Historic Detroit Bankruptcy Trial Nears an End

October 21, 2014

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 The Last Hurdle? Detroit’s historic municipal bankruptcy case is winding down, with the last remaining testimony in the trial over its proposed plan of debt adjustment scheduled for today and tomorrow, and closing arguments scheduled for next Monday. U.S. Bankruptcy Judge Steven Rhodes declared yesterday he will announce his decision whether or not he will approve the Motor City’s proposed plan of debt adjustment in open court the first week of November. Much of yesterday’s proceedings involved a complaint from Detroit’s largest union with regard to more than $8.7 billion owed to members for pension, health care, and bonus check payments. Attorneys for the City of Detroit and the American Federation of State, County and Municipal Employees Council 25 claimed members are owed the money for underfunded pension and retiree benefits — including so-called 13th checks — stemming from limits the city placed on its interest payments to savings funds in 2011, but Judge Rhodes concluded the plan language was not ambiguous, and that AFSCME’s claim was not consistent with the broad definition of what is in either the city’s updated, pending plan of debt adjustment or the federal chapter 9 municipal bankruptcy code, so that AFSCME’s claim will be discharged; rather, Judge Rhodes said the pension and health care claims by AFSCME should be covered by the retiree settlements. AFSCME’s attorney then argued its claims should be considered a Class 14, general unsecured, claim. One of the city’s lead attorneys, Heather Lennox, has argued the claims have been already addressed as part of its 8th submitted plan of debt adjustment—claims for which, she noted, if the city’s updated bankruptcy exit plan is not approved by Judge Rhodes―would mean the city would not  be liable, because certain of the unions’ actions were illegal, including the so-called 13th checks—payments or bonus checks which the city’s attorneys say cost the Motor City’s pension funds some $1.9 billion in investment value over two decades, contributing more than half of its currently estimated $3.5 billion in unfunded liability. AFSCME Attorney Richard Mack argued for a full hearing on the complaint and the issues of standing; however, Judge Rhodes responded Detroit’s plan of adjustment is not ambiguous, and he dismissed the claim. In addition, Ms. Lennox yesterday advised the court that the UAW and AFSCME have withdrawn an objection that had been pending in court, after noting that 300 retired library workers and six Cobo Center retirees will be provided health care benefits through a Voluntary Employee Benefit Association (VEBA) for general retirees; however, she advised Judge Rhodes that Detroit’s Retiree Committee does not agree with the provision. Nevertheless, she testified that the city has no intention of amending the proposal, telling him the benefits are provided by the VEBA trust and “that’s not something that the city decides;” rather, the benefits rather will be decided by a board, which is not yet active. (The VEBA trust is one of two funds financed with $450 million from the city under its proposed plan of debt adjustment to finance health care benefits: one trust is for general retirees, the other is dedicated to retired police officers and firefighters. Judge Rhodes yesterday refused to listen to objections from Sam Alberts, an attorney for the retiree committee. He directed Mr. Alberts to resolve the conflict involving the 336 employees, telling him: “I don’t want an explanation. I want you to resolve it. Now! Go resolve it.”

What’s Next for the Motor City? As the trial is winding down, Detroit still confronts a number of obstacles, including individual retirees fighting the city’s plan to eliminate $7 billion in debt and reinvest nearly $1.6 billion into its future fiscal sustainability. They key question for Judge Rhodes will be whether he finds the city’s eighth version of its proposed plan of debt adjustment to be fair, feasible, and in the best interest of its creditors. Should he so find, the Motor City’s Mayor and City Council could conceivably begin some of that investment upon a positive decision.

The New State Settlement Authority. The Michigan Settlement Authority, the newly state-authorized body overseeing distribution of pension aid to Detroit as part of Detroit’s “grand bargain” as incorporated in its bankruptcy exit plan, held its first meeting last Friday in Lansing, where it appointed Michigan State Treasurer Kevin Clinton as chair and acted on various other organizational steps. The Authority was created by PA 141 of 2014 to oversee the State of Michigan’s contribution to the Detroit pension funds as part of the settlement of the Detroit bankruptcy. As created, the board will be responsible for disbursing $195 million of state aid to Detroit’s two pension systems as part of the so-called “grand bargain” which is the cornerstone of the Motor City’s proposed plan of debt adjustment pending before the U.S. Bankruptcy Court. The grand bargain, largely facilitated by U.S. Judge Gerard Rosen, proposes to package approximately $610 million in foundation contributions, to ensure that no Detroit retiree under the city’s debt adjustment—if approved by Judge Steven Rhodes, would fall below the federal poverty level. Treasurer Clinton noted: “This is a small but significant step in the state’s continued support for the City of Detroit and its retirees…Many people and organizations from across the entire state have pulled together and pooled their resources to significantly lessen the potential impact of bankruptcy on current and past city employees.” Michigan is expected to tap its rainy-day fund to make the payment. The $610 million in private contributions, will boost the city’s pensions in exchange for protecting the city’s, or Detroit Institute of Art’s collection, by transferring it into a private trust. The state will begin to disburse its funds only after the federal judge overseeing the case approves the plan of confirmation, according to officials, or, as Treasurer Clinton put it: “This is a small but significant step in the state’s continued support for the City of Detroit and its retirees…Many people and organizations from across the entire state have pulled together and pooled their resources to significantly lessen the potential impact of bankruptcy on current and past city employees.” Other board members are State Budget Director John Roberts and retired bankruptcy attorney I. William Cohen of Huntington Woods. The state is expected to tap its rainy-day fund to make the payment.

Jail Locked Up. The Wayne County Board has voted 12-3 to pass a resolution to reject moving the jail to the Mound Road Correctional Facility, a state-owned former prison property near the outskirts of Detroit, its county seat, likely meaning the County will restart construction on a bond-financed downtown Detroit jail complex which the county abandoned in June 2013, the month Detroit filed for federal bankruptcy protection. The vote came amid cost overruns that have nearly doubled taxpayer costs to $390 million from $220 million, and legal questions after Wayne County sued the original contractor, and three current and former county officials were indicted last month, accused of lying about the jail project costs. Because the proposed jail would hold about 2,000 inmates and is sited just blocks from some of the Motor City’s best-known attractions—and its emerging business center, the decision comes in the face of adamant opposition of Detroit elected, civic, and business leaders apprehensive at the potential adverse economic impact. Wayne County operates three jails and had hoped to save money by consolidating services and costs at one facility in downtown Detroit. Unsurprisingly, the County’s vote drew criticism from prominent Detroit businessman Dan Gilbert, who has offered $50 million to buy the half-built downtown site and related lots. Like Michigan Gov. Rick Snyder, Mr. Gilbert has warned that a downtown jail complex could adversely impact downtown development and economic recovery. The Wayne County vote came just weeks after a grand jury indicted former Wayne County chief financial officer Carla Sledge and two others after an investigation into the project’s financing. Ms. Sledge, who retired in 2013 and left the chilly climes of Michigan for Florida, has been charged with two counts of misconduct in office and two counts of willful neglect of duty: she stands accused of lying to the county board and building authority about the finances of the project.

Getting Ready to Rumble. The Michigan Settlement Authority, a newly created body overseeing distribution of state aid to Detroit as part of the city’s bankruptcy plan of adjustment, has held its first meeting in Lansing, where it named State Treasurer Kevin Clinton as chair and acted on other organizational steps.

Trying to Block the Rolling of the Dice. The four major American professional sports leagues and the NCAA yesterday filed a motion yesterday in New Jersey District Court to stop a newly-signed law by New Jersey Governor Chris Christie as part of his renewed attempt to help the financially distressed city and its critical tax base of casinos by allowing sports betting at Atlantic City’s struggling casinos. Gov. Christie signed into law last week a bill removing state prohibitions on sports betting that proponents said would clear the way for such wagers in New Jersey; however, in their filing, the leagues argued the state law violates a federal ban on sports betting outside a handful of states and would cause them irreparable harm: The federal Sports Protection Act of 1992 made it illegal for state governments, except for those in Oregon, Delaware, Montana, and Nevada, to “sponsor, operate, advertise, promote, license or authorize by law or compact” sports betting. The complaint was filed yesterday in federal court in Trenton, just three days after Gov. Christie signed a revised bill to allow betting on sports at the state’s racetracks and casinos, but in their filing, the leagues complained the new bill is an attempt to end run a 2013 court order that had struck down a previous state law legalizing sports betting in Atlantic City casinos and at the tracks. The renewed push for sports betting arose in the wake of Gov. Christie’s closed-door summit in Atlantic City last month with municipal leaders and casino officials trying to assess how to halt and reverse its seeming slide towards insolvency.

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