The Last Full Measures of Municipal Bankruptcy

eBlog
October 17, 2014
Visit the project blog: The Municipal Sustainability Project

The Last Hurdle? Detroit reached an agreement early yesterday with FGIC, its largest remaining holdout creditor, which had claimed the Motor City owed it $1.1 billion. The federally facilitated agreement likely will accelerate an end to the nation’s largest municipal bankruptcy in history. The agreement was reached at 2:30 a.m. in the wake of closed-door negotiations overseen by Chief U.S. District Judge and bankruptcy mediator Gerald Rosen; but the discussions also involved Michigan Governor Rick Snyder’s adviser, Richard Baird. Syncora, another municipal bond insurer which had earlier reached an agreement with Detroit, and FGIC were two creditors who constituted the biggest outstanding holdout creditors to the city’s proposed plan for its adjustment of debts: together they had insured $1.4 billion in troubled pension debt. However, unlike the agreement reached last month with Syncora, the new agreement with FGIC settlement involving real estate must be approved by Mayor Mike Duggan and the Detroit City Council in the wake of the resolution adopted by the city last month which provided for the restoration of local control over city departments, contracts, and other day-to-day matters after 18 months under state emergency management. The settlement provides for a mix of cash and prime downtown Detroit real estate. FGIC will receive about $152 million in city notes, part of which will be backed by public parking revenue, as well as $19.7 million in credits it can apply for purchasing city parking assets or real estate. In return, FGIC, which has a $1.1 billion exposure from insuring the pension certificates of participation (COPs), will drop its objections to the city’s plan to adjust $18 billion of debt. In addition, another, smaller barrier was also removed yesterday when the city announced its settlement with the Macomb Interceptor Drainage District over a $26 million claim. The agreement could effectively end all creditor opposition to Detroit’s plan of debt adjustment—which will be updated so that an 8th, and presumably final, version will be submitted to the U.S. bankruptcy court next week, when the Motor City is scheduled to offer its closing arguments. “There wasn’t any more cash,’’ Mayor Mike Duggan said in an interview yesterday. “They made an assessment that their best chance for a return was to participate in Detroit’s redevelopment.” Nevertheless, it remains on Judge Rhodes plate to independently determine that the revised, eighth version of Detroit’s plan of debt adjustment is feasible, and his finding that the city has a reasonable likelihood of achieving its financial projections and performing its obligations.

The Deal. Yesterday’s federally mediated agreement involved FGIC’s wrapping of $1.1 billion worth of the city’s certificates of participation or COPs, which the city has sued to repudiate, claiming the debt was illegally issued by the former Kilpatrick administration—a lawsuit which will be dropped under yesterday’s agreement, although it remains uncertain whether the holders of the COPs, which include hedge funds, are parties to the agreement, with an attorney representing the COPs holders reportedly advising Judge Rhodes it was still uncertain how many would choose to opt in on the settlement. Under the agreement, Detroit would provide FGIC the opportunity to redevelop the city’s prime riverfront site which now includes the Joe Louis Arena, where the Detroit Red Wings skate, allowing FGIC to replace the arena with a 300-room hotel, condominiums, and retail, primarily to serve the neighboring convention center. The city testified in the courtroom yesterday that the proposed agreement would help redevelop a nearly nine-acre stretch of riverfront land in downtown Detroit. FGIC would get roughly $150 million in cash from two note issues floated by the city, reports said. The insurer would also receive $4 million in so-called revitalization credits and $14 million in tax increment financing district credits. Detroit emergency manager Kevyn Orr will ask the Detroit City Council to approve the deal next week. If the council rejects the plan, Mr. Orr could instead petition Michigan’ state emergency loan board for its approval. The city plans to turn in an amended confirmation plan – its eighth—reflecting the new agreement by Monday.

Taking Stock of Crime in Stockton. As the City Stockton awaits U.S. Bankruptcy Judge Christopher Klein’s decision at the end of the month with regard to approving the city’s proposed plan of debt adjustment―which would allow the city to exit municipal bankruptcy, the city faces elects just days afterwards—elections which could rechart the city’s future, notwithstanding its plan, and which will have to address public safety. Stockton Mayor Anthony Silva this week, in the aftermath of eight recent homicides, including five over the weekend in a four-hour span (there have been 45 homicides in Stockton in 2014. There were 32 in all of 2013) warned that the city’s recent crime wave is indicative of a “state of emergency,” asking citizens for “input” into the deployment of police officers. In addition, the Mayor renewed his call for voters to oust two incumbent City Council members in the upcoming elections. The crime surge occurred shortly after last week’s city announcement of the hiring of Jessica Glynn as manager of Stockton’s new Office of Violence Prevention. Mayor Silva said he is pleased the new job — which includes overseeing the city’s Operation Ceasefire anti-gang measures — has been filled, but he added that the city needs an immediate prescription in addition to a long-range cure: “As the mayor, I feel it’s my job to help protect the residents.” Stewart Wakeling of the California Partnership for Safe Communities — one of the city’s partners in Operation Ceasefire — said Tuesday he believes Stockton’s long-range approach is the right course for a sustainable improvement: “The way to deal with it is to use all the resources you can that are rooted in the evidence of what works…There are no shortcuts to this. You just have to do it. An overnight reduction is not likely to happen.” Last year’s Stockton homicide total represented a decrease of 39 from the city’s all-time high of 71 killings in 2012, a drop which Mr. Wakeling attributed to the institution of the city’s “Ceasefire” at the start of 2013, but added, “To really enhance and sustain the effort, you have to have dedicated resources…”

Charting Stockton’s Future. In addition to Council elections next month, Stockton residents will vote on Measure C, a list of proposed changes to the city’s charter, among which are:
• Remove a provision requiring the mayor be paid at least as much as the chairman of the San Joaquin County Board of Supervisors.
• Clarify and rephrase certain conflict-of-interest provisions and remove outdated language pertaining to employment qualifications.
• Remove mention of the city manager’s spending authority from the charter and provide for adoption of an administrative spending limit by ordinance.
• Render the charter silent on methods for selecting top officers in the Stockton Fire Department.

On vote-by-mail ballots in the coming weeks, and in voting booths on Nov. 4, Stockton residents will be making key decisions on three election campaigns that will determine the makeup of the City Council for the next four years. Perhaps largely unnoticed amid the campaign rhetoric is Measure C, which proposes a variety of changes to Stockton’s charter, the city’s governing document—or as the co-chairs of the citizen’s commission describe it: “Measure C is about modern, efficient government…A YES vote means progress toward modern, efficient government with policies that reflect the new direction of Stockton and drive the City toward a brighter future.” The space on the ballot that was allotted for an argument by opponents to Measure C is blank. No opposing argument was submitted. At issue for the next two years will be the current system, under which candidates in Stockton’s six geographical areas first must compete in a primary in which only their district’s residents can vote, but then must win a November city-wide election. That system has been in place since voters approved it in 1986, but it has been facing challenges for years. Twelve years ago, for instance, a group of south Stockton clergymen sought to change the system, arguing that it funnels political attention and dollars away from their community. But the effort died in the City Council. Former City Councilman Ralph Lee White, who serves on the charter review commission, has been seeking to change the system almost from the moment it was adopted, even though those who support the current system have argue there is little historical evidence that it has disenfranchised voters. Since the 1986 measure took effect, according to election records, 40 of 46 City Council candidates who won their district primaries went on to capture their races in the city-wide vote.

Trouble in River City. San Bernardino Mayor Cary Davis this week warned of new obstacles to the city’s hopes for exiting municipal bankruptcy, stating that police union claims that the city’s management “misinterpreted” a tentative agreement are untrue. Rather Mayor Davis said, it was the union seeking to change the contract under the “guise of ‘clarification,’ with the union now seeking to change the terms of the agreement and add additional burdensome costs over the life of the contract. This action took place after the agreement was approved by both sides. A deal is a deal and the fact that union leadership, through their announcement, would attempt to set aside a judicially mediated agreement and renegotiate is disturbing.” The disagreement, moreover, is not small: as City Manager Allen Parker noted: “It’s a significant difference — there’s a significant dollar sign difference over the length of the contract.” The breakdown between the city and its police union over the tentative agreement – in the wake of a filing with U.S. Bankruptcy Judge Meredith Jury that the two sides are no longer actively negotiating—is indicative of the obstacles in the path to any long-term consensus on a plan of debt adjustment that would clear the way for the city to exit from municipal bankruptcy and move forward with a sustainable fiscal future—as well as with the signal differences compared to Detroit, where the active, contributory role of Governor Rick Snyder and bipartisan leaders of the state legislature—not to mention the attuned musical ear of Judge Rhodes and unrelenting efforts of Chief U.S. Judge Gerald Rosen have put Detroit on the brink of exiting municipal bankruptcy at a far faster pace than San Bernardino. Since union president Steve Turner two weeks ago announced that the city “chose to turn its back” on a tentative agreement, city officials have mostly kept to statements that they intend to continue negotiating but cannot provide their side in detail because a federal judicial gag order covers the agreement. Moreover, as with its northern counterpart, Stockton, the issues are further exacerbated by the looming elections—here, specifically, as the campaign for and against Measure Q — which would change the city charter to set police and firefighter salaries by collective bargaining rather than as the average of 10 like-sized cities — heats up―a measure on which the union recently ended its neutral stance and began actively opposing. Or, as Mayor Davis notes: “It’s curious that the change happened at the cusp of the election.”

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