Is Detroit Nearing a Successful Exit from Municipal Bankruptcy?

October 16, 2014
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Hearing from the People. U.S. Bankruptcy Judge Steven Rhodes yesterday offered some 30 creditors of bankrupt Detroit who are not represented by attorneys to not only testify, but also to question witnesses as his trial to determine whether to approve Detroit’s proposed plan of debt adjustment. Nearly 40 people had filed objections with the federal court asking for permission either to testify or question witnesses, including Detroit officials. Most objections related to the proposed cuts to pensions. The testimony came ahead of closing arguments in the biggest municipal bankruptcy trial in U.S. history and offered people a final chance to convince Judge Rhodes he should dismiss, rather than approve the city’s debt-cutting and reinvestment plan. The opportunity made for some awkward, and racially charged, moments as Judge Rhodes relaxed rules and procedures normally in place for attorneys. Yesterday’s unconventional hearing permitting the individual objectors to argue against the Motor City’s restructuring plan precipitated some unexpected scenes, including one Detroit resident suddenly getting the chance to question emergency manager Kevyn Orr under oath. Wanda Jan Hill, an activist who ran for city council last year, originally asked to question Jones Day lawyer Heather Lennox about Detroit’s clawback of retirees’ annuity savings accounts; however, city attorneys sought to block the request, saying Ms. Lennox likely would be precluded from answering any questions because of her duty to keep private information shielded by attorney-client privileges and a gag order on the case’s mediation talks. Nevertheless, under questioning by Ms. Hill, Ms. Lennox acknowledged that Emergency Manager Kevyn Orr did not warn retirees in key documents that, under the city’s plan, they would be mandated to pay interest on monies clawed back from a savings plan that overpaid some workers. Ms. Hill told Judge Rhodes that had retirees known, they might have voted against, rather than for Mr. Orr’s proposed plan of debt adjustment. That led Judge Rhodes to ask Kevyn Orr, who was present in the courtroom, to respond—prodding him to be specific by telling him: “I think what Ms. Hill is trying to get here is whether or not any of the city’s filed documents disclose the 6.75% interest rate associated with the clawback.” Nevertheless, even with the Judge’s efforts to obtain a specific answer, no such response was forthcoming. Under the plan, general city employees will see their monthly retirement pay reduced by 4.5 percent and will lose their COLAs. Police and firefighters will get their full pensions, but have their COLAs cut in half. The cuts would affect about 30,000 active employees and retirees. Retirees who contributed money to an optional annuity savings fund will have to return overpayments they received from the program, plus 6.75 percent in interest. The annuity program paid employees a guaranteed interest rate regardless of how the fund’s assets performed. The city argued that workers were overpaid in many years. Those cuts, plus changes to retiree health benefits, mean retirees are projected to receive only about 60 percent of what they were promised, according to the city. Walter Gary Knoll, a retired city chemist, testified he will have to repay $42,000 because of the clawback, even though, as he told Judge Rhodes, “I engaged in no fraud or deceit in the annuity.” Others who testified yesterday included former Detroit Councilwoman JoAnn Watson, and Motor City resident Fredia Butler, whom Judge Rhodes allowed to wear a big black floppy hat while testifying. Ms. Butler told Judge Rhodes the city’s bankruptcy case was a “power grab,” and Michigan Governor Rick Snyder the city’s “master,” while decrying the loss of local control since the Governor’s appointment last year of Kevyn Orr as Emergency Manager. She told Judge Rhodes she was “praying for justice.”

A Final Bankruptcy Agreement? Attorneys for Detroit and Financial Guaranty Insurance Co. yesterday advised Judge Rhodes they plan to present a proposed settlement which could resolve FGIC’s objection to Detroit’s plan of debt adjustment in court today—in effect removing the last major stumbling block to Detroit’s exit from municipal bankruptcy. The city and FGIC have participated in closed-door, federally overseen mediation talks for weeks in an attempt to reach such an agreement. Thomas Cullen, a Jones Day attorney representing Detroit, advised Judge Rhodes that the city has a “firm and active faith” that a settlement with FGIC would be finalized by today, perhaps clearing the way for Judge Rhodes to find that Detroit’s modified plan of debt adjustment meets the federal test of being fair, feasible, and in the best interests of its thousands and thousands of creditors. Should such an agreement be offered to the federal court today, it would leave only a small number of financial creditors and individuals objecting to the Motor City’s modified plan of debt adjustment. FGIC has been working behind closed doors under the prodding of U.S. Judge Gerard Rosen to settle FGIC’s $1.1 billion claim stemming from a disastrous pension deal backed by ex- and now imprisoned former Detroit Mayor Kwame Kilpatrick. A settlement would let FGIC recover more money than under the current, seventh version of Detroit’s proposed plan of adjustment, but less than what rival bond insurer Syncora Guarantee Inc. received in its agreement with the city last month. Syncora and FGIC were two of the biggest objectors in the bankruptcy trial: together, the two had insured $1.4 billion in troubled pension debt that helped former Mayor Kilpatrick prop up the city’s pension funds in 2005. Under the current, pending plan of debt adjustment before the federal bankruptcy court, Detroit proposes paying FGIC as little as 6 cents on the dollar. Under Syncora’s agreement—incorporated in the pending plan, the bond insurer would receive nearly 14 percent recovery on claims totaling $400 million. If the two parties are able to present their potential agreement to the federal court today, Judge Rhodes could schedule closing arguments in the historic trial for next week.

Protecting the Motor City’s Future. To choke the flow of police officers leaving Detroit for other cities, City Council President Brenda Jones yesterday said she was considering the potential adoption of an ordinance that would force departing police officers to reimburse the city for their training costs—a reimbursement which could amount to thousands of dollars per officer. Councilmember Jones told her colleagues that it was “ridiculous to lose officers we’ve trained — and spent money on training — to another city.” Councilmember Jones announced her proposal in the wake of Detroit Police Chief James Craig’s description during yesterday’s council meeting of his department’s struggle to keep officers working in Detroit. Chief Craig said uncertainty created by Detroit’s municipal bankruptcy and concerns over the competitiveness of the city’s compensation appeared to be at the root of many of the departures, telling the Council Detroit was losing 20-25 police officers per month when the drain was at its worst. He warned that big cities, such as Houston and Atlanta, have sent recruitment teams to Detroit, while other officers had decamped to local suburbs or joined Wayne State University’s police force. Council President Jones did not define the duration over which a Detroit officer would have to remain in Detroit to avoid the potential financial penalty, nor did she say how much it costs the city to train a police officer, but a police department representative told Council the training fee had been about $5,500 in the past, telling the Councilmembers: “What’s driving many officers to leave, candidly, is uncertainty about the future, pay.” The Detroit Police Department has about 1,800 police officers and about 1,000 civilian workers—and is focused on getting as many of its members as possible on the street fighting crime. Chief Craig said that despite losing officers, his department had succeeded in reducing overall crime in Detroit, telling them that overall crime in Detroit is down 17% and homicides are down 14%.

Russian Roulette? Even as the Garden State is focusing on ensuring the fiscal viability of Newark, there are growing concerns about the potential solvency of Atlantic City. Thus it appears efforts are underway to seek state intervention—and fiscal aid—to saving Atlantic City’s Trump Taj Mahal casino and its almost 3,000 jobs. Trump Entertainment Resorts Inc., the bankrupt casino operator which owns the Taj Mahal, has turned to state officials after Atlantic City elected leaders rejected the gambling center’s efforts to be given $175 million in property tax abatements. At a corporate federal bankruptcy hearing yesterday, a Trump Entertainment advisor testified Trump Entertainment has said it may close its remaining casino next month without tax relief and labor concessions. (Mr. Trump’s estimated wealth as of last March was $3.9 billion.) Having failed to secure a bailout by the city, the city, the casino is now asking Jon Hanson, Chairman of the New Jersey Gaming, Sports, and Entertainment Advisory Commission, to put together a bailout package of state funds to keep the casino open.

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