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.