What Does it Take to Exit Municipal Bankruptcy?

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September 30, 2014
Visit the project blog: The Municipal Sustainability Project

Taking Stock in Stockton. More than two years after Stockton sought federal bankruptcy protection and nearly 4 months since its bankruptcy trial over the city’s proposed plan of adjustment commenced last June, the city is poised to emerge as early as tomorrow, with U.S. Bankruptcy Judge Christopher Klein expected to announce his decision in federal court tomorrow. In anticipation, closed-session City Council special meetings have been scheduled for today and tomorrow at City Hall. When Stockton filed for federal bankruptcy two years ago in June, it was the largest city in the U.S. to seek such protection—until eclipsed by Detroit nearly a year later. The holdup—not dissimilar to Detroit’s—has been Stockton’s last major holdout creditor, Franklin Templeton Investments, with which there is, as yet, no agreement. That means that tomorrow’s decision could lead to either a confirmation of the city’s proposed plan of adjustment—letting the city begin to implement its recovery plan—or Judge Klein could reject the plan, in which case the city would be forced to go back to the drawing board to address any specific concerns that it can glean from Judge Klein’s decision—either with regard to the city’s public pension obligations, especially with regard to its obligations under California’s constitution and law to the California Public Retirement System or CalPERS (Last July, in federal bankruptcy court, Judge Klein said he “might very well conclude the CalPERS contract would be rejected and that its proposed $1.5 billion lien is not enforceable.”), or with its holdout creditor Franklin: might it have to recalibrate its offer to resolve some nearly $30 million in unsecured debt, because the court did not agree to a so-called cram-down in the city’s proposed plan of adjustment, under which it is proposing to repay only about $300,000? The most critical issue for Judge Klein, however, will be whether he finds the city’s plan to be fiscally sustainable—should he determine that the plan does not provide for a long-term recovery, he would have little choice but to send the municipality back to the drawing board. In preparation, the city has scheduled closed-door sessions for this afternoon and tomorrow morning, with the notices specifically referring to Stockton’s bankruptcy case, with tomorrow’s session scheduled to start just two hours after Judge Klein is scheduled to render his ruling in his federal courtroom in Sacramento.

Financing an Exit from Municipal Bankruptcy. Meanwhile, nearly halfway across the country, Detroit—whose municipal bankruptcy process has outpaced Stockton’s and could itself come to fruition in the next two weeks has gained the State of Michigan’s approval for a plan to issue $1.1 billion of municipal bonds as part of its municipal bankruptcy exit financing under its proposed plan of adjustment to raise resources to pay off several of its creditors—borrowings already approved by the Detroit City Council, as the city ramps up its efforts to recover from service insolvency and provide resources for investment into services that are part of the Motor City’s plan of adjustment—albeit, as with the entirety of the plan, the final nod will be up to U.S. Bankruptcy Judge Steven Rhodes. The approval came from the state emergency loan board, which is made up of three members of Gov. Rick Snyder’s administration, including the state treasurer or his deputy. The borrowings include a $325 million exit financing that will initially be completed via a private placement with Barclays, financed by means of an intercept on Detroit’s income tax revenues, including covenants which would mandate Detroit to keep income tax rates at a level sufficient to generate at least twice its debt service coverage, with the proceeds dedicated to pay off an earlier $120 million of a debtor-in-possession financing with Barclays. The city will also use some of the money for service improvements. In addition, the state approved another $777 million of bonds that will be structured as limited-tax general obligation bonds featuring a first-budget obligation—with a $55 million series to be used to pay off limited-tax general obligation bondholders, who settled for a 34% recovery on their $164 million claim, and an $88 million series to be dedicated to paying off holders of $1.5 billion of disputed certificates of participation (COPs)—with the revenues derived from the Motor City’s parking revenues and supported by a first budget obligation pledge and proceeds from the ad valorem tax levy. In addition, under its recent agreement to resolve holdout creditor Syncora’s objections to its plan of adjustment, a significant portion will be provided to Syncora Guarantee Inc., which holds $390 million of the COPs and reached a settlement with the city three weeks ago. Meanwhile, as the tempo accelerates, the Detroit Free Press reports that the Motor City and its last major holdout creditor, Financial Guaranty Insurance Co., are hashing out a settlement behind closed doors that would, if worked out, remove the most serious obstacle to Detroit’s successful exit from municipal bankruptcy.

Essential Municipal Services. U.S. Bankruptcy Judge Steven Rhodes yesterday decided he lacked authority to issue a restraining order to the City of Detroit to bar water shutoffs because of over delinquent bills. Judge Rhodes wrote that federal municipal bankruptcy law, or chapter 9, “strictly limits the courts’ power in a bankruptcy case,” and that there is no constitutional right to water. Judge Rhodes further wrote that moratorium would be a financial hit to the Detroit Water and Sewerage Department. And Judge Rhodes found that last point persuasive, writing that with the Motor City in bankruptcy and under intense pressure to make every operation in the city as cost-effective and efficient as possible, “the last thing it needs is this hit to its revenues.” In addition, noting the intergovernmental implication, Judge Rhodes wrote that Detroit and its neighboring counties of Wayne, Oakland, and Macomb counties are in the process of approving a new Great Lakes Water Authority under which Detroit would maintain ownership of the region’s water and sewer system but lease the pipes that largely serve the suburbs, in exchange for $50 million a year for 40 years dedicated to fixing aging water and sewer lines.

Hear Ye. Meanwhile, the Motor City’s days in court before Judge Rhodes have continued, with soon-to-depart Detroit emergency manager Kevyn Orr likely to be called to testify as early as today. Yesterday, Judge Rhodes pressed Ernst & Young financial consultant Guarav Malhotra to explain his main concerns with regard to the Motor City’s future fiscal sustainability if Judge Rhodes were to approve the city’s pending plan of debt adjustment. In response, Mr. Malhotra said the biggest risks included:
• whether the city’s pension systems would be healthy after the end of 10 years;
• whether new labor contracts would increase costs; and
• whether city financial staff would be able to take over managing Detroit’s cash, a job Ernst & Young has been doing.

ReTaking Local Control & Parallel Exits from Chapter 9

September 26, 2014

Visit the project blog: The Municipal Sustainability Project 

Transitioning Back to Local Control. Detroit’s Council last evening voted unanimously to approve a resolution and to restore power to Detroit’s elected leaders, while retaining Kevyn Orr as emergency manager through the remainder of the city’s bankruptcy after marathon closed-door sessions involving the council, Mr. Orr, Mayor Duggan, and federal mediators since Tuesday that spanned about 16 hours over three days. The move means that local officials will gain control of the Motor City for the first time since March 2013, when Gov. Rick Snyder declared a financial emergency and appointed Mr. Orr as emergency manager.  Immediately after the City Council unanimously approved the return to traditional governance, Mr. Orr signed his 42nd formal order, Order No. 42 (Emergency manager order), moving full authority to manage the city back the mayor and council. Under the terms of the order, Mr. Orr will remain Detroit’s emergency manager, but only with respect to the municipal bankruptcy: he will turn over his other responsibilities to the elected leadership; his official removal will be effective if and when the Motor City’s pending plan of debt adjustment is confirmed by U.S. Bankruptcy Judge Steven Rhodes. Detroit Mayor Mike Duggan, after the session, remarked: “As of tomorrow (this morning), Council will be approving contracts, Council will be adopting ordinances, and those powers will be restored…The traditional powers will be fully restored.” Detroit Council President Brenda Jones said: “We are ready to continue the business of this city, but none of us are bankruptcy lawyers…We know there is litigation that must continue…Kevyn Orr knows that proceeding better than anyone. We knew that Kevyn Orr would be the best person to do so.” Michigan Governor Rick Snyder, who had appointed Mr. Orr, last night added: Gov. Rick Snyder issued a statement: “Detroit continues to move forward. Today’s transition of responsibilities is a reflection of the continuing cooperation between the state and its largest city…Leaders are working together for the best interests of Detroit and all of Michigan. Emergency manager Kevyn Orr’s expertise and counsel to the mayor and city council are vital in guiding the city toward a successful conclusion of the bankruptcy process.” Under the agreement, the Motor City will, technically, remain under state emergency management, but that management would be restricted to guiding and seeking to facilitate Detroit’s emergence from federal bankruptcy, or, as Mayor Duggan put it last night: “I expect you will see Mr. Orr sign four or five orders, the most important of which is returning democracy back to the city of Detroit,” adding that he expects by this morning to have control of the police department and finance department. Council President Jones added it is important for the city’s elected leaders to carry on progress made since Mr. Orr’s appointment by Governor Snyder, adding the Council would not get in Mr. Orr’s way with regard to overseeing bankruptcy matters: “We do not want to stand in the way of the bankruptcy proceeding…None of us are bankruptcy lawyers.” For his part, Mr. Orr, after signing the order ceding his state-appointed power back to local elected leaders, said: “The city is more than ready” to move out from under the control of an emergency manager, adding that in the wake of the vote by the city’s retirees to accept the grand bargain to reduce pension payments and spare the Detroit Institute of Arts from asset sales, accompanied by bipartisan state lawmakers’ commitment of $195 million to that effort, demonstrated tremendous momentum in the city toward getting out of bankruptcy and rebuilding: “We have a little bit more to go, but this is the right thing to do.”

Taking Stock in Stockton. Even as the Motor City nears the end of its confirmation trial in Detroit, U.S. Bankruptcy Judge Christopher Klein has scheduled a status hearing on Stockton’s efforts to exit municipal bankruptcy for next Wednesday—even as the California city’s major holdout creditor Franklin Templeton Investments this week filed a 46-page brief with the federal bankruptcy court petitioning it to deny confirmation of Stockton’s proposed plan of debt adjustment and seeking to have the court order the city to treat Franklin fairly or impose the same draconian impairment on all of its creditors including “taking advantage of its ability to discharge its prepetition pension liability and other debts.” Franklin Templeton Investments, the last hold-out creditor to Stockton’s proposed plan of debt adjustment, is seeking to have the court treat its pension obligations to CalPERS the same as the municipality’s other creditors, arguing earlier this month that the federal bankruptcy court cannot approve a plan that provides full payment of Stockton’s “massive pre-petition liability for unfunded pensions, delivers recoveries ranging from 52% to 100% for all other material unsecured creditors, yet cram down a sub-1% payment on Franklin.” But demonstrating the horns of the city’s dilemma, one horn is California’s state constitutional protection for public pensions—the other is the prohibitive cost for a municipality to withdraw from the state public pension authority, CalPERS: the cost to Stockton to terminate would be a debt, immediately due, of $1.6 billion. Thus, unsurprisingly, with the city caught between the horns of its fiscal and legal dilemmas, municipal bankruptcy was one of the hot topic at the City Council candidates first of two public forums ahead of its Nov. 4^th municipal elections—where an audience of more than 100 at Central United Methodist Church listened as moderator David Renison, president of the San Joaquin Taxpayers Association, asked candidates 39 questions in two hours, of which nearly one-third were bankruptcy related. One of the challengers told the audience: “We are far from being out of the woods…This is no time for patting ourselves on the back.” Not very differently, incumbent Councilmember Albert Holman, added, “A lot of people say if the judge rules for us, happy days are here again. But we still have a lot of work to do.” With the city in flux between federal judicial and local control, three seats will be decided in citywide voting.

Municipal Bankruptcy & Governance in Transition

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September 25, 2014
Visit the project blog: The Municipal Sustainability Project

Bankruptcies, Double Standards, & Bailouts. The U.S. Treasury Inspector General yesterday released a Treasury special inspector general report finding that top executives at General Motors and Ally Financial, corporations which each—unlike host city Detroit―received double bailouts (both cash― GM received $49.5 billion from U.S. taxpayers; Chrysler received $10.5 billion; Detroit received $0. Moreover, both private corporations were able to transfer their respective pension obligations to the U.S. Pension Benefit Guaranty Corporation) from the federal government in the wake of the Great Recession. In contrast, the unique and unprecedented efforts by Michigan Governor Rick Snyder, bipartisan Michigan legislative leaders, foundations, and federal Judge Gerald Rosen combined in the case of Detroit to create an unprecedented “grand bargain” to partially offset a significant reduction in Detroit’s pension obligations—all of which will continue to be borne not by the PBGC in Washington, but rather by the taxpayers in Detroit and Michigan, and by the city’s retirees. In its special report, the Inspector General reported that the automobile executives were paid excessively even as U.S., Michigan, and Detroit taxpayers lost money. The report criticizes the Treasury Department for loosening its own restrictions on executive pay for G.M. and Ally year after year. These limits had been imposed on the companies in exchange for the federal bailout funds they received in the wake of the financial crisis from the Troubled Asset Relief Program, or TARP, that was started by President George W. Bush and continued by President Obama. The U.S. Treasury, for example, last year signed off on at least $1 million in pay for each of the top 25 employees at both G.M. and Ally, and approved $3 million in pay raises for nine G.M. employees, according to the report. The department also allowed the tripling of the number of G.M. and Ally financial employees who received cash salaries exceeding $500,000 from 2009 to 2013. No employee of the State of Michigan or City of Detroit receives comparable compensation. The U.S. Treasury Department holds a 13.8 percent stake in Ally Financial; the Treasury sold the last of its G.M. shares in December. The special inspector general’s office reported that U.S. taxpayers had lost $11.2 billion on G.M.’s rescue, as well as $1.8 billion on the sale of some Ally Financial common stock. U.S. taxpayers have lost $0 on Detroit’s non-rescue. The report found that the Treasury Department had recovered almost $18.1 billion on the Ally investment, almost $900 million more than the original $17.2 billion investment, but noted that taxpayers are not only entitled to the original investment that the Treasury Department made in these companies, but also to whatever dividends and interest had accrued over the years. The office said G.M., which emerged from bankruptcy in 2009, and Ally Financial had not repaid the bailout money in full because the Treasury Department had to sell some of its shares in the companies on the open market at a loss.

Essential Municipal Services. Hillary Flynn of the Bond Buyer this morning writes of the challenges for municipalities in raising capital—both critical issues for Detroit and Chicago, noting that municipal bond investors have “flocked” to purchase offerings “because the bonds’ association with the two fiscally troubled cities boosted their yields, while their ratings remained higher than the cities’ general obligation bonds.” She wrote, however, that both municipalities have had to offer higher returns to attract investors for a reason, quoting Dan Heckman of U.S. Bank: “‘The problem with these issuers are that they are financially challenged especially in those locations…They are in an area of the country that is economically challenged and will remain so for the time being, even though [the cities] are making great strides.” She notes that the $1.8 billion Detroit Water and Sewer deal last month and the $293.4 million Chicago Wastewater issuance this month were oversubscribed—leading Paul Mansour, managing director and head of municipal credit research at Conning, to describe to her the strategy of buying bonds sold by an essential service issuer linked to an economically troubled area in an interview: “The theme of our [investment strategy] is to look for solid essential service revenue bonds in areas that are a little distressed to get a little bit of yield,” noting his group had been trying to purchase the Chicago Water bonds, but that it had been unsuccessful due to the high demand for the credits. But he added that the bonds “provide a little extra bonus for the investor” in terms of yield, terming them “the best credit” in Chicago: “It’s a fundamentally improving credit, and offers enough insulation from the city of Chicago to offer enough value for the rating,” adding, “Right now our general investment strategy is looking for credit with high capital and low human resource costs; this fits the bill. The percent of expenditures that go to personnel is relatively low versus other credits, and revenues fairly stable.” Ms. Flynn writes: “The investment in these credits from essential services issuers associated with fiscally challenged cities seems to be paying off, as spreads of bonds from the three issuances to Municipal Market Data’s triple-A curve are tightening across the board.”

Rebalancing Governance in Recovering from Municipal Bankruptcy

eBlog
September 24, 2014
Visit the project blog: The Municipal Sustainability Project

Motor City Governance Transition. In the wake of the Detroit City Council’s vote to reject Detroit Emergency Manager Kevyn Orr’s proposal to transfer 45,000 city-owned residential parcels to the Detroit Land Bank Authority, Mr. Orr yesterday sent a memorandum to the Council cancelling the proposal. The massive land transfer was to proceed this week under the state’s emergency manager law despite the City Council’s unanimous rejection of the deal last week. A majority of the Council questioned whether the land bank, which already has taken control of more than 16,000 city-owned properties, could handle an additional 45,000 properties. (The land bank is part of Mayor Mike Duggan’s blight elimination strategy and could demolish or rehabilitate the properties.) The council did, yesterday, approve a transfer of 10,316 vacant residential parcels to the land bank under which residents who live next to vacant properties can buy those lots from the land bank for $100 under the side lot program. Hours after receiving Mr. Orr’s abrupt reversal, Councilmembers met in a closed door session with Motor City Mayor Duggan and Chief U.S. District Judge Gerald Rosen, who is serving as a court-appointed federal mediator involved in Detroit’s bankruptcy, to focus on the transition from Mr. Orr’s state-appointed role back to local control. Under Michigan’s Public Act 436, the city council, with Mayor Duggan’s approval, can remove its state-appointed emergency manager after 18 months in the position. The Council is scheduled to reconvene this morning in closed door session to attempt to reach consensus on what Mr. Orr’s role will be in the city’s transition back to local control—with a likelihood of attempting to fashion a role for Orr so that he could serve through the city’s transition out from under both state and federal court control. Under state law, that will require a vote of six of the Council’s nine members. One key distinction between Mr. Orr’s initial proposal and that adopted by the Council was that the emergency manager’s proposal included a provision to automatically transfer to the land bank certain properties Detroit acquired in the future. Nevertheless, Councilwoman Mary Sheffield, who originated the proposal to transfer only 10,316 parcels to the land bank, noted, nevertheless, that she appreciated how Mr. Orr listened to the city council, adding that his reversal came as a surprise: “The pressure from Council really made him think twice about it.”

Holdout Challenge. Bond insurer Financial Guaranty Insurance Co. (FGIC), the last major creditor holding out in the Detroit bankruptcy, late Friday filed a third supplemental objection to Detroit’s pending plan of debt adjustment, focusing on the disparate treatment it would receive—in violation of the federal bankruptcy code—compared to its fellow class creditor Syncora, which, in its settlement with the city, received a mix of cash, downtown real estate, and asset leases. With Judge Rhodes having delayed resumption of the trial until next Monday in order to give FGIC time to craft a new legal strategy, FGIC’s revised brief writes that the Syncora agreement with the Motor City unfairly discriminates against it, because the revised plan of adjustment does not offer either the land and asset leases or their equivalent value to all certificate holders, or, as the firm’s attorney noted; “A plan cannot afford more effective recovery rights to particular creditors within a class….There is no justification for distributing these additional assets only to Syncora and not offering them to the rest of Class 9.”

Water & Municipal Bankruptcy. While Detroit’s bankruptcy exit trial has been on hold, U.S. Bankruptcy Judge Steven Rhodes has convened hearings related to the essential public service of water—with the Detroit Water and Sewerage Department having severed service to 19,000 homes in Detroit in recent months. Advocacy groups, including the National Action Network and Michigan Welfare Rights Organization, have sued, seeking a restraining order, claiming Detroit’s implemented shutoffs were made unfairly, without adequate notice, and with little financial assistance for poor people who lack the means to pay. Judge Rhodes plans to make a decision Monday on the request, and a separate motion to dismiss by the city. In response, Detroit’s attorneys have told the court Detroit cannot provide free water. Judge Rhodes heard from five Motown residents yesterday, and will resume the hearing this a.m. The attorney representing the city testified yesterday that a moratorium on shut-offs would impose harm not only on those seeking the federal court relief. But on all the city’s residents: “The city has a responsibility to all of its residents…It’s not fair to them to shoulder the burden of free water to others,” adding that a moratorium on shut-offs would only hurt delinquent customers because their bills would pile up. The advocacy groups called DSWD Water Director Sue McCormick to testify about the shutoff policy; Ms. McCormick acknowledged that the department’s old rules (2003) for cutting off service are posted on the department’s website—which rules call for a water department worker to “identify himself/herself to the customer” and show the past due account. However, this year the water department hired a contractor who often made no contact with delinquent customers before shutting off their water. Judge Rhodes focused on this discrepancy and asked Ms. McCormick: “When a public body has a rule that it decides needs review and change, is it appropriate to simply ignore it and stop implementing it?” Ms. McCormick said the department stopped notifying customers face-to-face, but she was unsure exactly when the policy changed. She testified that the department had shut off service to about 24,000 Detroit residential accounts in 2013 and about 19,500 so far this year before a temporary moratorium that ended in August. But she could not answer a series of questions about how many of those accounts were for homes with children or people with medical issues or disabilities. Another issue arose: could DWSD implement an affordability plan. Roger Colton, a Massachusetts-based consultant, who worked on creating such a water affordability plan in Detroit nearly ten years ago (a plan that was never fully implemented, because, one attorney for Detroit told the court, income-based sliding scale payments are illegal in Michigan.) testified that there are municipalities that have instituted billing practices that take customer income levels into account, with general acceptance among a majority of states and the Environmental Protection Agency that water and sewer bills should account for no more than 2 percent of household income. But Chicago water consultant Eric Rothstein, who has worked for the DWSD on negotiations over a new regional water authority, testified water departments have enough on their pipes delivering safe drinking water: they ought not to be federally mandated to be getting into the mandate of adjusting rates for income, adding that the organization’s request before the court to impose a six-month moratorium on water shutoffs would force the DWSD to continue to provide water at no cost to residents who do not pay—warning this would create an incentive for many others not to pay and putting the DWSD further underwater as it were. Alexis Wiley, chief of staff to Motor City Mayor Mike Duggan, testified she worked to assemble a team to craft a 10-point plan for DWSD—a plan designed to expand customer service and assistance funding options and curb water shutoffs. Since implementation in August, Ms. Wiley testified a centralized assistance fund and the distribution of educational materials has led to a sharp reduction in calls for water assistance, which declined from 1,000 in August to about 300 this month. DSWD Deputy Director Darryl Latimer added that DSWD was “breaking records” in terms of collections before a month-long moratorium on water shutoffs was implemented late July: DSWD was on pace to collect $1.5 million in fees in July, he said. But the next month, where the moratorium was in place until Aug. 26, collections dropped to around $200,000.

Transitioning out of Municipal Bankruptcy

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September 23, 2014
Visit the project blog: The Municipal Sustainability Project

Motor City Governance Transition. Detroit Councilmember George Cushingberry, Jr. yesterday said there are ongoing discussions involving state-appointed Emergency Manager Kevyn Orr, Mayor Mike Duggan, and Governor Rick Snyder over the terms of returning control of the Motor City to its current elected officials, with the discussions accelerating in advance of the time—this weekend—when, under the terms of Michigan state law, city officials could remove him—even as the city’s municipal bankruptcy trial enters its most critical phase. Under Michigan’s Act 47, the Council has the authority to remove Mr. Orr after he has served 18 months—a deadline that will fall this Saturday. Mayor Duggan has said he supports keeping Mr. Orr on in some capacity to see the city through confirmation of its bankruptcy exit plans; nevertheless, Mayor Duggan has been clear he wants control of critical issues – the police department and finances, which emergency manager Orr has kept under his control: “I think not only I, but I think all nine members of the city council ran for election telling the voters that we were going to do everything we could to return democracy back to the people of the city of Detroit at the earliest possible date…So it’s a campaign pledge we all made, and I assume we all meant it.” Nevertheless, Councilmember Cushingberry noted that retaining Mr. Orr until the trial over the city’s proposed plan of debt adjustment is resolved would ensure continuity and a smooth transition of power to the officials elected by residents. One of the key issues between the Mayor, Council, and Governor relates to which powers he ought to retain any new role. Detroit’s Council will meet in a closed-door session this afternoon to discuss its options. Under Act 47 the removal of an emergency manager requires both a two-thirds vote of the council and approval by the Mayor. At the same time as the Mayor and Council are negotiating the terms of this delicate transition in the midst of the ongoing federal bankruptcy trial, there will also be a transition to state oversight. Under terms of the so-called grand bargain, Governor Snyder and bipartisan state legislators enacted a state-appointed board to oversee Detroit’s financial affairs for 13 years—a board, similar to one that oversaw financial decisions in New York and Washington, D.C., after financial crises in those cities, which will exercise significant oversight over contracts, spending, and borrowing matters city leaders have traditionally decided.

Water & Municipal Bankruptcy. Even as U.S. Bankruptcy Judge Steven Rhodes has scheduled this week off from the Motor City’s plan of adjustment trial to give Detroit’s only major holdout creditor FGIC time to both negotiate and/or to reframe its arguments in opposition to emergency manager Kevyn Orr’s proposed plan of debt adjustment, the ever rhythmic electric guitar playing judge has been occupied on the bench with the related issue of one of Detroit’s essential services: water. Detroit’s Water and Sewerage Department (DWSD) stepped up shut-off enforcement in March for individuals 60 days behind or owing more than $150. About 15,000 customers experienced shutoffs between April and June. Yesterday Judge Rhodes presided as attorneys for 10 Detroit residents who are seeking a federal order to require the Motor City to halt water shut-offs sought the court’s imposition of a six-month moratorium—a position adamantly opposed by the city, fearing such a federal order would be harmful to Detroit and the public. The evidentiary hearing was held in response to a July lawsuit aiming to block Detroit from continuing its controversial shut-off program for residential customers with delinquent bills—with those suing the city asserting Detroit is not responding legally or appropriately to improve its communication with residential customers with medical emergencies. Attorney Alice Jennings, who represents the customers fighting the shut-offs, warned that families with small children, elderly parents, or life-threatening medical conditions are confronted with “imminent” danger if their water is shut off. When Ms. Jennings questioned DWSD Director Sue McCormick in the courtroom yesterday, Ms. McCormack responded she did not how many residences where service had been disconnected housed children or disabled people; nevertheless, attorneys for both the city and DWSD said a federal ordering to stop shut-offs would be the same as the city providing free water — a move that would raise rates for all Detroiters who pay their water bills and adversely impact the city’s finances and recovery. Attorneys also testified that in the wake of Detroit’s recent agreement with its surrounding neighbors to create the Great Lakes Water Authority, which calls for Detroit to retain ownership of its water system but gives suburban counties more of a stake in its operations, the plan incorporates some $4.5 million in aid for people in Detroit and throughout southeast Michigan who cannot afford to pay water bills—a plan approved by the Detroit City Council last Friday on a 7-2 vote.

The Transition of Governance in Municipal Bankruptcy

eBlog
September 22, 2014
Visit the project blog: The Municipal Sustainability Project

Profound Transition. The next two weeks could witness a profound transformation in Detroit from state to federal back to local control. Michigan Governor Rick Scott, under Michigan’s Act 47, effectively took over control of the city on March 13, 2013, with the appointment of Emergency Manager Kevyn Orr. On July 18, 2013, Mr. Orr filed for chapter 9 municipal bankruptcy protection by the federal government—a filing which was accepted by the U.S. Bankruptcy Court—effectively putting the city under federal control—on December 5, 2013. Now, under Act 47’s time frame, Mr. Orr will step down from his Act 47 position effective at the end of this month—so that Mayor Mike Duggan and the Detroit City Council will reassume authority—under the oversight of a new state board. At the same time, with the clock in Judge Rhodes’ courtroom running down, either an agreement with the last remaining major holdout creditor (FGIC), or a decision by Judge Rhodes to approve Mr. Orr’s pending plan of debt adjustment would effectively end the federal judiciary’s control of Detroit. Thus, even as the trial and closed door negotiations under the auspices of U.S. Chief Judge Gerard Rosen, continue; the process of transitioning is accelerating. But this long and difficult process from municipal to state to federal and back to local control promises to be difficult—albeit a process which might provide invaluable lessons for state and local leaders throughout the nation.
Regional Water Agreement. Thus, last Friday—which, under Michigan’s emergency manager law, Act 47, was the deadline for the council to vote on each of the three items proposed by emergency manager Kevyn Orr, the Detroit City Council approved, 7-2, creation of a new regional water authority under which the city would lease infrastructure to suburban communities in exchange for a 40-year, $50 million annual fee and an annual $4.5 million payment assistance fund and the settlement with bond insurer Syncora, but disapproved, unanimously, a proposed transfer of 45,000 city-owned parcels to the Detroit Land Bank. The affirmative vote came just days after Mayor Mike Duggan provided the Council with a detailed presentation and urged them to support the plan. Separately, the council approved a key agreement outlined in Mr. Orr’s pending plan of debt adjustment before Judge Rhodes for a comprehensive settlement with Syncora Guarantee Inc. Under the new, regional water agreement, the annual fee may only be used for Detroit water-related repairs, maintenance, and improvements—and rate increases will be capped at 4 percent over the next 10 years. To gain final approval, the water agreement must gain a nod from the Detroit City Council and at least one of the counties of Wayne, Oakland, or Macomb. The deadline for county officials to vote is October 10th. In response to a governance question, Detroit Corporation Counsel Melvin Butch Hollowell, prior to Friday’s vote, informed and clarified for the Council that the agreement would not create a franchise or violate the Motor City’s charter.
Regional Water Agreement II. Demonstrating the multiple layers of governance now involved in this transition, the prior day, U.S. Bankruptcy Judge Steven Rhodes addressed his own significant concerns to Mr. Orr’s plan on the regional water agreement, sharply questioning how Detroit’s Water and Sewerage Department plans to fund as much as $2 billion in needed infrastructure improvements over the next decade, even as it transforms itself into a regional authority that will receive additional funding from suburban communities—and as the city has been enveloped in fierce disputes with regard to its management: indeed, the Judge has scheduled a hearing for this morning on whether to temporarily delay water shutoffs to Motor City residents with unpaid bills. Thus, Detroit’s ability to finance desperately needed repairs and upgrades of its water and sewer system could become a factor not just for potential future purchasers of Detroit’s and the new system’s municipal revenue bonds, but also whether Kevyn Orr’s pending plan of adjustment before the federal court is feasible. Currently, both the city of Detroit and Detroit Public Schools owe the Detroit Water and Sewer District millions and are behind on payments.
Detroit Land Bank Authority. But the City Council voted unanimously to reject a resolution authorizing the transfer of 45,000 vacant city-owned residential lots to the Detroit Land Bank Authority—with the elected leaders reacting in frustration to what Councilmember Saunteel Jenkins described as an “illusion of inclusion: At least give this body the respect of pretending to allow us to vote yes or no,” telling her elected colleagues that the plan had “already been laid out” and tied the Council’s hands on residential land issues in future years, describi9ng the deal as one where the “goal is to make sure that people around this table are not able to provide input based on what your constituents want.” Similarly, Councilmember Jones called the process “insulting.” Others, including members Mary Sheffield and Raquel Castaneda-Lopez said they couldn’t support the transfer plan as written. But on the land bank issue, the governance challenges were even more complicated, as some believe that the proposal actually came more from Detroit Mayor Mike Duggan than Mr. Orr, as Mayor Duggan has vested significant time and energy in his efforts to put together a strategy to fight blight. So it is not clear this is a federal-state-local dispute; rather it appears to reflect power concerns within the city as it nears returning to local control. Under Act 47, the Detroit City Council now has seven days to propose an alternative that would provide the city with the same or greater benefit. If the Council so acts, its proposal would go to Michigan’s Emergency Loan Board, which would decide between the two plans.
Trial Resumes A Week from Today. Delay. U.S. Bankruptcy Judge Steven Rhodes has agreed to the motion by Detroit and Financial Guaranty Insurance Co. (FGIC) to delay further proceedings in the bankruptcy trial until September 29th in order to give municipal bond insurer and the Motor City’s last remaining major holdout creditor more time to prepare its case against the city’s pending plan of debt adjustment—as well as to permit further federally mediated negotiations.

From the start of the bankruptcy case, U. S. Bankruptcy Judge Steven Rhodes has made it clear that the city must prove that its bankruptcy plan will enable the city to be “viable,” after it emerges from bankruptcy. Part of the hard question—a question which Judge Rhodes can only answer with a yes or no, is whether he can find the city’s proposed plan of debt adjustment to provide for a sustainable future—that is, not just a city that can deliver fire and police protection, but rather one that also must offer other services such as parks and recreation and cultural attractions if the municipality is to retain residents and attract businesses.

Compared to Detroit. How a municipality gets out of municipal bankruptcy can be a long and convoluted process, as can be better understood in watching and comparing San Bernardino—which filed for federal bankruptcy protection a year before Detroit, but which appears to still be months away from putting together its own plan of adjustment, the prerequisite to obtain federal permission to exit bankruptcy. Now some of San Bernardino’s creditors are objecting to the slow process by the city, with a filing with U.S. Bankruptcy Judge Meredith Jury last month noting: “During the past two years, the City has taken advantage, sometimes unlawfully, of a wide variety of perceived benefits derived from the bankruptcy filing…During this time, the City has been free of most of the cumbersome responsibilities required of a reorganizing bankrupt entity surrendering to the jurisdiction of a bankruptcy filing. Even so, the City has made little progress toward the filing of a plan of adjustment. In fact, it appears that the City is comfortable with all the delays occurring in this case.” The police unions’ attorney has suggested, and the fire union has formally requested, a court-imposed deadline for the city to file its plan of adjustment — the plan on how the city will settle its debts and exit bankruptcy. The city’s unions, who filed the notice with regard to the legality of the city imposing benefit cuts and making other changes under the perceived umbrella of the federal process will be heard this week, where, according to San Bernardino City Attorney Gary Saenz, Judge Jury will shed some light with regard to the pace of the process, noting: “What the bankruptcy laws do is provide protection for the city so we can make adjustments to our financial situation and make adjustments to our revenue that we achieve and our costs that we incur, so we can maintain a solvent budget going forward…(Bankruptcy protection) allows the city to continue providing services at a level that we otherwise couldn’t provide if we did not have the bankruptcy protection. I know that people are impatient. I think what people want more than anything is not so much to be out of bankruptcy but for the city to become more solvent or more financially able to move forward.” Mr. Saenz notes that the cost of chapter 9 and its litigation is high — more than $3 million for each 12-month period of bankruptcy so far, sometimes approaching $4 million — but less expensive than not having that protection, but adds: “We have been charged with, and the court is making sure we are, moving toward solvency…And that solvency includes a solvency in terms of our service levels. So as the citizens consider the fact that we’re in bankruptcy, they need to be assured that the focus of the city and of the court is to have a solvent level of service for the citizens.”

City Attorney Saenz expects San Bernardino’s Plan of Debt Adjustment to be ready by spring 2015, consistent with a timeline Mayor Carey Davis proposed and the City Council approved last July. Similarly, while both San Bernardino and Detroit have been confronted with the federal-state challenge with regard to state constitutional provisions barring any reductions in pensions—and whether the federal bankruptcy law can override the respective state constitutions; there has been a signal difference in the processes between the bankruptcy processes in California between Stockton and San Bernardino—a municipality more comparable in size than Detroit to San Bernardino. Or, as a CalPERS spokesperson wrote: “San Bernardino filed its bankruptcy following the declaration of a fiscal emergency without going through the pre-filing mediation process that Stockton went through…So San Bernardino did not get the head start that Stockton got by meeting with creditors and a neutral mediator prior to the bankruptcy filing.”
Modified Firefight. Last Friday, U.S. Bankruptcy Judge Meredith Jury slightly modified her previous order with regard to San Bernardino’s authority to modify or reject its current contract with the firefighters union. In effect, the modified federal court order allows the city to fill that void with a new firefighter contract of its choosing; however, Judge Jury did not provide explicit authority for San Bernardino to impose a new contract, directing that the municipality must comply with relevant laws, and striking parts of the city’s proposed order containing that language. In addition, Judge Jury wrote that the municipality’s firefighters’ attorneys were right that San Bernardino had originally asked for more before backing off that request: “The city is disingenuous when it says it didn’t ask for more…Until I got the reply papers on the supplemental request … I certainly had the impression they were asking for me to do more than just reject (the contract).” The order says the city’s motion was granted in part and rejected in part, which doesn’t change its legal effect. Attorneys for both the firefighters’ union and the city had submitted proposed orders interpreting the tentative ruling she had given orally a week before, leading Judge Jury to note: “Each party got some of it right, from my perspective, and some of it wrong.” The next status conference in the city’s bankruptcy case was scheduled for Nov. 6.

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September 19, 2014
Visit the project blog: The Municipal Sustainability Project

Trial Delay. U.S. Bankruptcy Judge Steven Rhodes yesterday agreed to the motion by Detroit and Financial Guaranty Insurance Co. (FGIC) to delay further proceedings in the bankruptcy trial until September 29th in order to give municipal bond insurer and the Motor City’s last remaining major holdout creditor more time to prepare its case against the city’s pending plan of debt adjustment—as well as to permit further federally mediated negotiations. To date, the insurer’s main challenge to the feasibility and equity of emergency manager Kevyn Orr’s proposed plan has been against the “grand bargain,” the proposal to raise more than $800 million from donors and the state in return for protecting the Detroit-owned, world class art collection from a fire sale to pay off the bankrupt city’s debts—and an issue which consumed much of yesterday’s day in the federal courtroom (please see below). FGIC has much at risk: the bond insurer confronts claims of $1.1 billion from pension debt investors who could face severe financial losses under the terms of the city’s most recent plan of adjustment under which those investors would receive about 10 percent of what they are owed—with the remainder falling upon FGIC to reimburse under the terms of its insurance obligations.
The Fine Art of Municipal Bankruptcy. Meanwhile, yesterday’s session before U.S. Bankruptcy Judge Steven Rhodes carried over Wednesday’s challenge to the so-called grand bargain put together by Michigan Governor Rick Snyder, bipartisan leaders of the Michigan legislature, and all with the deft ministrations of U.S. Judge Gerald Rosen. Yesterday, Michael Plummer, the founder of Artvest Partners LLC, testified that the world-class collection at the Detroit Institute of Arts could allow Detroit to be just like Brooklyn, providing a way for the Motor City to emulate Brooklyn’s success in cultivating a community of artists that would help revitalize Detroit: “Artists are driven by cheap real estate.” Michael Plummer testified, as he sought to paint a grim portrait of the consequences to Detroit’s future if the Detroit Institute of Arts were compelled by the federal bankruptcy court to sell its most valuable or best-known works of art. Artvest’s report to the city, submitted in July, projected that that if the DIA’s collection was liquidated to raise cash as part of the resolution of the Motor City’s municipal bankruptcy resolution, it would likely bring in between $1.1 to $1.8 billion. But if the museum were forced sell its works of art, its reputation as one of the nation’s top museums would evaporate: “The items that are the most treasured in the museum are the ones that have the most commercial value…So if you were to denude it of those most commercial items, you would diminish its reputation as an international institution with standing,” adding that the museum’s “attendance would drop significantly. It would more or less fall off the map in terms of international individuals who would come to visit. It would most likely lose its donor base,” because, he testified, donors would stop giving because “they would feel their gifts are not being protected.” An important part of his presentation yesterday related to the city’s future – that is, the ability to finance a sustainable, fiscal recovery―the ability to draw hundreds of thousands of visitors into the city. He cited Brooklyn as a good model for Detroit, because its renewal was based partly on artists moving out of expensive real estate in Manhattan to the more affordable borough. That created a cultural shift in New York, he said. Mr. Plummer warned that if the city’s proposed plan was rejected, and Detroit was forced to sell its famed art from the Institute as FGIC is insisting, “artists would have no reason to move here.” But Edward Soto, an attorney representing FGIC, yesterday challenged Detroit’s claim that its municipally owned collection cannot be sold without first fighting a years-long court battle with the institute and Michigan’s attorney general. In response, Mr. Plummer testified that, au contraire, Detroit had a valid reason to be apprehensive, because, he said, sales of other large collections have been held up for five years or longer by similar disputes. The DIA’s Vice President, Annmarie Erickson, testified the Institute would strongly oppose any effort to be forced or compelled to sell its artwork, because it believes the collection, including the pieces owned by the city, are held in public trust and cannot be sold just to pay debt, telling the court that the museum is restricted in its rights to sell parts of its collections to only those instances where such sales are necessary in order to raise money to purchase other artwork. When Judge Rhodes followed up by asking Ms. Erickson how valuable the museum is to the education of children, to the social enjoyment of families who visit the museum, particularly the 60,000 local children who visit annually as part of school programs, and for Southeast Michigan as a whole; Ms. Erickson responded that the museum helps the city’s children develop critical thinking skills, and helps visiting families learn about art. She also testified that a liquidation of the treasured Detroit Institute of Arts collection would be a “devastating blow” to the museum’s reputation, donor base, and future funding, adding: “It helps people find connections with art; it helps people find personal meaning with art.”

Who Owns the DIA? Yesterday’s judicially artistic inquiries raised the question of whether the city of Detroit owns the museum and whether the city should sell some or all of the museum’s most valuable works to pay off creditors, in what has become among the central and most controversial questions of the largest municipal bankruptcy in U.S. history. Ed McCarthy, who represents bond insurer FGIC, presented a number of documents during yesterday’s hearing in an effort to demonstrate that the city owns the museum. Though the DIA began as an independent nonprofit in 1885, it quickly turned to the City of Detroit for financial help and, in 1919, it became a city department. In 1998, the DIA regained full control of its operations and is charged with running the museum in accordance with industry standards. But the operating agreement, which runs through 2018, makes no specific provisions for a municipal bankruptcy, leading Mr. McCarthy to ask: “Has the DIA looked at the potential impact on the museum of renting or leasing its collection?” Ms. Erickson responded that no, “We have not looked into that.” However, she testified that if creditors were successful in compelling Detroit to sell the DIA’s art, the city’s efforts to gain closure and exit from municipal bankruptcy would, instead, become mired in additional lawsuits: “We would be in litigation to protect the collection…It is an obligation that we cannot shirk,” telling Judge Rhodes the museum and its art collection are inseparable: “You cannot untangle the museum and the collection. They are one and the same…We are the collection…safeguarding that collection…is the foundation of what we are; we cannot unwind the two.”

From the start of the bankruptcy case, U. S. Bankruptcy Judge Steven Rhodes has made it clear that the city must prove that its bankruptcy plan will enable the city to be “viable,” after it emerges from bankruptcy. Part of the hard question—a question which Judge Rhodes can only answer with a yes or no, is whether he can find the city’s proposed plan of debt adjustment to provide for a sustainable future—that is, not just a city that can deliver fire and police protection, but rather one that also must offer other services such as parks and recreation and cultural attractions if the municipality is to retain residents and attract businesses.

Getting Ready for the Checkered Flag in the Motor City

September 16, 2014

Visit the project blog: The Municipal Sustainability Project 

Getting Ready for the Checkered Flag. Detroit’s trial before U.S. Bankruptcy Judge Steven Rhodes resumed yesterday after he refused to grant an extension of the timeout requested by FGIC, with Martha Kopacz, the court-appointed financial expert, asked by the court: “Is it likely that the City of Detroit after (emerging from bankruptcy) will be able to sustainably provide basic city services to the citizens of Detroit and meet the obligations in the plan without the probability of a significant default?” Ms. Kopacz answered in the affirmative.  Judge Rhodes followed up by asking Ms. Kopacz whether she was confident in her conclusions. She testified that she was. Later testimony focused on the financial assumptions the city used to establish how much its two pension systems were underfunded and forecasts for future pension investment returns and liabilities. The trial will resume this morning at 8:30.

The Denouement. Judge Rhodes’ query to Ms. Kopacz will be the question—in the end—that Judge Rhodes, alone, will have to answer. As the pace of the trial has accelerated inside and outside the courtroom, both the allotted time for the trial is elapsing, as is the time for Governor Rick Snyder’s Emergency Manager Kevyn Orr. Mr. Orr’s tenure as emergency manager under Public Act 436 is scheduled to end at the end of the month—at which point the Council can force his departure. It appears that Mr. Orr will transition to what Mayor Mike Duggan last week termed a “bankruptcy adviser” to the Mayor and Council, and governance of the Motor City will revert to self-governance—but governance overseen by a financial oversight board. Detroit’s mayor and a City Council led by President Brenda Jones will have the powers of their respective offices fully restored. But as the wise columnist for the Detroit News, Daniel Howes, asks: “[W]ill their collective posture change and become more resistant to the requirements of a restructuring plan they did not draft?” That is to write that the question burning in Judge Rhodes—who, after all, can only say ‘yes’ or ‘no’ to Mr. Orr’s proposed plan of adjustment—is after Mr. Orr leaves, will the right leaders be in place to administer a plan they did not write—and that no one knows for certain can work?

Less Harried in Harrisburg. Pennsylvania’s House Urban Affairs Committee yesterday unanimously approved legislation to enable the state’s capital city Harrisburg to develop vacant, desolate, underused, or abandoned space under the City Revitalization and Improvement Zone or CRIZ program—a program which authorizes the investment of Pennsylvania tax revenues in designated zones to enable new investment in local economies by redeveloping eligible vacant, blighted, and/or abandoned properties for commercial, hospitality, conference, retail, community, or other mixed-use purposes.. Under the program, eligible municipalities are authorized to create an authority to issue bonds for redevelopment projects, with the bonds repaid using most state and local taxes generated within the CRIZ area during and after construction. Developers are required to supply at least 20 percent of the development cost for the project through private funding. The program, which was created last year, is based on Allentown’s neighborhood improvement zone program, which resulted in more than $500 million in new investment for the city. Under the original legislation, third-class cities with populations above 30,000, except for Harrisburg, which—in the wake of opting not to file for federal bankruptcy protection, went under state receivership, could enroll in the program. Even though Harrisburg successfully exited receivership last March, the committee determined it should be able to participate.

September 15, 2014

Visit the project blog: The Municipal Sustainability Project 

Getting Ready for the Checkered Flag. David Heiman, an attorney for Detroit, this morning, in announcing a settlement with perhaps the bitterest adversary to the Motor City’s proposed plan of adjustment, bond insurer Syncora,  told U.S. Bankruptcy Judge Steven Rhodes that the once “passionate adversaries” had “laid down the swords” and achieved a comprehensive settlement. Among the elements of the deal, through which Syncora will withdraw objections and appeals tied to the city’s plan to shed $7 billion in debt, the bond insurer is expected to receive approximately 14 percent recovery on financing it supplied for the burgeoning pension debt, up from about 10 percent. The agreement involves a transfer of property owned by the city and extension of the Detroit-Windsor Tunnel lease to a Syncora subsidiary and a 30-year lease of a parking garage below Grand Circus Park. Syncora will also receive $6.25 million in settlement credits to be used on eligible properties, including the Joe Louis Arena, other parking assets, and real property located within three miles of the tunnel. Mr. Heiman testified that there are aspects of the agreement that still need to be addressed, including complications related to specific parcels that cannot be conveyed to Syncora, but indicated the sides expected to resolve the outstanding issues by close of business tomorrow. Syncora and the city had agreed to a tentative settlement last Tuesday in which the insurer would get a 20-year extension on its deal to operate the Detroit-Windsor Tunnel, a 30-year lease on a city parking garage and millions in bonds and options to purchase city property. Altogether, the deal is difficult to value, but people familiar with the agreement have estimated Syncora will ultimately collect 20% to 25% of the approximately $200 million it’s owed. Ryan Bennett, an attorney for Syncora, told Judge Rhodes the agreement was a “very complicated and creative” resolution to the firm’s relationship with Detroit—coming in the wake of marathon weekend negotiations. The breakthrough was accompanied by a formal apology by Syncora’s attorney for accusing bankruptcy mediators, especially Chief U.S. Judge Gerald Rosen, of “naked favoritism.” (Please see next item below.)

The abrupt announcements this morning could put the Motor City on the verge of reaching a comprehensive agreement on its bankruptcy exit plan with all its creditors—leaving bond insurer Financial Guaranty Insurance Co. (FGIC), which was previously allied with Syncora, remaining as Detroit’s single greatest obstacle to a successful emergency from insolvency, although several hedge funds and more than 600 individuals are still objecting to the city’s proposed plan of adjustment pending before the court for Judge Rhodes’ approval or disapproval. When the Motor City and Syncora reached their tentative agreement last week, there were apprehensions Syncora would first insist upon concessions from Bank of America and UBS, the two global banks — which had agreed to their own $85 million settlement with Detroit on the swaps agreement which the city had argued was illegal, and which had led to the conviction and imprisonment of former Detroit Mayor Kwame Kilpatrick  — with the banks demanding that Syncora and FGIC cover their losses on the interest-rate transaction brokered by Mayor Kwame Kilpatrick’s administration in 2005. Syncora, which is confronting its own solvency apprehensions, had been seeking a release by the two banks from its obligation to cover those losses. In their own settlement with Detroit, UBS and Bank of America are getting $85 million on interest rate swaps worth $290 million—potentially leaving Syncora on the hook for the remainder. Syncora also had objections related to Mr. Orr’s proposal for additional funds to provide millions more to two retiree health insurance trust funds if Detroit were successful in eliminating $1.4 billion in pension debt that Syncora and Financial Guaranty Insurance Co. insured. Nevertheless, Syncora’s decision to withdraw its objections to the city’s restructuring plan enhances the likelihood that Judge Rhodes would approve Detroit Emergency Manager Kevyn Orr’s proposed plan to eliminate $7 billion of the Motor City’s debts and reinvest $1.4 billion in the city’s future sustainability. At the same time, however, hopes for an agreement with Detroit’s key holdout creditor, FGIC, remain in question—albeit, with the clock clicking down, the pressure on FGIC to come to an agreement with the city or face a significant loss is tightening the screws. With Judge Rhodes making it ever so clear he will not allow Detroit to exit bankruptcy unless he is convinced the city’s proposed plan of adjustment will provide for a sustainable future, FGIC does not want to be the last creditor standing.

Mea Culpa. In addition, this a.m., Syncora issued a formal apology to U.S. Chief Judge Gerald Rosen—filing a four-page apology to Judge Gerald Rosen and mediator Eugene Driker, who the firm had accused of engineering a “fraudulent” plan to rescue Motor City retirees and to preserve city-owned art at the Detroit Institute of Art at the expense of other creditors, writing “We are deeply sorry for the mistake we made and for any unfounded aspersions it may have cast on Chief Judge Rosen and the Drikers.” Judge Rhodes responded that the apology resolved a pending consideration from the judge to sanction the bond insurer over its “scandalous and defamatory” claims against the mediation team.

Detroit & San Bernardino Race to the Last Lap

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September 12, 2014

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Getting Ready for the Checkered Flag. Chief U.S. Judge Gerald Rosen yesterday afternoon ordered Detroit, Syncora, UBS, Merrill Lynch, Ambac, Black Rock, the city’s Official Committee of Retirees, FGIC, and other financial creditors into continued mediation this morning, “continuing day-to-day, as deemed necessary, until released by the mediators,” as the city’s efforts to work out agreements with its key creditors before emergency manager Kevyn Orr’s likely exit on October 1st nears—and the key obstacle to resolution hinging on whether Syncora is able—in these closed door, mediated negotiations—to obtain concessions from other creditors, including Bank of America Corp. and the city’s retirees. Judge Rosen said negotiations will continue every day until a deal is reached or he sends them home. The closed-door negotiations are, theoretically, to go around the clock until Detroit and its outstanding holdout creditors can negotiate an end to the biggest municipal bankruptcy in U.S. history. After the momentous agreement reached Tuesday between the Motor City and Syncora, FGIC is the last and only major creditor opposed to the city’s proposed plan of adjustment pending before the U.S. Bankruptcy Court. Tuesday’s agreement calls for Syncora to get $23.5 million from the $162 million pool of settlement funds. Now Syncora wants banking giants UBS AG and Bank of America to drop their pursuit of a nearly $200 million insurance claim against Syncora tied to Detroit’s troubled pension debt and has indicated its deal with the city hinges on getting the banks, retirees and bondholders to forgo a potentially better recovery of what they’re owed, a likely topic of negotiation in mediation. Syncora is apprehensive that without an agreement by Bank of America’s Merrill Lynch unit and UBS to modify their rights to collect their insurance payments from Syncora on the soured swap deals that put the Motor City’s former mayor in prison, the plan still cannot proceed. Detroit’s representatives take the position that Syncora can still drop its objections to the city’s plan and go ahead with the settlement no matter what UBS, Bank of America and other creditors decide. If Syncora is unsuccessful in obtaining an ok from the banks to forgo the insurance, it will have to choose whether to continue to oppose the city’s proposed plan of adjustment and put its fate in the hands of Judge Steven Rhodes. But, in the complex negotiations being mediated by Judge Rosen, the Judge is pressing to obtain consent from a committee of retired workers and investors who hold tax-backed bonds.

Under Syncora’s settlement, Detroit would give Syncora new debt, renew a lease on a tunnel to Canada that the bond insurer controls, turn over a parking structure and give an affiliate of the company land for development. The fight lasted 14 months. During that time, Syncora fought to liquidate the city’s art collection, tried to block repairs to miles of broken streetlights and leveled a “blistering” personal attack on federal mediators that drew a rebuke from the judge. Under the deal, the city agreed to extend a lease of the Detroit-Windsor tunnel with a Syncora-controlled firm for 20 years. Syncora also gets to lease a city-owned parking lot underneath Grand Circus Park for 30 years, according to a city term sheet released Wednesday. The package of incentives is worth about $70 million, according to a source familiar with the deal. In return, Syncora has pledged to help Detroit fight bond insurer Financial Guaranty Insurance Co., which is still objecting to Detroit’s debt-cutting plan. Syncora and FGIC were two of the biggest opponents in the bankruptcy trial. Both firms claim the city’s debt-cutting plan pays them as little as 6 cents on the dollar for the $1.4 billion in troubled pension debt they insured to help former Mayor Kwame Kilpatrick prop up the city’s pension funds in 2005. FGIC has claims of more than $1.1 billion — three times the size of Syncora’s. The firm’s negotiators walked out of closed-door talks with the city two weeks ago.

Because FGIC is in the same bankruptcy creditor class as Syncora, for Judge Rhodes to approve Detroit’s proposed plan of adjustment—which is being modified to reflect Tuesday’s Syncora deal—he would have to find that the plan proposed equity amongst classes of creditors—i.e., in this instance, FGIC and Syncora. Detroit had been trying to get the entire $1.4 billion in swap debt Syncora and FGIC insured erased from its balance sheet, claiming the debt illegally exceeded the city’s statutory borrowing limits; the deal (see box above) changes that claim. What this all means is that now one of the most serious obstacles to the Motor City’s emergence from the largest municipal bankruptcy in U.S. history is dependent on the unique and gifted Judge Rosen.

Property Disposal. Detroit Emergency Manager Kevyn Orr yesterday notified the City Council he plans to transfer up to 45,000 city-owned properties to the Detroit Land Bank Authority, which auctions off and demolishes vacant, abandoned and foreclosed properties. Mr. Orr’s plan provides the council 10 days to approve or disapprove of the transfer. In addition, Mr. Orr’s proposal includes a provision requiring all tax-foreclosed properties that revert back to the city instead go to the land bank―all part of what his office reports is an effort to “speed up the process to redevelop that land.” If the Detroit City Council rejects the transfer, it has seven days to come up with a proposal that would yield substantially the same financial result, under provisions of Michigan’s Public Act 436 of 2012, the state’s emergency manager law. If the council develops its own version, that version would be reviewed by the state’s three-member Emergency Financial Assistance Loan Board, which would have 30 days to approve one of the proposals.

Progress in San Bernardino. U.S. Bankruptcy Judge Meredith Jury, in an interim ruling yesterday, agreed to the city of San Bernardino’s proposal—as part of its bankruptcy plan of adjustment—to reject the current bargaining agreement between the municipality and its firefighters. The firefighters’ contract is a burden on the city’s finances in at least two ways, Judge Jury found: pension contributions by the city cost too much, and overtime rules are too generous. Should she adhere to her preliminary ruling, San Bernardino would be free to impose pay and benefit cuts, and the city will have the authority to impose a new contract of its own choosing. In its filing with the federal court, the city wrote that part of the reason to reject the existing contract was so it could replace a constant staffing model with minimum staffing, a proposal which would give the city the flexibility and authority to leave some firefighter positions unfilled for a shift if a firefighter does not come to work—a change critical to the city’s efforts to reduce the more than $4 million in overtime it pays firefighters most years. Another expected reason was continuing to make firefighters pay the retirement contributions the city handled until a year ago last January, reducing the employees’ take-home pay by nearly 14 percent. In a separate ruling, Judge Jury rejected the firefighter union’s motion for relief from the stay preventing anyone from suing the city while it is in bankruptcy. Firefighters’ attorneys want to argue in state court that the city had not followed state law in its negotiations. Judge Jury did not rule on separate, pending motions for relief from the stay from the police and fire unions after contracts were imposed on those unions in January of last year; she made clear that she was not agreeing to the specifics of any potential imposition, advising the parties San Bernardino cannot violate “substantive law,” including the city charter provision that prevents cutting public safety salaries—an issue which is on November’s ballot for possible repeal, adding that previous cases have not established how long the imposed contract can be used, advising the parties: “I said it’s interim, but I don’t how long interim is…I think until a new collective bargaining agreement is negotiated or the plan (to exit bankruptcy) is approved.” San Bernardino’s attorneys will submit proposed wording of the order today, giving firefighters’ union attorneys until midweek to object or file an alternative proposal before a hearing on September 19th to finalize the order. Judge Jury made clear she would provide the firefighters’ attorney an opportunity to question a key city witness before making her final ruling, but noted: “It is very unlikely they are going to convince me” that the contract is not a burden on the city’s recovery. Yesterday’s actions come as the Southern California city has either reached agreements with or is in negotiations with almost all its major creditors. After filing for municipal bankruptcy in 2012, San Bernardino had enmeshed in negotiations with unions and its biggest creditor, the California Public Employees’ Retirement System (CalPERS), to which the municipality owes about $143 million, according to court filings.

eBlog
September 10, 2014

Visit the project blog: The Municipal Sustainability Project

An Interrupted Day Five. The fifth day of Detroit’s municipal bankruptcy exit trial began late and was interrupted by two key announcements arising out of the extraordinary efforts of Chief U.S. Judge Gerald Rosen and U.S. Judge Sean Cox, who have been mediating with objecting creditors of the city—in the case of Judge Rosen, holdout creditors Syncora and FGIC, and in the case of Judge Cox, the negotiations with the city’s surrounding counties over the future of the Detroit Water and Sewer District. With the twin resolutions (please see below) announced yesterday overshadowing the testimony before U.S. Bankruptcy Judge Steven Rhodes, the trial is likely to be suspended today and tomorrow. Indeed, the apparent agreements between the city and its most significant holdout creditors could accelerate the denouement. Kevyn Orr’s spokesperson yesterday noted: “Anything that shortens the time that we’re in court, that limits the objectors that we have, is good for the city…We’re not just giving Syncora anything. They’re going to have to make investments.” On the second front, after a year of failed talks, Detroit announced it had reached agreement to spin off its troubled water and sewer department to surrounding communities that would generate a $50 million annual payment to the city, with Mayor Mike Duggan yesterday stating at a press conference with adjacent county elected leaders: “There has been 40 years of conflict between the city and the suburbs…What you have today is a pretty remarkable accomplishment.” The officials made the announcement at the federal courthouse, where the city’s bankruptcy trial is being held, to make the announcement. In addition, Mayor Duggan noted that Gov. Rick Snyder and his top aide Rich Baird, were “very important” to the negotiations. The Mayor’s announcement could not only eliminate critical opposition to the city’s proposed plan of adjustment pending before the federal court, but also generate annual revenue for the city.

Is it a Smoking Pigeon? Yesterday, Detroit Police Chief James Craig, who assumed leadership a year ago, testified he ran into a situation when he assumed command unlike any before, telling the court the city’s police car fleet was “probably the worst” he had ever experienced and describing the police department as one where it “was very clear that morale was at the very bottom…It was also clear that the department lacked leadership and accountability … and the department had no credibility with the community it served.” Combined with Fire Commissioner Edsel Jenkins’ earlier testimony of the Fire Department’s dire need of repairs, technological upgrades and more firefighters—and that arsonists are the most serious challenge to the Motor City’s firefighters—with 70% of fires in Detroit involving vacant structures. When asked why this happens, he told Judge Rhodes: “I know pigeons don’t smoke.” Chief Jenkins testified that the Fire Department is in dire need of better safety equipment, technology upgrades and more firefighters, who spend most of their time chasing fires set by arsonists. The two chiefs’ testimony came as part of the city’s continued efforts to lay before the court the importance of its proposed plan of adjustment provisions for investing about $1.4 billion into critical public improvements—in effect pressing the federal court to agree that using those funds to invest in the city’s future fiscal and economic viability and sustainability instead of paying higher percentages of debts it owes to its creditors is equitable. Under emergency manager Kevyn Orr’s proposed plan of adjustment pending before the federal court, the city would increase funding to the Police Department by $114 million, and to the Fire Department by $82 million. Chief Craig testified the investment would make a key difference, telling the court the importance of funding for new officers, upgraded video cameras in the cruisers, and better portable radios. He wants to hire 234 civilian staff to cover jobs that are held by police officers but should not be in order to free up the officers to work in the field. He testified Detroit’s overall crime rate is down and detectives are now in all 12 neighborhood police stations: police response time is down to 21 minutes, down to nearly a third what it was when he assumed command—but telling the court that a 21-minute response time was still “not adequate.” He testified his goal is to get response times down to five minutes for priority calls.

Breakthrough.
Later yesterday, outside the courtroom—behind closed doors, Detroit reached agreement with one of its biggest opponents and holdout creditors to the city’s bankruptcy filing, insurer Syncora, which claims it is owed hundreds of millions of dollars by Detroit for insuring a swap agreement under the former and now convicted and imprisoned Mayor Kwame Kilpatrick—a deal which the city claims was illegal, and consequently did not propose financing in its proposed plan of adjustment. The proposed deal would require Syncora to drop all of its pending appeals at the 6th U.S. Circuit Court of Appeals, including its attempt to block Detroit from access to crucial monthly casino tax revenue that the two banks held as collateral. With yesterday’s agreement, both the city and Syncora asked Judge Rhodes for an adjournment of the trial until Friday to work out the details, telling the court the agreement could “profoundly alter” Mr. Orr’s proposed plan of adjustment pending before the court. A hearing is set for this morning on that request. It appears that under the tentative agreement, the city would pay Syncora 26 percent of what the company claims it is owed; Detroit would also extend Syncora’s lease on the Detroit-Windsor Tunnel (Ownership of the company that operates the U.S. side of the Detroit-Windsor Tunnel was transferred from an investment company to Syncora in September in exchange for $334 million in swap liability.) by 20 years, to 2040, and give the company a 30-year lease on the Grand Circus Park parking garage. In their filing, the city and Syncora wrote: “If this agreement is finalized within this time period as we expect, it will profoundly alter the course of the proceeding and the litigation plans of the remaining parties.” In addition, under the agreement Syncora would pledge to help counter bond insurer Financial Guaranty Insurance Co. (FGIC), which now looms as the single largest holdout creditor opposing the city’s proposed plan of adjustment. The announcement yesterday—especially in the wake of Syncora’s bitter opposition and severe, personal attacks on Judge Rosen and other federal mediators—an attack that drew a rebuke from U.S. Bankruptcy Judge Steven Rhodes, and in the wake of Syncora adamant opposition and legal challenges to the so-called “grand bargain” put together by Michigan Governor Rick Snyder and bipartisan leaders in Michigan’s legislature; the turnaround was stunning. Moreover, nearly simultaneously, closed door negotiations between Detroit and its surrounding counties resulted in an announcement of an agreement—expected to be formally released today—to spin off the Detroit Water and Sewer Department. The twin breakthroughs yesterday mean the single greatest obstacle to Detroit’s exit from municipal bankruptcy is holdout creditor municipal bond insurer FGIC, with claims of more than $1.1 billion in pension bonds it insured—some three times the claim Syncora had sought. FGIC walked out of closed-door negotiations two weeks ago. Now the insurer risks being the last one on the bridge.

The tentative agreement. Under the tentative agreement, Detroit would permit Syncora share in $120 million of so-called “B notes,” or new Detroit municipal bonds the city is issuing to creditors to be paid over time under its pending plan of adjustment, with Syncora to receive about a 16% of the deal. Detroit would give Syncora the opportunity to operate a city-owned parking garage underneath Grand Circus Park under a 30-year lease deal—the 800 space garage is Detroit’s third-largest municipal garage—in return for which Syncora would have to make $13 million in capital improvements in the garage, after which it would be able to receive 75 percent of the parking revenue, with the remainder going to the city. The deal would also provide Syncora with a $6.25 million coupon that could be used to bid on any available city property — such as the Joe Louis Arena site, once the city’s NHL Red Wings move out after construction of a planned arena north of the Fox and Comerica Park. As part of the proposal, Detroit would issue $21.3 million in parking revenue bonds, with the cash raised going to Syncora. The city would also give the firm $5 million in cash to help settle claims with firms involved in the $1.4 billion pension arrangement which led to the downfall and imprisonment of former Mayor Kilpatrick. Overall, the federally mediated agreement is projected to increase Syncora’s potential recovery by in excess of 400% compared to its current recovery plan of adjustment pending in the federal bankruptcy court—bringing the city’s proposed offer to approximately 26 cents on the dollar—a significant increase. That current plan proposes paying its retirees about 46 cents on the dollar for their $3.1 billion claim; while UBS and Bank of America are projected to receive about $85 million, or 29 cents on the dollar, for their interest rate swap claim against the Motor City.

The Sharing Economy. In the second of the one-two punches that shook up the federal court yesterday, Detroit and its neighboring jurisdictions of Macomb, Oakland and Wayne counties yesterday announced a forty-year agreement to form a regional water authority, the Great Lakes Water Authority, which will provide $50 million annually to help finance system upgrades. Under the agreement, Detroit would retain its ownership, but the pact would provide the counties with a greater stake in the system’s operations over a system that serves nearly 40 percent of the state’s residents. Under the deal involving Detroit and Macomb, Oakland and Wayne counties, the city will lease infrastructure to suburban communities in exchange for the $50 million annual fee and annual $4.5 million payment assistance fund. Motor City Mayor Duggan noted that not only will the agreement help resolve the city’s pending municipal bankruptcy, but also end what he called “forty years of conflict between city and suburbs over water.” The leaders of the counties had opposed Detroit’s proposed plan of adjustment to exit municipal bankruptcy, claiming then plan would extract tens of millions of dollars from their water departments, trigger rate increases, and prevent needed repairs. Mayhap more importantly, the agreement not only removes a critical obstacle to Detroit’s successful exit from municipal bankruptcy, but also addresses the question posed yesterday by Macomb County Executive Mark A. Hackel, who asked: “How do we become more regional? If we want to be competitive with other regions, we can’t be competitive among ourselves.” Mayhap indicative of the importance of the pact, in the wake of its announcement, the market sharply reacted, with Detroit’s 5.75 percent sewer bonds due in 2031 climbing 5 percent to 111.7 cents on the dollar. The new Authority will be run by a six-person board: two appointed by Detroit, one by each of the counties, and one by Governor Rick Snyder. The lease payments would last 40 years and allow the city to issue $500 million to $800 million in bonds to repair its aging, local water system, which has suffered 5,000 water-main breaks in the past three years. “Major decisions, such as rate increases, will require five of the six votes to be approved,” according to the statement. The Detroit water and sewer system consists of more than 3,400 miles of local water mains, 3,000 miles of local sewer pipes, 27,000 fire hydrants and an extensive billing and collection system. Last week, Detroit closed the sale on $1.79 billion in new bonds for the utility. The new bonds are expected over the 21-year life of the bonds to save the city about $11 million a year. The agreement could also facilitate apprehensions with regard to taking on legacy costs and absorbing Detroit’s high rate of unpaid water bills. The city recently triggered a national outcry when it began shutting off service to delinquent customers. Those issues are said to have been resolved, or commitments made to settle them, after the authority is approved.

Ungambling. With casinos dropping like flies and threatening the solvency of Atlantic City, New Jersey Governor Chris Christie this week met behind closed doors with political leaders and casino officials on strategies to build Atlantic City revenue on non-gambling attractions, telling the media the discussions were focused on finding what he called larger short- and long-term solutions to help Atlantic City adjust to gambling on a smaller scale The abrupt summit comes four years into Gov. Christie’s five-year plan to revitalize the city—a plan now that appears to be in tatters. Now the Governor has signed an executive order to permit New Jersey casinos and racetracks to accept sports bets―as long as they do not involve New Jersey college matches. A non-municipal bankruptcy court reorganization could give Carl Icahn two additional hotels in the city, where funds controlled by Mr. Icahn are Trump Entertainment’s largest creditor, according to public filings. In addition, Mr. Icahn controls 68 percent of Las Vegas-based Tropicana Entertainment Inc., which owns the Tropicana in Atlantic City.

The Expensive Challenge of Finding the Right Outcome in Municipal Bankruptcy

eBlog
September 9, 2014
Visit the project blog: The Municipal Sustainability Project

Fourth Lap. Detroit continued to cull through its list of twenty-five planned witnesses in the hearings on the city’s bankruptcy plan of adjustment yesterday, with a key—and depressing—focus on the state of the city’s technology and information systems. Beth Niblock, a former information technology chief for the city of Louisville, who was recruited earlier this year by Mayor Mike Duggan, testified that the city’s information technology is “generations behind” current standards, noting, for instance, that employees send emails, but emails that never arrive in the recipient’s inbox. Drawing a devastating image for U.S. Bankruptcy Judge Steven Rhodes of the city’s computers, software, and email system, Ms. Niblock testified the city’s systems are also extremely susceptible to cybersecurity attacks, adding that the system is so out-dated that it hampers the city’s ability to issue paychecks, collect taxes, communicate internally, and dispatch police and firefighters: “It is fundamentally broken or beyond fundamentally broken…In some cases fundamentally broken would be good.” Emergency Manager Kevyn Orr and the city’s legal team has been using this portion of the trial to justify the plan’s proposal not just to obtain the federal court’s approval to eliminate some $7 billion of Detroit’s obligations, but also to approve the plan’s proposal to reinvest more than $1.4 billion in services, including basic information technology. Her testimony followed the carryover of the city’s chief restructuring consultant, Chuck Moore of the firm Conway MacKenzie, who began last Friday explaining to the court ways Mr. Orr’s plan would improve and reshape the city government, testifying that eliminating waste, fraud, and inefficient spending is crucial to ensure that the city’s proposed plan of adjustment is successful. In response to Judge Rhodes’ questions about whether the plan really offers an achievable plan to improve basic services, Mr. Moore testified that the cash budgeted to improve city services over 10 years must be spent responsibly, noting carefully: “Just because the money exists doesn’t mean it can be spent…It has to be justified.”

Is there a Right Balance? Municipal bankruptcy is rare in the U.S., part of the reason that municipal bonds issued by state and local governments are perceived as such a safe bet: the default rate is just 0.23%. Notwithstanding, for those bondholders in that category, part of their struggle in Detroit’s bankruptcy trial is to recover what they might view as a more equitable share of what they are owed. Unlike a non-municipal corporate bankruptcy—where the corporation can simply be extinguished and its assets equitably distributed; the challenge in municipal bankruptcy is infinitely more challenging: how does one put together a plan to adjust that debt in a manner that will not only be accepted by a federal bankruptcy court, but also will stand the test of time by proving that said plan will provide for a sustainable future for that city? In Detroit, the city foundered under unpayable debts—debts estimated at $18 billion or $26,000 per Motor City resident. Kevyn Orr, the city’s state-appointed emergency manager, has proposed a plan of adjustment to the court to eliminate that debt—but also to try and determine the magic amount in that same plan requisite to try and ensure that Detroit can not just eliminate its debt, but actually have a viable future. Fabulous Matt Fabian of Municipal Market Advisors wisely notes that Mr. Orr’s plan—if approved by the federal bankruptcy court—would help Detroit’s balance sheet—but not its income statement. The city, which already taxes itself more than any other city in Michigan, and which—at least under its plan—will invest in 20th century technology to more effectively collect the revenues it is owed; nevertheless faces declining revenues and a continuing likely decline in assessed property values. It will not be competing with other big cities across the country on a level playing field. Revenues from casinos are down, property values are likely to be re-rated (see chart), and future state fiscal assistance would seem uncertain at best. This is the hard test over the next thirty days before U.S. Bankruptcy Judge Steven Rhodes: does this proposed plan by the city put the Motor City’s finances on a viable path for a sustainable future.

The Extraordinary Cost of Municipal Bankruptcy. While Judge Rhodes is struggling to determine whether to approve or disapprove Detroit’s proposed plan to adjust its debts—paying less, in some cases far less, than it owes to its creditors, but struggling to find some resources to invest so that the city can have a sustainable future; the legal and accounting costs are mounting. For instance, Jones Day, the law firm from which Kevyn Orr was drawn, and his colleagues involved in the case has already, according to fee examiner Robert Fishman, submitted bills to Detroit for just over $26 million, according to Mr. Fishman’s most recent report, which was made public yesterday. Mr. Fishman’s supplemental report adds $3 million in fees and nearly $83,000 in expenses billed in March by Jones Day, the former law firm of Detroit’s state-appointed emergency manager, Kevyn Orr. The addition of the March numbers brings Jones Day’s total billing from July of last year to last March to $25.1 million in fees and $1 million in expenses. It also brings the total price tag for all of Detroit’s professional services in the historic case and reported so far by the fee examiner to about $55 million. Nevertheless, Mr. Orr has said he hopes the final cost will not reach the hundreds of millions of dollars. Jefferson County, Alabama (please see below), which was the largest municipal bankruptcy before Detroit sought federal bankruptcy protection, spent only about $25 million on its two-year case. Experts expect that Mr. Fishman’s next quarterly reports will demonstrate a sharp upsurge in costs to Detroit’s taxpayers, because of the heavy workload by the Jones Day team and other consultants both to prepare for and help shepherd the city through the current trial to determine if the federal court will accept the current proposed plan of adjustment—and the trial is projected to last another five weeks.

Slapping at SWAPs. Wall Street bankers, golfing with frequent pit stops for alcoholic beverages, and the sale of exotic financial instruments were a volatile combination that played a key role in plunging Jefferson County, Alabama into what, before Detroit, was the largest bankruptcy in American history. Swaps, or interest-rate transactions between two so-called counterparties in which fixed and floating interest-rate payments are traded—especially when such financial arrangements are undertaken without a sophisticated municipal advisor held to a legal standard of putting the municipality’s best interests ahead of her or his own—were central to what the former Republican Chairman of the House Financial Services Committee described to me as a criminal endeavor. Thus, as in Detroit, both sewers and swaps involved sophisticated financial advisors preying on municipalities in fiscal straits—ending in prison for the former Mayor of Detroit and bankruptcy for his city. In Bermingham, U.S. District Judge Abdul Kallon has rejected motions by two ex-JPMorgan bankers to dismiss the pay-to-play case against them involving Jefferson County, Alabama’s sewer deals and swaps, rejecting several motions by former bankers Charles LeCroy and Douglas MacFaddin, including a request for partial summary judgment based on the contention that the federal court lacked jurisdiction over the interest rate swap transactions. Messieurs LeCroy and MacFaddin had also filed a request with the court seeking permission to file another motion to dismiss the case based on lack of jurisdiction due to the five-year statute of limitation—a request which Judge Kallon also rejected. In addition, Judge Kallon rejected a motion by Mr. LeCroy for partial summary judgment based on the contention that at least one claim by the Securities and Exchange Commission (SEC) against him should be barred because of the statute of limitations. The SEC is seeking declaratory relief, a permanent injunction enjoining the defendants from violating federal securities laws, and disgorgement of profits or proceeds as a result of their conduct. In his decision, Judge Kallon noted: “[Mr.] LeCroy relies primarily on his own self-serving declaration to support this contention, and he has consistently asserted his Fifth Amendment right at his depositions when asked about his work history and securities dealings after he left J.P. Morgan Securities…This court will not allow LeCroy to convert the [Fifth Amendment] privilege from the shield against compulsory self-incrimination which it was intended to be, into a sword.” The SEC filed suit in 2009 claiming that Messieurs MacFaddin and LeCroy violated multiple securities laws as managing directors at JPMorgan; the former bankers agreed with certain Jefferson County Commissioners to pay more than $8.2 million to close friends who either owned or worked at local broker-dealers, but had no official role in selling the county’s sewer bonds in 2002 and 2003, according to the SEC complaint. The payments, undisclosed at the time, were to ensure that JPMorgan won $5 billion in underwriting and interest rate swap transaction business from Jefferson County. Jefferson County exited from municipal bankruptcy last December, but the case is being appealed.