisdiction and oversight for the life of the associated warrants. At Monday’s hearing, appellants are expected to focus on the deal that led the county out of bankruptcy, how it impacts residents, and the corruption-tainted underlying debt that was refunded. Appellant Calvin Grigsby is representing more than a dozen elected officials and residents, known as the Bennett ratepayers, who filed three appeals of Jefferson County’s reorganization plan or plan of adjustment. Mr. Grigsby has argued that much of the sewer debt refunded in December was unconstitutional, tainted by corruption, and therefore issued illegally in 2002 and 2003. Nevertheless, Jefferson County Commission president David Carrington said the county remains confident in its legal positions regarding the outcome of the appeals, and Jefferson County’s attorneys have argued that the appeals are moot, because the underlying legal challenges were dismissed when Judge Bennett confirmed the county’s plan of adjustment on Nov. 22. Unlike Detroit, Jefferson County, whose municipal bankruptcy was the largest in U.S. history before Detroit’s eclipsed it, originally for federal bankruptcy protection in November 2011, citing a total of $4.1 billion in long-term debt, none related to retiree obligations, but citing some 75%, or $3.14 billion was for sewer warrants. Thus, Mr. Grigsby charges that, referring to Judge Bennett, the “judge’s order to make innocent ratepayers, forced with threat of water shut-offs and evictions and foreclosures, to repay $14 billion when the value of the sewer system is no more than $1.5 billion is consumer fraud of the highest order.”

Fire in the Budget. After Washoe County District Judge Lydia Stiglich issued an injunction temporarily halting the City of Reno, Nevada’s plan to begin layoffs of 22 of its firefighters effective with its new fiscal year on July 1st, the city’s councilmembers have become embroiled in a legal battle over the layoffs—added to by divisions within the Council to bar continued payments to pay an outside law firm up to $600,000 to fight this challenge.The City of Reno has appealed the district judge’s ruling to the Supreme Court and is still awaiting that decision. In the original Fiscal Year 14/15 budget that was adopted by Reno City Council on May 20, the City of Reno was approved to lay off 33 firefighters on July 1. That number was subsequently reduced to 21 due to retirements. The district judge’s injunction blocks the layoffs, which forced the City of Reno to reassess its current fiscal year budget. Under the current plan, without layoffs, that would leave about a $3 million budget gap—or about 4% of the city’s budget. Coming on the heels of last year’s Moody’s downgrade, the kerfuffle threatens the city’s cost of borrowing and makes for hard choices. It raises the issues of fiscal sustainability and service insolvency—the very issues confronting Flint, Michigan. In the wake of the federal court’s action, City Council members have slashed nearly $1.8 million from the budget, approving a slate of small, one-time cuts to provide enough money to keep the 22 firefighters employed for another year, but deferring making a decision on more controversial proposals such as closing before and after school programs at three schools, eliminating recreational programs for teenagers, and using a temporary staffer to act as a recreational coordinator rather than a full-time city employee. The cuts include delaying the start of a the police academy, which is needed to train 13 new police officers; fuel and equipment savings from the Reno Fire Department; slashing travel and discretionary money for individual Council members; delaying hiring new employees; and reducing how much the city spends to lobby the Nevada Legislature. The Council plans to hold another meeting on Aug. 6 to make those decisions. Reno City Manager Andrew Clinger puts it succinctly: “We’re closer to solving the problem in the short term, but this budget augmentation is not sustainable…We’re still projecting a structural deficit for Fiscal Year 2016 and beyond.”

 

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