November 7, 2014
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Motor City Gets the Checkered Flag. U.S. Bankruptcy Judge Steven Rhodes, noting that “[T]his city is insolvent and desperately needs to fix its future,” this afternoon approved the City of Detroit’s plan of adjustment, ending the largest municipal bankruptcy in American history. Judge Rhodes, in his statement, reminded the court of the importance of the law, enacted under former President Ronald Reagan’s signature in 1988: “In Chapter 9 of the United States Bankruptcy Code, the federal government provides help” to cities,” he said: “Today this federal bankruptcy court grants that help…the court confirms the plan,” in effect determining the Motor City’s plan to be fair and feasible, and overruling the objections of a handful of retirees who still opposed it. The city, which, under emergency manager Kevyn Orr filed for federal bankruptcy protection a year ago last July, had—at that filing, listed $18 billion in liabilities. This afternoon, finding the city’s 8th and final version of its proposed plan to eliminate more than $7 billion in unsecured liabilities and reinvest some $1.4 billion over the next decade into a sustainable fiscal future for the Motor City to be equitable and feasible, the approval clears the way for the city – under state oversight – to eliminate close to 74% of its unsecured debt, a fiscal step that will free up critical resources to invest in a revitalized future, including investments to ensure much greater efficiency in the city’s essential public services. Judge Rhodes termed Detroit’s settlement with its retirees a nearly “miraculous” outcome. He overruled all objections to the city’s plan. In the end, thanks to the extraordinary and bipartisan leadership by Michigan Governor Rick Snyder and leaders of the Michigan legislature—together with foundations and the unrelenting work of Chief U.S. Judge Gerard Rosen―all of the city’s major creditors agreeing to support the plan of adjustment. The city is expected to officially emerge from bankruptcy within weeks. In some ways it almost seemed as Judge Rhodes had managed the kind of rhythm of his Indubitable Equivalents band to bring the disparate elements together in a process that last about 15 months. Detroit’s foundations this afternoon issued a statement acknowledging the sacrifice and innovative leadership of Detroit’s public unions: “It would not have been possible without the leadership and sacrifice shown by Detroit’s hardworking retirees and public sector unions, whose continued commitment to a better Detroit should be honored and acknowledged today…Today is a day of determination for Detroit. With Judge Rhodes’ confirmation, the city and its residents can focus on the important tasks of rebuilding institutions, repairing communities, reinvigorating the economy and restoring the trust of its citizens.”
The key to this afternoon’s decision came in the wake of a different outcome last week in Stockton, where U.S. Bankruptcy Judge Christopher Klein in effect rejected the objection of one of that California city’s major creditors in approving its plan of debt adjustment: In Detroit, the key remaining holdout creditors, municipal bond insurers Syncora and Financial Guaranty Insurance Co., dropped their objections to the city’s plan because, they claimed and argued repeatedly during the case that the city’s plan was illegal because it favored pensioners over other creditors. However, under the continued ministrations of Judge Rosen, the two firms dropped their objections after reaching settlements in the midst of what was a twenty-four day trial, including 41 witnesses and 2,327 exhibits on the viability of the city’s evolving plan of debt adjustment—so that, by this week, all the city’s major creditors backed the plan, including the U.S. government-appointed Official Committee of Retirees, Detroit’s two pension funds, its two major retiree associations, all of the city’s unions, and two global banks, UBS and Bank of America Merrill Lynch. General pensioners, who voted overwhelmingly to support the plan approved today, will receive reductions of 4.5% cuts to their monthly checks, the elimination of annual cost-of-living-adjustment (COLA) increases, and a clawback in excessive interest from annuity savings. Police and fire pensioners will experience a reduction in their COLA increases.
Transition. The successful outcome this afternoon will mark another chapter in governance—ending the tenure of the Michigan appointment of Kevyn Orr as the Motor City’s emergency manager—a position which Mr. Orr held for 18 months, before restoring power and authority to the city’s elected leaders, Mayor Mike Duggan and the City Council in September, even while he stayed at the helm to shepherd the city’s bankruptcy case through the federal court. Nevertheless, the city will remain under state oversight for at least a decade, overseen by a Financial Review Commission — mostly controlled by gubernatorial appointees — to oversee the city’s finances. In addition, an investment committee will oversee decisions made by the city’s two pension boards. The Commission will have the power to veto the Mayor and Council’s spending and debt decisions. In addition, Judge Rhodes will hold a status conference hearing on the implementation of his order.
The Grand Wizard of municipal bankruptcy, James Spiotto, with whom I worked for many years to ensure passage of chapter 9 and its signing into public law under President Reagan, (Mr. Spiotto today serves as the managing director at Chicago’s Chapman Strategic Advisors LLC) noted some of the unique features of Detroit’s case, including its success in pressing the city utility’s water and sewer bondholders to make sacrifices, even though their debt was guaranteed by the Detroit Water and Sewer Authority, which was not in bankruptcy and has demonstrated an uninterrupted record of paying its debt on time. Detroit was also successful in forcing bondholders who held debt tied to property taxes to agree to take less than they were owed, something that municipal bond investors had assumed a bankruptcy court would never permit.