Fiscal Sustainability & Service Solvency after Bankruptcy

             July 22, 2014

Visit the project blog: The Municipal Sustainability Project 

Detroit’s Fiscal Sustainability & Future Service Solvency. U.S. Bankruptcy Judge Steven Rhodes Friday cleared for release yesterday a report (please see attached) from a special team he requested to examine Kevyn Orr’s proposed plan of adjustment to determine whether the assumptions that undergird the plan’s cash-flow projections and forecasts are reasonable and whether its overall plan to deal with city debts and exit Chapter 9 is feasible, asking: “Is it likely that the City of Detroit, after the confirmation of the Plan of Adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and to meet the obligations contemplated in the Plan without the significant probability of a default?” The report, submitted by Martha Kopacz and Phoenix management Services, concludes: “It is likely that the city of Detroit, after the confirmation of the Plan of Adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and to meet the obligations contemplated in the Plan without the significant probability of a default.” Ms. Kopacz wrote that “by most accounts, there is forward progress being made in the city” on the administrative front with the team finding that the combined efforts of Emergency Manager Kevyn Orr and Mayor Mike Duggan “are addressing service shortfalls.” Nevertheless, noting the throughout her report for the court that “there is not one controlling set of projections that will provide a financial road map to the City, its constituents, and the Financial Review Commission,” she recommended Detroit “immediately produce an integrated plan, which includes the expected initiatives, deferrals, and other items, by department and fund. This will provide a longer term roadmap and assist the Mayor, the Financial Review Commission and other interested parties in understanding how the City is making progress towards the forecast detailed in the Plan.” The report offers some qualifications and raises concerns on projections in some areas, making suggestions that could enhance the feasibility of the plan.

& The Votes Are In: About 82 percent of the Motor City’s current and retired police and firefighters voted in favor of the city’s proposed plan of adjustment; about 73 percent of general city workers and retirees supported it—in effect casting their votes to accept cuts to their pensions and health-care benefits as part of the overall plan to eliminate some $7.4 billion in debt. Even though the tally is not binding on the federal court, it will form an important consideration for Judge Rhodes when he presides over next month’s trial to weigh whether to approve the Motor City’s plan—along with the votes of the city’s bondholders―creditors who are divided: holders of Detroit’s limited tax obligation bonds rejected the plan, according to a filing yesterday in the federal bankruptcy court, whilst unlimited tax bond holders voted in favor by the necessary majorities. Under the City’s proposed plan, current and retired city employees, as well as investors or bondholders, would be forced to take less than the $10.4 billion they are owed if the court approves the plan, with some of the city’s municipal bondholders potentially receiving as little as 11 percent of their claims. Retired police and firefighters are to collect all of their current monthly pension checks, while general employees would get about 95 percent of theirs. The police and firefighters would see future cost-of-living increases reduced, while general employees would lose that benefit entirely. The plan proposes reductions in health care benefits for both current and retired employees, with the plan proposing a 74 percent reduction in the city’s total OPEB, or post-employment benefits. The Motor City’s unions, and groups representing retired city employees, urged their members to vote in favor of the plan—and they did: more than 5,800 current and retired police and firefighters voted in support, while fewer than 1,300 voted in opposition, according to yesterday’s filing. Among the city’s current and retired general workers, the vote was nearly three to one in support out of the 8,500 votes cast. Among investors who hold the Motor City’s general obligation bonds, those with $174.9 million in limited tax bonds rejected the plan, while those with $366.2 million in unlimited tax bonds voted to accept it. The strong support demonstrated by the retirees appears to pave the way for the so-called Grand Bargain, which will trigger a spinoff of the Detroit Institute of Arts to become an independent institution, no longer owned by Detroit, and trigger the combined state—Detroit Institute of Arts $816 million plus package of assistance to ensure no Detroit retiree’s income falls below federal poverty levels. Detroit Emergency Manager Kevyn Orr issued a statement after the release of the vote tally: “The voting shows strong support for the city’s plan to adjust its debts and for the investment necessary to provide essential services and put Detroit on secure financial footing…I want to thank city retirees and active employees who voted for casting aside the rhetoric and making an informed positive decision about their future and the future of the City of Detroit.” Nevertheless, not all the creditors exhibited the same level of support. 119 classes of Detroit Water and Sewer Department secured bondholders voted “no,” compared to 32 that voted “yes,” with the no’s apparently representing bondholders upset that even though they will be paid 100% of their principal, they are opposed to the city’s plan to redeem their bonds early. In addition, four groups of unsecured creditors voted “no,” including bond insurers and hedge funds which control $1.4 billion in pension debt issued by former and now convicted Mayor Kwame Kilpatrick’s administration in 2005—making clear that a contested issue when the trial commences next month will be the pitting of the city’s bondholders and bond insurers versus its employees and retirees—not to mention its smaller unsecured creditors, including people who sued the city and are owed settlements. These creditors also voted to oppose the city’s plan. Nevertheless, now armed with the sustainability and solvency report and the voting results, Judge Rhodes is more equipped to assess—in the trial commencing next month—whether Mr. Orr’s Plan of Adjustment is legal, fair, and feasible—the three hurdles the city must clear to emerge from bankruptcy.

Won’t You Be My Neighbor? U.S. Bankruptcy Judge Steven Rhodes yesterday granted Macomb County’s request to be deemed a creditor granted an opportunity to vote on Detroit’s proposed plan of adjustment, ruling that a claim the county’s public works commissioner is seeking against the city is worth $26 million for purposes of voting on the city’s plan of adjustment, rejecting Detroit’s position that the claim should only be assessed to be worth one dollar. The neighboring county’s request involves its $26-million claim against the Motor City over fraudulent overbilling on a 2004-05 sewer line repair in Sterling Heights after a collapsed line created a giant sinkhole, with the issue focused on Macomb County Public Works Commissioner Anthony Marrocco’s 2011 lawsuit against former Motor City Mayor Kwame Kilpatrick, members of his administration, the former mayor’s friend and contractor Bobby Ferguson, and others over the sewer repair. Ferguson was among the contractors working on the project that Commissioner Marrocco alleges was overbilled by $26 million. In the wake of the federal corruption convictions against Messieurs Kilpatrick, Ferguson, and former Detroit Water and Sewerage Department Director Victor Mercado, Macomb County later amended its suit to include the City of Detroit. The difference to readers between $1 and $26 million might be readily measurable; for municipal bankruptcy purposes—because creditors’ votes are weighted so that not only must there be a majority of creditors who cast ballots who vote yes, but also because the yes votes must represent two-thirds of claims in order for the plan to be approved.  Commissioner Marrocco’s claim is in Class 14, a group of unsecured creditors with total claims of about $150 million; Macomb County has opposed the plan of adjustment based on concerns about Detroit shifting responsibility for water department pensions onto suburban customers. Nevertheless, in announcing his decision, Judge Rhodes noted that his ruling would not have an impact with regard to whether Macomb eventually prevails: “This estimation will carry absolutely no weight in actually fixing the amount of the claim, which will be done at a later date.”

Trials & Tribulations. Even as the momentum towards the trial of the century next month builds, municipal bond insurer and Motor City creditor Syncora yesterday sought in Judge Rhodes’ courtroom to move back the commencement of the trial to October—requesting the federal court to grant a six-week delay in the trial, because, the insurer charged, Detroit has not been forthcoming with the production of  documents it claims it needs: “We have a right to object to the plan, but right now we don’t know what that plan is,” the firm’s attorney charged, telling Judge Rhodes that the information the city has provided has been incomplete about matters such as the $816-million grand bargain to reduce pension cuts and spare the Detroit Institute of Arts from selling its masterpieces. In response, Motor City’s attorney Heather Lennox testified the city has released detailed information to creditors and continues to do so as agreements with creditors are reached, telling the court a six-week delay “completely unwarranted,” and advising Judge Rhodes that Detroit expects to release an updated version of its plan of adjustment sometime this week. Any delay into October, such as Syncora is seeking, would not only add significant costs to the city, its taxpayers, and its future; but also would create an added complication—Emergency manager Kevyn Orr’s appointment is scheduled to end on October 1st.

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