Exiting Municipal Bankruptcy

October 30, 2014
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Stockton Exits Municipal Bankruptcy. U.S. Bankruptcy Judge Christopher Klein this afternoon approved Stockton bankruptcy plan of debt adjustment, saying he was “satisfied that [its] plan of debt adjustment has been proposed in good faith.” His decision comes 28 months after the financially desperate city first declared itself to be insolvent. The federal judge said he would not issue written findings, but he allowed the parties to request additional findings. In issuing his approval, the federal judge in effect protected the California Public Retirement System (CalPERS) from taking any haircut, while imposing steep cuts on the city’s lone holdout creditor Franklin Investments—so a very different plan than Detroit, where U.S. Bankruptcy Judge Steven Rhodes is scheduled to announce his opinion next week. In his ruling, Judge Klein noted that employees have already agreed to pay cuts and other concessions, and that retirees were stripped of their medical plans. If the city were to reduce its pensions to free up cash for Franklin Templeton, workers and retirees would, he said, be “the real victims.” In the Motor City’s plan, accepted by its retirees, there are modest cuts in the retirement pensions and steep post-retirement health care cuts. Unlike Detroit, Stockton, despite the green light from Judge Klein, did not propose any reductions in its payments to CalPERS. Indeed, in his ruling this afternoon, Judge Klein noted that the real creditors impacted in such a ruling would be the city’s retirees, who gave up retiree health care benefits valued at more than a half-billion dollars during the bankruptcy. A status conference will be convened in Judge Klein’s courtroom at 11 am on December 10th.

Judge Klein’s ruling brings to an end a trial that began last May 12th—and rang up some $10 million in legal fees. The city reports says it saved $2 billion through agreements with creditors, employee groups, and retirees in putting together its final plan of debt adjustment that was reached before the start of the trial. The city gained Judge Klein’s confirmation today despite never reaching a settlement with Franklin Templeton Investments, which lent the city $35 million in 2009. Stockton’s plan of adjustment to exit bankruptcy called for Franklin to receive only a $300,000 repayment of $32 million in still-outstanding unsecured debt. Judge Klein this afternoon said he was not persuaded by Franklin’s argument that it was being treated unfairly in the city’s bankruptcy exit plan, overruling objections from investor Franklin Advisers that it was being unfairly treated in the city’s bankruptcy exit plan, noting he would enter judgment on the adversary part of the proceeding (concerning value of Franklin’s secured claim). Stockton’s attorneys will have drafted a proposed conference order and adversary proceeding judgment by next week. In the plan, the city’s retiree health care claim is set at $545 million, but Judge Klein said he would consider motions on adjusting the amount. In one area of continuing disagreement—the fee issue, Stockton and Franklin disagree, with Franklin arguing that all fees be disclosed in detail and city saying (notwithstanding what Judge Rhodes has done in his Detroit case). Chapter 9 does not provide for court oversight of the fees unless the parties request it. Judge Klein said §Sec 429 of the federal bankruptcy code requires statements from attorneys, but it does not apply to Chapter 9 municipal bankruptcy cases. §43(b) applies to disclosure of future payments, not past, despite disclosures made by Stockton last May of its fees and expenses. Stockton’s leaders were thrilled with this afternoon’s decision, which they said will enable the city to move forward after years of financial crisis: “We are on a more stable financial footing,” said City Manager Kurt Wilson, adding that police officers and other city employees have been leaving Stockton, in part because of uncertainty over their pensions and the city’s financial troubles. He believes the exodus will now stop: “That’s going to be a very big help for us.”

Left uncertain is whether Franklin Templeton Investments, with whom there is a nearly unbridgeable chasm over some $32 million in unsecured debt―will appeal. That loan was to finance construction of a fire station, upgrade the city’s police communications center, and build parks and streets at a time when the city’s finances already were careening toward disaster when the loan was made in 2009―on which the city’s now federally approved plan will mean Franklin will receive only about $300,000, or less than 1 cent on the dollar—in stark contrast to the city’s plan’s commitment to 100 cents on the dollar to the California Public Employees’ Retirement System of CalPERS. Nor is it clear how municipal credit rating agencies will react: In the wake of Judge Klein’s earlier oral opinion, credit rating agency Moody’s termed it “a positive sign for investors (in state and local municipal bonds) that pension obligations will not be given preferential treatment over debt in a municipal bankruptcy,” with Moody’s adding that it could prompt other stressed municipalities to “consider bankruptcy as a way of trimming unaffordable and growing pension burdens.”

Combatting Blight. Louis Aguilar of the Detroit News, this morning provided us with a bird’s eye view of a new and innovative version of the sharing economy, writing about how the “war on blight” has spread beyond Detroit into Hamtramck and Highland Park—cities within Detroit’s boundaries, and could soon expand to other Michigan cities. The two cities are undertaking their first comprehensive attempts to count the number of blighted properties within their boundaries. Like Detroit, the two municipalities have lost tens of thousands of residents, so they each have dozens and dozens of burned-out homes and abandoned buildings—sites which have become havens for squatters, crime, and unpaid property taxes—and where assessed property values have disappeared. Highland Park, where Henry Ford built his first auto plant in what was then known as the “City of Trees” today counts part of that former Model T plant amongst its estimated 3,000 empty buildings in the city―which make up nearly 50% of the structures left. The bleak fiscal shape of the two municipalities’ treasuries have made even the task of counting their respective abandoned homes and buildings beyond reach—but now, thanks to generous grants from the Kresge and Skillman foundations, and a Detroit startup company that invented something called “blexting,” such a goal is now obtainable; so last week, Highland Park and Hamtramck teamed up with the Motor City Mapping project, which paved the way for 20 workers to go out with camera phones and tablets and survey every parcel in each city. The funding was provided by the foundations, with support from the nonprofit Data Driven Detroit and Detroit-based business Rock Ventures. The Motor City Mapping project was conceived by startup Loveland Technologies, which has been exploring ways to digitize Detroit’s property information and make the data available to the public. Blexting (blexting) was used in the historic Motor City Mapping project (www.motorcitymapping.org), which surveyed all 380,000 properties in the City of Detroit, using the app to take photos of every parcel and answering a series of questions about each — about 6,700 in Hamtramck and 6,600 in Highland Park. The program, to be run by the Michigan State Housing Development Authority, will work in Detroit, Ecorse, Hamtramck, Highland Park, Inkster, and River Rouge in Wayne County as well as Adrian, Ironwood, Jackson, Lansing, Muskegon Heights and Port Huron.


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