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.

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.


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