Detroit Gets Ready for Trial; & How to Avoid Future Detroit’s

August 29, 2014

Visit the project blog: The Municipal Sustainability Project 

Getting Ready to Rumble in the Motor City. With Detroit’s trial on whether the federal bankruptcy court will sign off on the Motor City’s sixth version of its proposed plan of adjustment to address its nearly $18 billion in debt scheduled to open bright and early next Tuesday, U.S. Bankruptcy Judge Steven Rhodes yesterday rejected Detroit bond insurer Syncora’s blistering “personal attack” on Detroit’s chief bankruptcy mediator and ordered the creditor’s attorneys to prove why they not have sanctions imposed upon them, and Judge Rhodes struck from Detroit’s bankruptcy record Syncora Guarantee Inc.’s objection from earlier this month in which Syncora accused Chief District Judge Gerald Rosen and mediator-attorney Eugene Driker of demonstrating “naked favoritism” toward retirees—rejecting Syncora’s claims outright and ordering its objection struck from the public record, writing in his order: “Syncora’s highly personal attack on Chief Judge Rosen in the objection was legally and factually unwarranted, unprofessional and unjust…Justice requires the court to strike the attack from its record,” giving Syncora’s attorneys two weeks in which to respond in writing with evidence as to why sanctions should not be imposed. Calling Syncora’s allegations false, Judge Rhodes stated that Judge Rosen and Mr. Driker carried out their responsibilities in trying to offer potential resolutions to address the Motor City’s pension problems, writing: “They were in no position to ‘collude’ with anyone, to ‘orchestrate’ or ‘engineer’ anything, to ‘execute a transaction,’ or to ‘pick winners and losers.’ Nevertheless, the court did not act on the city’s request that Syncora be required to publicly apologize to Judge Rosen and Mr.Driker, with Judge Rhodes writing: “The court concludes that a coerced and therefore insincere apology is not a true apology at all; it is not an acknowledgment of a mistake or an expression of regret.” Judge Rhodes’ 22-page decision was issued yesterday as Syncora and another holdout bond insurer, Financial Guaranty Insurance Co. (FGIC), were reported to be in mediation talks with Emergency Manager Kevyn Orr’s team.

Getting Ready for Tomorrow. Meanwhile, Detroit, mayhap already looking beyond the outcome of its confirmation trial set to commence next week, yesterday secured up to $275 million in financing — funds critical to support the city emergence from municipal bankruptcy—if and when the U.S. bankruptcy court determines its proposed plan of adjustment is approved. The Motor City is hoping to use the funds to help finance the city’s restructuring and pay off debts, disclosing the agreement with Barclay’s Capital yesterday to Judge Rhodes. The funds will allow the city to pay off its $120 million loan from Barclays that financed “quality of life” improvements to city services, $45 million toward a settlement of a troubled pension-related debt with two banks, and potentially $55 million toward limited-tax general obligation bondholders. The loan also denotes a mark of confidence that a municipality—even in bankruptcy—can secure financing after filing for bankruptcy. In this instance, once again, the arrangement also appears to demonstrate the importance of the State of Michigan’s enhanced role in the Motor City’s successful efforts to emerge from bankruptcy: the arrangement involves the Michigan Finance Authority issuing bonds if Detroit successfully emerges from bankruptcy court. A trial over the city’s debt-cutting plan starts Tuesday in bankruptcy court. Indeed, Emergency Manager Kevyn Orr indicated that several firms had expressed interest in lending money, noting: “Detroit continues to make steady progress in returning to firm financial footing and becoming an attractive place to invest once again…We look forward to deploying these funds in our ongoing effort to make Detroit a viable and strong American city once again.” Yesterday’s agreement also demonstrates a turnaround: two earlier such borrowing efforts by the city had been rejected by Judge Rhodes, because the earlier efforts involved the city proposing to use the proceeds to pay off a troubled pension-related debt. The Barclay’s loan is backed by Detroit’s income tax revenue and up to $10 million in collateral from the sale or “monetization” of unspecified city assets, but it “expressly excludes” any city-owned art at the Detroit Institute of Arts—with the proceeds intended to go toward upgrading Detroit’s computer systems and buying new equipment for the police, fire, and emergency medical services departments. Barclays is charging the city a base interest rate of 3.5 percent plus a market-based flexible rate that would cap total interest payments at 6.5 percent, according to Mr. Orr’s office, with the term of the loan scheduled to expire co-terminously with the term of the quality-of-life loan on the date Detroit exits bankruptcy—after which Detroit would have to secure “bridge financing” to service the new debt or earmark certain revenues for repayment of the balance.

What about Your City? The former Governor of Wyoming late yesterday sent me an article, “How 21st-Century Cities Can Avoid the Fate of 20th-Century Detroit,” (How 21st-Century Cities Can Avoid the Fate of 20th-Century Detroit) from Scientific American by Carl Benedikt Frey, who is a research fellow of the Oxford Martin School at the University of Oxford and the Department of Economic History at Lund University—and who also serves as a specialist advisor to the Select Committee on Digital Skills at the House of Lords, U.K. Parliament. How could one resist an opportunity to benefit from a scientific perspective about how U.S. state and local leaders might want to think about the future of cities in this country—and what lessons there might be to be learned from Detroit? Mr. Frey writes that “Cities that invest in the creation of an adaptable labor force will remain resilient to technological change,” noting that “[M]anufacturing cities such as Manchester and Detroit did not decline because of a slowdown in technology adoption. On the contrary, they consistently embraced new technologies and increased the efficiency and output of their industries. Yet they declined. Why?

“The reason is that they failed to produce new employment opportunities to replace those that are being eroded by technological change. Instead of taking advantage of technological opportunities to create new occupations and industries, they adopted technologies to increase productivity by automating their factories and displacing labor.

“The fate of manufacturing cities such as Manchester and Detroit illustrates an important point: long-run economic growth is not simply about increasing productivity or output—it is about incorporating technologies into new work. Having nearly filed for bankruptcy in 1975, New York City has become a prime case of how to adapt to technological change. Whereas average wages in Detroit were still slightly higher than in New York in 1977, they are now less than 60 percent of the latter’s incomes. At a time when Detroit successfully adopted computers and industrial robots to substitute for labor, New York adapted by creating new employment opportunities in professional services, computer programming and software engineering.”

That is, Mr. Frey notes, state and local leaders need to manage the transition into new work—a leadership effort that will require an understanding of the direction of technological change, noting especially that technology is already beginning to impact many municipal jobs—where humans increasingly can be more cheaply replaced by computers and technology—replacing low income, low skill jobs in municipalities—so that future leaders will need to think and focus on “jobs that are not susceptible to computerization,” adding: “The reason why Bloom Energy, Tesla Motors, eBay and Facebook all recently emerged in (or moved to) Silicon Valley is straightforward: the presence of adaptable skilled workers that are willing to relocate to the companies with the most promising innovations. Importantly, local universities, such as Stanford and U.C. Berkeley, have incubated ideas, educated workers and fostered technologies breakthroughs for decades. Since Frederick Terman, the dean of Stanford’s School of Engineering, encouraged two of his students, William Hewlett and David Packard, to found Hewlett–Packard in 1938, Stanford alumni have created 39,900 companies and about 5.4 million jobs.” This seems to reflect some of the fine insights of my colleague Jack Belcher, Arlington’s Chief of Technology—who has been doing some of the hardest thinking about how to transform municipalities into the 21st Century. As Mr. Frey writes: “It is thus not surprising that we find San Jose, Santa Fe, San Francisco, and Washington, D.C., among the places that have most successfully adapted to the digital revolution.”

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