Officially Exiting Municipal Bankruptcy

November 25, 2014

Visit the project blog: The Municipal Sustainability Project 

Escaping from Municipal Bankruptcy. Detroit’s bankruptcy attorney Heather Lennox yesterday testified to U.S. Bankruptcy Judge Steven Rhodes that the Motor City will not officially end its bankruptcy before December 8th, telling the court that Mayor Mike Duggan and the City Council still must revise its two-year budget to incorporate the spending plans outlined in its plan of debt adjustment or bankruptcy structuring plan—an action which she said would pave the way for the completion of financing to fund key creditor settlements. Therefore, Judge Rhodes did not set an effective exit date. In addition, the city must also release detailed information about its debt restructuring plan to the municipal market before it can complete the settlements tied to the plan of adjustment, which will allow the city to eliminate $7 billion in liabilities and reinvest $1.7 billion over 10 years in key, municipal services. Ms. Lennox testified that the city expects to resolve remaining issues this week―including approval by the State of Michigan on agreements with Detroit bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co. under which the two will be finalizing proposals to develop city property as part of their settlements with the city—in part financed with nearly $100 million in city-issued taxable limited-tax general obligation (LTGO) bonds, which Detroit intends to pay off over the next dozen years with municipal parking revenues. In addition, the Motor City will allocate some $632 million of 30-year taxable LTGO bonds to various creditors, with the majority of the bonds going to voluntary employee beneficiary associations created under the bankruptcy plan to fund retiree healthcare. These bonds will carry 4 percent interest rates for the first 20 years, increasing to 6 percent for the last 10, with no principal payments for 10 years, according to Reuters. The state will also step in, lending its higher credit rating, for two other debt issuances via the Michigan Finance Authority to help finance the costs to Detroit to exit from its chapter 9 municipal bankruptcy—an issuance of nearly $300 million in tax-exempt and taxable LTGO municipal bonds secured by a statutory lien on Detroit’s municipal income tax revenue. The city must exit bankruptcy by the end of the year to ensure the grand bargain, which preserves the Detroit Institute of Arts and reduces pension cuts, stays intact.

Pensionary Considerations. Several processes are already under way to execute Detroit’s plan of debt adjustment to exit municipal bankruptcy. The state’s Financial Review Commission, which will have the power to reject Detroit’s spending and borrowing plans for at least a decade, has launched unofficial meetings. The city’s pensioners will receive a mailing in early December which will contain details on how to apply for income assistance if pension cuts will put them below the poverty line, according to state attorney Steven Howell. Pension cuts will take effect March 1. At yesterday’s session, advisers to Detroit’s two pension funds argued that they should not be subject to court-imposed scrutiny for the fees they earned during the bankruptcy case, with Robert Gordon, one adviser, testifying that the pension funds are independent of the city and should not be subject to fee examiner Robert Fishman’s review process. Mark Shapiro, an attorney for Greenhill, the pension funds’ financial adviser is set to receive a $3.55-million payment when the city exits bankruptcy. The testimony is at issue, because Judge Rhodes is reconsidering subjecting the pension fund advisers to the fee review process after previously deciding that their fees may cause the city of Detroit to pay more to fund pensions over the next decade. Ms. Lennox urged Judge Rhodes’ review, because, she testified, “the city is the sole bearer of those costs,” because the fees widen Detroit’s pension shortfall: “It matters not that the city doesn’t pay invoices directly.”

State Monitoring. The state oversight board, the Michigan Financial Review Commission, which will monitor Detroit’s finances after the city officially emerges from bankruptcy, has established its schedule of monthly meetings through which, with the able assistance of New York City financial guru Dick Ravitch, it will help make sure the city stays on solid financial footing. The nine-member state financial review commission will meet the fourth Monday of every month from 2:30 to 3:30 p.m. The commission includes five appointees of Gov. Rick Snyder, along with state Treasurer Kevin Clinton, state budget director John Roberts, Detroit Mayor Mike Duggan, and City Council President Brenda Jones. Under state law, the commission will have oversight of Detroit’s finances for at least 13 years, although the commission could go dormant if Detroit meets terms of its bankruptcy exit plan and keeps its budgets balanced three years in succession. The commission’s role could be significant: it includes broad powers to approve or reject city contracts, budgets, spending and labor contracts. The commission’s next meeting is from 9 a.m.-noon Dec. 5 at the Cadillac Place offices—meetings which are open to the public. The state commission, which was created as part of the “grand bargain,’ under which the state ponied up $195 million to help leverage the city out of bankruptcy, includes five gubernatorial appointees, of which three of Governor Rick Snyder’s are from Detroit. The commission has authority to approve Detroit’s four-year budgets, approve sizeable contracts, approve collective bargaining agreements, and report to the Governor twice a year for the next 13 years. The nine-member commission, the product of discussions involving U.S. Chief Judge Gerald Rosen, the Detroit Institute of Arts, and Governor Snyder and key, bipartisan legislators, is intended to protect nearly $200 million in state funding to Detroit by ensuring that city leaders budget money responsibly―in effect taking on a politically difficult role by risking any perception that it might be interfering with the ability of Detroit’s democratically elected officials to run the city. In this task, however, it is ably assisted by Dick Ravitch, whose experience as part of New York City’s state oversight board and previous service to U.S. Bankruptcy Judge Steven Rhodes gives the commission broad experience and perspective. In addition, under pressure from Mayor Duggan and Council President Brenda Jones, the Detroit City Council also has a representative on the commission, as well as a gubernatorial non-Detroit resident appointee. The commission is to receive $900,000 from this year’s state treasury budget for operations.

Hiring an Architect. San Bernardino has just hired former Stockton city manager, Bob Deis, who ably served on our Friday afternoon panel on “Lessons learned from Municipal Bankruptcy” at the National League of City’s Congress of Cities in Austin, and who is regarded as the architect of Stockton’s plan of adjustment approved last month by U.S. Bankruptcy Judge Christopher Klein. Mr. Deis was hired by the City of San Bernardino to help develop its plan of debt adjustment to exit municipal bankruptcy by the new deadline set by federal bankruptcy Judge Meredith Jury. The San Bernardino city council voted 6-to-1 to award a $300,000 contract to Management Partners, which under the direction of Mr. Deis worked on the Stockton “plan of adjustment” to cut debt and exit bankruptcy. The signing came in the wake of a court filing last week which officially revealed, after a mediator lifted a gag order, that under an agreement set last June, San Bernardino has begun repaying skipped payments of $13.5 million plus fees and interest to the CalPERS–and that the city will not reduce its pension payments to CalPERS as part of its proposed plan of debt adjustment. San Bernardino has, however, filed a notice with Judge Jury’s bankruptcy court noting that: “Just recently, the city and the retiree committee reached a tentative agreement regarding modifications to retiree health benefits, contingent upon the parties reaching an overall agreement on plan treatment of retiree claims.” Mr. Deis retired as the Stockton city manager last November and joined Management Partners in May. The consulting firm worked with San Bernardino from 2007 to 2011. Our George Mason University study last year reported that San Bernardino’s annual per capita income, $15,762, was about half of the state average, $29,634, and the city had “committed to salaries and pensions that were neither proportionate nor sustainable.”

Gambling on a City’s Future. Atlantic City’s precarious fiscal situation could be further clouded by some $119 million in municipal debt for a power plant serving the closed and forlorn Revel Casino, which, itself having rolled the dice, now appears to be nearing default. Demonstrating the complexity of state-local relations, Bloomberg reports that investors who rolled the dice in investing in the casino are scheduled to receive a $6.9 million interest payment next Tuesday—a payment related to municipal debt issued by the New Jersey Economic development Authority in 2011 to help finance a facility to keep the lights on and the air conditioners running at the now bedimming Revel Casino, its sole customer. The power plant in September reported it may have to file for bankruptcy itself, as Revel did last June. Or as the fabulous Matt Fabian of Municipal Market Advisors puts it: “It looks like (municipal) bondholders were tying their fortunes to the casino, and that was an unfortunate bet.” The souring bets, Moody’s this week opined: “signal continued deterioration of the city’s taxable base and are credit negative” for Atlantic City, writing that “Prospective purchasers of the Bonds should make an investment decision based on their assessment of the ability of Revel to operate the hotel and casino and to generate sufficient revenues to meet its obligations….“If the Resort, including the hotel and casino, or the retail shops cease operations, or if they are transferred to ownership other than Revel, there is no assurance that there will be a need for the energy produced by the Project Facility or that subsequent owners will not obtain required energy elsewhere.”

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