Transitioning out of Municipal Bankruptcy

eBlog
September 23, 2014
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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.

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