Rebalancing Governance in Recovering from Municipal Bankruptcy

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.


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