ReTaking Local Control & Parallel Exits from Chapter 9

September 26, 2014

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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. 4th 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.


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