August 27, 2014
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COPs and Sobbers. U.S. District Court Chief Judge Gerald Rosen, the Detroit bankruptcy mediator appointed by U.S. Bankruptcy Judge Steven Rhodes, filed an order yesterday to require a mediation session today with the Certificates of Participation or COPs parties, as Judge Rosen seeks to resolve one of the last major obstacles to the Motor City’s potential exit from the nation’s largest municipal bankruptcy before the confirmation trial begins next Tuesday. The order went to the City of Detroit, Syncora Capital Assurance, Inc.; Syncora Guarantee, Inc.; Berkshire Hathaway Reinsurance Group; Wilmington Trust Company, National Association, as successor to U.S. Bank National Association, as Trustee and Contract Administrator Successors-in-interest to EEPK Bank and its affiliates, and the Ad Hoc COP Holders (Dexia Credit Local, Dexia Holdings, Inc., Norddeutsche Landesbank Covered Finance Bank, S.A.) (the “Hedge Funds”), and Financial Guaranty Insurance Co. to appear at the federal courthouse this morning at 10 a.m. in a last ditch effort to resolve the disputes between the city and the holders and insurers of $1.4 billion of pension certificates of participation—with the COP investors and insurers the critical, objecting creditors to the Motor City’s proposed plan of adjustment of its $18 billion in debts. The order notes that the “parties and counsel should be prepared to stay overnight in Detroit for a continuation of the mediation session on Thursday, August 28, 2014 in the event the mediators deem it necessary.” The issue involves Detroit’s suit, which seeks to invalidate the COPs, because, Detroit claims, the certificates were issued illegally in the original 2005 transaction; therefore, the city should have no obligation to repay. (Detroit defaulted on the debt a year ago last June and has offered holders pennies on the dollar.) Judge Rosen’s order follows Monday’s session before U.S. Bankruptcy Judge Rhodes, when Detroit sought to have the federal court strike a portion of Syncora’s objection to the city’s plan of adjustment and impose sanctions on the insurer in the wake of Syncora’s accusation that Judge Rosen conspired to protect pensioners and the Detroit Institute of Arts over bondholders.
Drip. As the Michigan Finance Authority yesterday began issuing about $1.8 billion of municipal revenue bonds on behalf of the Detroit Water and Sewerage Department to finance the purchase of debt from investors, S&P upped its rating on the bonds three levels up from junk bond territory—expressing greater confidence than either Fitch or Moody’s. The sale includes a $121 million uninsured senior-lien portion maturing in July 2044, which is being offered at just under 5 percent, according to Bloomberg. The sale is another key piece in the puzzle of resolving the Motor City’s municipal bankruptcy—especially in the wake of the Motor City’s agreements with its general obligation bond holders and its retirees. If the refinancing proceeds as planned, investors and bond insurers would drop their objections to the water and sewer portions of Detroit’s debt-cutting plan, enhancing the prospects for Detroit to exit municipal bankruptcy. Thus, S&P’s investment grades (BBB+) denote that the bonds are at low risk of default. The issuance is important, because, according to DWSD CFO Nicolette Bateson, the refinancing could save $11.4 million annually over the first 19 years of the deal, and it could also raise $150 million for projects to improve the city’s sewage system. The refinancing transaction is expected to achieve debt service savings of at least $240 million, and it is intended as an alternative to the Motor City’s current bankruptcy plan for the revenue bonds, which calls for the impairment of nearly 50% of the debt by either stripping out call protection or replacing the current coupon with a lower interest rate. In the wake of the sale, Detroit intends to amend its plan of adjustment to treat all the debt as unimpaired, with the untendered bonds continuing to get the scheduled principal and interest payments. The bonds are secured by a lien on net revenues of each respective water and sewer system that include user fees, investments, and earnings. While the DWSD system’s funds and accounts are separate from the city with excess revenue invested by the bond trustee at the direction of the water and sewer department, investors have been warier. Indeed, the Detroit Water and Sewer Department provides service to some 43% of Michigan’s population, with over 70% of operating revenues coming from suburban customers. The sale includes a $121 million uninsured senior-lien portion maturing in July 2044—which was offered at a 4.85 percent yield, according to Bloomberg. Some bonds are backed by Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp., according to the people with knowledge of the deal. The refinancing transaction is expected to achieve debt service savings of at least $240 million.
Charting San Bernardino’s Future. Even as the City of San Bernardino continues its closed-door discussions with its creditors under the aegis of U.S. Bankruptcy Judge Meredith Jury, the city’s voters are preparing to weigh in themselves in the wake of the city council’s decision earlier this month (4-3) to put two ballot measures on the November ballot, which would determine how police and firefighter salaries are determined and repeal a longstanding formula used for determining those wages. The first measure, Measure Q, would repeal a section of the city charter establishing the criteria for police officer and firefighter salaries. (Under Section 186 of the city charter, salaries for police and firefighters are determined based on what police and firefighters are paid in 10 other cities of comparable size and population.) The other measure (Measure R) proposes to eliminate paying fired employees while they are appealing their terminations to the civil service commission until the commission makes a decision on whether or not to reinstate the employee. In addition, demoted employees appealing their demotions would be paid their adjusted wage until the civil service commission determined they should go back to what they were previously paid. Now the actual wording for the ballots arguing for and against changing the city charter have been resolved—with the arguments in favor of both proposed amendments signed by Cal State San Bernardino economics professor Thomas Pierce, who was on the citizen committee which recommended the two measures voters will see. The opposition to Measure Q — which would set police and firefighter salaries by collective bargaining instead of the average of 10 like-sized cities — is signed by Amelia Sanchez-Lopez, community advocate; Vinson Gates Jr., retired fire captain; Ronald Coats, business owner and citizen; Jim Eble, community advocate; and Marie Negrete, community leader. In contrast, on the second measure, Measure R, no one filed an argument against the Measure in time, according to the city clerk’s office. The affirmative position voters will see states: “This simply doesn’t make sense. The City and its taxpayers should not be forced to pay an employee that lost his or her job due to disciplinary reasons simply because the employee is appealing the decision.” The text — the language on the ballot — would eliminate the existing language of Section 186, including its salary-setting formula, shift requirements, and the one mention of paramedics — saying the council “may authorize additional salary to be paid to local safety members of the Fire Department, assigned to duty as paramedics, during the period of such assignment.” In its place would be the following: “Salaries. The Safety of the people in the City is a highest priority of its government. Compensation of police, fire and emergency safety personnel shall be set by resolution of the Mayor and Common Council after collective bargaining as appropriate under applicable law, as it does for other City employees.”
The arguments for and against Measure Q’s change to Section 186 follow:
- Pro: “In every other city in California, the salaries of public safety employees are determined by collective bargaining and City Council resolution,” Measure Q’s backers begin. “Only in the City of San Bernardino is this not the case. Our City Charter dictates that outside forces will determine the salaries of our public safety employees.” The statement also says that by mandating shift hours for firefighters, Section 186 “locks the City into mandatory overtime, which comes to approximately $7 million in FY 2014-2015.”
- Con: The group arguing against the changes to Section 186 argues it would add more politics to the salary-setting process, “cause our best-qualified firefighters and police to leave — making San Bernardino even less safe for residents” and do nothing to help the city’s finances…It puts taxpayers at risk while doing nothing to solve San Bernardino’s serious financial problems…Measure Q would reduce city paramedic services and make San Bernardino less safe for residents.”
While the argument says the change “will result in the outsourcing of paramedic services” and “the City Manager has publicly confirmed that the main purpose behind Measure Q is to outsource city paramedic services to an out-of-town corporation,” there remains uncertainty with regard to whether the amendment would have that effect. City Manager Allen Parker has stated he would like to consider the possibility of making the company AMR responsible for at least some paramedic services.
The 10-day examination period for the arguments for and against the ballot changes ends Sept. 2.