How Can a City Reduce Services But Realize Increased revenues?

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December 30, 2014
Visit the project blog: The Municipal Sustainability Project

How can a city reduce public services and increase revenues? One of the most searing challenges for cities in distress is how to balance the need to cut services—but find ways to increase revenues. Indeed, in San Bernardino, city leaders have opted, over the last several years, to cut what they acknowledge are important services, because shrinking municipal revenues have left, seemingly, no other options. Whether in Detroit, Stockton, Central Falls—or any other fiscally distressed city or county—elected leaders, however, recognize that any long-term fiscal plan has to produce increased revenues. Cutting services, after all, is more than likely to reduce the attraction of new businesses or families to want to live there—and, similarly, to hasten the departure of both businesses and families to other municipalities. Such a plan could, of course, mean more efficient and effective collection of revenues (a key issue in Detroit); but in a larger sense it means devising a longer term plan that sets specific plans to increase revenues―but, of course, far easier said than done.

In the case of San Bernardino, the city last summer created a new position: a new deputy city manager, Bill Manis, who was tasked with developing such a plan. Mr. Manis, who began in September, this week reports: “I believe people can see changes already. With the dissolution of the former redevelopment agency, combined with the bankruptcy situation and staff reductions, the economic development function of the city was dormant for a period of time. That has officially changed thanks to the new leadership…We all have a ‘can do’ attitude and a united interest to bring prosperity and interest back to the City of San Bernardino.” But then Mr. Manis noted a few of the steps the city has taken, including: Updating the economic development presence on the city’s website; implementing an “Available Properties” data base for the city; completing the dissolution process for the Successor Agency (Please see inset below for the unique challenges created by the state impacting California’s municipalities.) and marketing projects that were part of the redevelopment agency. Mr. Manis’ plans also include:

On January 10, 2011, Governor Jerry Brown proposed the elimination of all redevelopment agencies (RDAs) throughout the State of California as a component of his budget proposal. Subsequently, on June 29, 2011, Governor Brown signed Assembly Bills 26 (AB1x 26) – a dissolution of all RDAs throughout the state, and Assembly Bill 27 (AB1x 27) – a bill that would create an alternative voluntary redevelopment program, which would allow agencies to continue redevelopment activity by voluntarily authorizing the contribution of tax increment to county auditor-controller offices to benefit education and public safety. On July 18, 2011, the California Redevelopment Association (CRA) and the League of California Cities (League) petitioned the California Supreme Court (Court) for a writ of mandate challenging AB1x 26 and AB1x 27, and a request for a temporary stay of both bills pending resolution of said petition (CRA v. Matosantos). The Court agreed to hear the Case and issued a partial stay; however, on December 29, 2011, the California Supreme Court ruled to uphold Assembly Bill 26 (AB1x 26), ordering the dissolution of all redevelopment agencies throughout the State of California effective February 1, 2012. Consequently, on January 9, 2012, the City of San Bernardino became the Successor Agency to the Redevelopment Agency (RDA) through Resolution 2012-12, whereas the Successor Agency would be responsible to carry out the enforceable obligations and administer the wind down of the former RDA. Furthermore, the City became the Successor of housing functions of the former RDA on January 25, 2012 through Resolution 2012-19. As a result, the City of San Bernardino began implementing its duties as Successor Agency on that date. The Successor Agency to the Redevelopment Agency for the City of San Bernardino will function, with limited authority, according to AB1x 26. The Successor Agency operates under the direction of an Oversight Board, the California State Controller’s Office, and the California Department of Finance.

• Working with the Successor Agency team on the Long-Range Property Management Plan;
• Discussing the need for an Economic Development Strategic Plan with the city manager, mayor and City Council;
• Working closely with the city Manager, Mayor and Common Council on the City’s Homelessness situation;
• Working with San Bernardino County and other partners to apply to be a Promise Zone (a federal designation that would open additional funding opportunities for the city). The application was submitted just before Thanksgiving, and results are expected in early 2015, according to Mr. Manis.
The San Bernardino Sun reports that some of the city’s elected officials believe that bringing in a team to help the city’s development was already paying off, with Councilwoman Virginia Marquez noting: “For a long time, (City Manager) Allen Parker was a one-man shop…Now we’re seeing a lot of things in the works, downtown and elsewhere. It’s really a positive thing.” Councilman Jim Mulvihill added: “It’s not getting all the attention, but we’re putting forward things that are going to make an important difference.” The Sun reports that Art Pearlman, CEO of the Arthur Pearlman Corporation, and who teaches at the Wharton School of Business and the University of Southern California—and who is familiar with San Bernardino’s development difficulties, noted that Mr. Manis is “very, very good at putting people and projects together. He’s a wonderful problem solver — and not everyone is.”

Motor City Deadline. Today is the deadline for Detroit’s low-income retirees to apply for financial assistance which would be vital to offsetting some of the loss in their monthly pension checks as a result of Detroit’s bankruptcy. The State of Michigan began accepting one-time applications this month for the initiative which arose out of the Grand Bargain intended to help supplement pension payments to qualified retirees affected by the city’s federally approved plan of debt adjustment. The Income Stabilization Fund Program was created as part of the bankruptcy resolution: it is intended to prevent eligible retirees from falling below the poverty line as a result of the impending pension cuts. The program allocates $20 million over 14 years for eligible retirees from either of the city’s two pension funds. In order to be eligible, a pensioner must be 60 or older and have an income that is at 140 percent of the 2013 federal poverty level, with the requirements adjusted for the number of dependents, but ranging from no more than an annual income of $16,338 for a single person to $22,022 for a household of two, and $33,390 for a household of four. The city estimates there are an estimated 20,000 retirees in the General Retirement and Detroit Police and Fire Retirement systems who will be affected by pension deductions resulting from the city’s bankruptcy. Under the city’s plan of adjustment, general city workers will take a 4.5 percent base cut in pensions and the elimination of their COLA or annual cost-of-living increase. In addition, the city will seek to recoup $239 million from the optional annuity savings fund accounts of some general city retirees who were credited with interest earnings that exceeded the retirement system’s actual investment returns. The stabilization plan does not cut pensions of police and firefighters, but it does reduce their COLAs from 2.25 percent to about 1 percent. The program is expected to commence on March 1st, when changes are implemented in benefit payments, according to pension officials: Michigan Treasury officials are overseeing the application process and report that, at this point, it is difficult to estimate how many retirees will qualify, since it will be determined on a case-by-case basis depending on adjusted gross income and dependents. But an initial expectation was that it could involve 6,000 to 8,000, according to Treasury spokesman Terry Stanton.

The Challenges in Emerging from Municipal Bankruptcy

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December 19, 2014
Visit the project blog: The Municipal Sustainability Project

T’was the week before Christmas, and all through the year
The progress on municipal sustainability was something to cheer;
From the rhythm guitar of Judges Rosen and Rhodes,
The Motor City seems to be back on its roads;
Stockton, by Judge Klein, has experienced great Deis,
Its sustainable future now could go any which ways.

Credit where credit’s due in the Motor City? Despite Detroit’s successful emergence from the largest municipal bankruptcy in U.S. history, credit rating agency Moody’s yesterday assigned the Motor City a B3 rating (a level six levels below an investment grade rating)—its first post municipal bankruptcy rating—and one that is, as the Bond Buyer notes, at junk bond levels. Moody’s did assign Detroit a stable outlook. Moody’s wrote: “The B3 issuer rating reflects Detroit’s improved credit profile and lower risk of near-term default now that it has emerged from its historic Chapter 9 bankruptcy filing…The improvements include a reduction in long-term liabilities and stronger near-term cash flow, as well as significant management and operational changes that are poised to enhance service delivery and stem population decline.” Nevertheless, the less than rave post-bankruptcy rating reflected the challenges Detroit confronts, including a persistently weak economy, diminished population, and fixed costs related to debt service retiree benefit costs, which are projected to consume a substantial portion of the city’s post-bankruptcy revenues, or as analyst Genevieve Nolan wrote: “Further, the city may face difficulties if it experiences even modest declines in the key revenue streams that support general operations.” Nevertheless, the stable outlook reflects the agency’s expectation that the Motown can resume paying its outstanding debt on time and in full ― and that its plan of adjustment, if fully implemented, will improve the city’s overall cash position and put it on a path of fiscal sustainability. Moody’s opined Detroit could be assigned an upgrade if it experiences economic improvements, material operating surpluses and cash balances, and reduces fixed costs under strong management oversight. In contrast, Moody’s moodily warned it could downgrade the city should its tax base decline, key revenue sources falter, debt levels rise significantly as a percentage of the operating budget, or the city experiences a trend of operating deficits. The ratings were issued just a week after the city successfully emerged from bankruptcy―issuing some $1.28 billion of new debt—debt which its financial advisors noted required novel financing structures to both comply with Michigan municipal law and the strict confines of Chapter 9 creditor settlements.

Schooling a Motor City Recovery? Ingrid Jacques, of the great Detroit News, yesterday noted that pressure is mounting for Detroit Mayor Mike Duggan to assume responsibility for Detroit’s school system, even though, as she noted, Mayor Mike Duggan unsurprisingly says: “I’ve got enough on the my plate right now.” But Ms. Jacques wrote: “Duggan has his hands full. Yet the mayor understands how integral schools are to Detroit’s turnaround. A strong K-12 network of schools is essential to rebuilding a middle class in the city. Without that, Detroit’s future is grim. While the mayor remains cool to the idea of taking on another major challenge, others in his administration have faith in him.” Nonetheless, a top city hall aide told her: “He doesn’t want to take over the schools, but he’ll have to do it…You can’t fix the city without fixing the schools.” But he might not be alone, as Gov. Rick Snyder has also begun to focus on the Motor City’s schools—especially with the term of his third emergency manager set to expire—with little to show for the long state takeover, even, as Ms. Jacques notes that the Governor has “made it clear that he’s not a fan of the Detroit school board regaining more control. But he’s also admitted emergency managers for the district haven’t been as effective as he’d like”—or, as she quotes the Gov.: “‘How do we do a better job of educating kids in Detroit?’” Whilst the Gov. has not directly proposed that Mayor Duggan assume greater oversight of city schools, she writes that he definitely thinks Mayor Duggan should take part in the developing conversation about schools. And, she adds, “[Gov.] Snyder wants the next blueprint for improving schools to come from the community — not him: ‘I want the community to be actively involved in this process.’”

Taking Stock in Stockton. At a hearing yesterday, U.S. Bankruptcy Judge Christopher Klein denied a request from the city’s holdout creditor, Franklin Advisors, to increase the amount Stockton would be required to pay the firm on its claim. Judge Klein’s ruling, which came in the wake of Franklin’s appeal to Judge Klein’s confirmation of Stockton’s plan of debt adjustment and stay on the city’s authority to exit municipal bankruptcy, deferred a final decision until, as the Judge said, he hears arguments on Franklin’s bid for a stay when the city’s plan becomes effective. Franklin continues to challenge the city’s exit plan on the grounds that it took steep cuts while the city’s plan of debt adjustment included no cuts at all in the city’s obligations to the California Public Employees’ Retirement System or CalPERS. The firm had been grouped in a class of creditors with city retirees who are set to receive a similar recovery rate. (Stockton’s plan of debt adjustment approved by Judge Klein did eliminate future health benefits for retirees, for an estimated savings of $545 million for the city.) Franklin argued said that if the retiree health benefits claim were discounted to present day value, the true savings would double; however, Judge Klein said he was not required to discount the claim and denied Franklin’s request. Stockton’s attorneys yesterday said the city’s plan of debt adjustment would go into effect within three weeks.

Yuletide Appeal. The National Association of Bond Lawyers yesterday filed an amicus brief with the 11th U.S. Circuit Court of Appeals in support of Jefferson County’s request that the court take an interlocutory appeal from a ruling of the District Court in Jefferson County v. Bennett, et al. Certain Jefferson County water and sewer ratepayers brought a case in the District Court to appeal the plan of adjustment confirmed by the intrepid U.S. Bankruptcy Judge Thomas Bennett in Jefferson County’s bankruptcy case—an effort which the County sought to have the District Court dismiss as moot, because the bankruptcy confirmation order had been substantially consummated when the county sold $1.8 billion of warrants on December 3, 2013. Although the doctrine of equitable mootness has been established in other chapters of the Bankruptcy Code, this is a case of first impression with respect to Chapter 9. The District Court denied Jefferson County’s motion to dismiss, but did certify the question for an interlocutory appeal to the U.S. 11th Circuit  Court of Appeals. The bond lawyers support the 11th Circuit taking the interlocutory appeal, because, they write, doing so would materially advance the disposition of the case and provide needed guidance to the municipal bond market regarding the finality of substantially consummated Chapter 9 plans of adjustment.

The Unique Federalism of Municipal Bankruptcy

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

Federalism Writ Large

As we observe the interplay of the three different levels of government in addressing municipal bankruptcies across the nation, one of the most striking issues is the extraordinary disparity in state roles and the unforeseen, but extraordinary role of the federal judiciary branch. While the federal municipal bankruptcy law, chapter 9, bars a municipality from eligibility to file for federal protection absent state authorization; the state—if it so authorizes—then can also define how it wishes to play (or not to play). Thus, in the wake of Central Falls, Rhode Island’s bankruptcy filing, the state not only appointed a former Rhode Island Supreme Court Judge, Robert Flanders, to serve as the city’s receiver, but undertook significant state actions to provide intervention and assistance in an effort to help other severely distressed municipalities from having to enter into bankruptcy. Central Falls had served as a wake-up call. In contrast, in the case of Jefferson County, U.S. Bankruptcy Judge Thomas Bennett wrote: “All those who attribute Jefferson County’s bankruptcy case…and plight only to the conduct and actions by the county are ill informed…The State of Alabama and its legislature are a significant, precipitating cause…” In the case of Detroit, the deft (and astute) intervention by U.S. Chief Judge Gerald Rosen appeared to play a unique role in facilitating a significant state role, as Michigan Governor Rick Snyder and bipartisan leaders of the Michigan legislature converted Judge Rosen’s hastily scribbled diagram into what become the so-called “Grand Bargain”—a development that seemed to be the key to the Motor City’s successful exit from bankruptcy. But in California, as in Alabama, the state not only appears to have contributed to some of the severe fiscal stress that precipitated the string of municipal bankruptcies, but also has been virtually irrelevant to any and all efforts to municipal bankruptcy recovery. Rather, it is the federal judiciary—especially in its intermediary role—that seems to be contributing to defining a new, constructive role.

A Friendly Federal Hand. With the judicious assistance of court-appointed mediator, U.S. Judge Gregg Zive of the Federal Bankruptcy Court in Reno, Nevada; San Bernardino finally has what City Attorney Gary Saenz describes as a “work plan” to prepare its plan of adjustment to address not only the city’s 200 creditors, but also to put together its plan of debt adjustment so that San Bernardino could exit bankruptcy and create a path to a sustainable future. Not only that, but the plan has been reviewed by the entire City Council — not just the small team that previously was allowed to know details of the confidential mediation where much of the city’s bankruptcy plan has been ironed out. Mr. Saenz noted: “That [gag]order (by Judge Zive) has now been revised so that Council will now be part of those negotiations and will significantly become a part of bankruptcy team discussions…However, as mediation with creditors continues, your council representatives will be subject to the confidentiality order and will not be at liberty to discuss particulars.” Mr. Saenz said the council will now meet regularly with the bankruptcy team, whereas, previously, the majority of the council was not permitted to be involved in these critical discussions about whether and how to shape the city’s plans to exit municipal bankruptcy and create the architecture for a sustainable future—or, as Councilmember Henry Nickel noted yesterday: “You’re making decisions with very, very incomplete information…That, I think, really inhibits the ability to make fully considered decisions.” Interestingly, Judge Zive’s gag order encompassed not just San Bernardino elected officials, but also U.S. Bankruptcy Judge Meredith Jury. Mr. Saenz yesterday said the City Council met Monday with Management Partners, the consulting company San Bernardino hired last November and which played a key role in helping former Stockton City Manager Bob Deis and the city’s elected officials to put together Stockton’s plan of adjustment—providing the key for the city to successfully exit municipal bankruptcy last month. Thus, Mr. Saenz told the Council: “They now stand united in their pledge and commitment to support the city manager and his team to ensure the work plan is fully executed…We are at this time confidently poised to develop and present a comprehensive recovery plan that will take us through and out of bankruptcy.” Mr. Saenz added: “As we proceed through development of our recovery plan of adjustment, the public will be provided more and more information regarding its particulars, so that, ultimately, all stakeholders, citizens, business community and even creditors will commit to and support the plan.”

Michigan Takes on Urban Blight. Michigan Governor Rick Snyder yesterday announced the state is splitting $75 million in federal funding between 12 cities, including nearly $50 million for Detroit, in its latest effort to take on blight: “This is another important step in Michigan’s comeback, which has become a national example for what can be accomplished when federal, state and city partners work together with a shared vision to solve a problem…As a result of this collaboration, these cities will be better places to live, work, play and invest.” The effort is being funded under the U.S. Department of Treasury’s Hardest Hit Fund program. Last October, the U.S. Treasury approved Michigan State Housing Development Authority’s reallocation of $75 million to its blight elimination program: the $75 million is part of nearly $500 million Michigan was allocated in 2010 through a federal program to help homeowners hit hard by the national housing crisis, with the state creating an evaluation system which includes residential housing vacancies and requiring each applicant municipality to submit blight plans, estimate project costs, and provide a timeline for the work. U.S. Treasury Deputy Secretary Sarah Bloom Raskin noted: “This partnership demonstrates a commitment to revitalizing our cities and to addressing the damaging effects caused by vacant and blighted properties…Removing blighted properties is an important step in stabilizing neighborhoods, and we look forward to continuing our efforts to assist hardest hit communities around the nation.” In its application, the Motor City successfully applied for $50 million of the current $75 million allotment to provide for 3,100 demolitions, or significantly less than 10% of its more than 40,000 vacant structures. (The feds have already has awarded Detroit’s Land Bank $52 million to tear down at least 3,300 of them. Another $420 million — saved by the city as part of its federally approved plan of debt adjustment — also will be used to raze vacant houses and clear lots. The city’s land bank is averaging about 200 demolitions a week. The included communities are: Detroit, $50 million ($47.4 million in second-round funding combined with $2.6 million in reserves from the first round); Lansing, $6 million; Jackson, $5.5 million; Highland Park, $5 million; Inkster, $2.25 million; Ecorse, $2.19 million; Muskegon Heights, $1.8 million; River Rouge, $1.3 million; Port Huron, $1 million; Hamtramck (a municipality wholly within the boundaries of Detroit), $952,000; Ironwood, $675,000; and Adrian, $375,000. According to officials, each blight partner must spend 25 percent of all funds in the first six months, 70 percent of funds within 12 months, and 100 percent within 18 months. U.S. Treasury requirements state any remaining funds as of New Year’s Eve, 2017, must be returned to their office.

Rethinking a Post Municipal Bankruptcy Future

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December 16, 2014
Visit the project blog: The Municipal Sustainability Project

The Motor City Takes on New Debt. U.S. Bankruptcy Judge Steven Rhodes yesterday, during a hearing, ordered Detroit’s legal team and consultants to file final bills within the next week. Judge Rhodes did not issue any clarification or information with regard to the agreement achieved last week to reduce those fees by as much as $25 million, but gave the city until December 27th to make all the information public. By late October, the city’s lead bankruptcy law firm, Jones Day, had charged Detroit $52.3 million; Motor City consulting firm Miller Buckfire has renegotiated its contract with the city twice, most recently in June. In the newest contract, the firm was to receive a flat fee of $28 million for all of its services. The city intends to devote any and all savings achieved to public safety and other essential municipal services. The agreement, achieved under seemingly unrelenting pressure from both Mayor Mike Duggan and Judge Rhodes, pitted the city’s fiscal future against the exceptional costs of financing the city’s exit from municipal bankruptcy—costs that, for the most part, were or are in the process of going from Detroit’s taxpayers out of the city. It is that final, significant export of very large sums that has led Mayor Duggan to express concern about escalating fees consuming scarce resources critical to reinvesting in the Motor City instead of undercutting Detroit’s restructuring plan. The fee issue is complicated, moreover, because the city is likely to rely on some of the firms in its post-bankruptcy recovery process. Judge Rhodes’ decision yesterday came in the wake of four federally mediated sessions with regard to the reasonableness of more than $140 million in fees billed to Detroit by its bankruptcy lawyers and restructuring consultants. Prior to revising its contract, the firm had already given the city a discounted rate, according to former Emergency Manager Kevyn Orr’s office. Orr, himself a former Jones Day attorney, told The Detroit News that the fees may seem high, but he said he did not believe they were out of line for a case of Detroit’s magnitude, reminding the media that the successful plan of debt adjustment will allow Detroit to shed $7 billion in debt and to restructure another $3 billion.

Rechartering the Municipal Future? Meanwhile, in California, where political governance issues have seemingly bedeviled San Bernardino’s efforts to pull together a plan of debt adjustment to present to U.S. Bankruptcy Judge Meredith Jury, members of a citizens committee tasked with reforming the city charter, which had been scheduled to meet today, has been put off until January 6th, according to City Clerk Gigi Hanna. The nine-person committee, appointed by the Mayor and City Council last March, has been charged by the city council with reviewing the city’s 46-page charter: the next opportunity for the city’s voters to consider any recommended changes under California’s laws will be in November 2016. Some of the difficulty the citizens’ committee members confront is what, exactly, the City Council now expects of them—especially in the wake of their previous unanimous recommendation of five amendments to the charter—of which the council voted to put two on last month’s 2014 ballot—of which voters approved one under which terminated city employees are no longer paid while they wait for an appeal of their employment. Another festering issue, on which the citizens’ committee had voted 7-2, was to repeal Section 186, which locks the city into paying police and fire salaries at the average of ten comparably sized cities, albeit, also voting 8-0 to try to clarify that recommendation by tempering what the revised process would be. The citizens committee had also voted to:
• Remove language from the city charter that purports to regulate the San Bernardino City Unified School District (although the district is run independently from the city and is not subject to the charter);
• Add a section providing that the charter should be interpreted in a way that enables the Mayor, City Council, and city manager rather than restricting them, if any of its provisions can be read either way;
• Remove the requirement that terminated employees continue to be paid until they have an opportunity for the Civil Service Board to hear an appeal of the termination. Employees who previously had that right — generally, everyone except management — can still appeal and recoup lost wages if they convince the board they were wrongfully terminated;
• Replace three sections on the procedure for referendums, initiatives, and recalls with a single paragraph providing that the city would run those according to state election code. (Last year San Bernardino lost more than $200,000 in legal fees when it and recall proponents had conflicting interpretations of the charter’s language, and a Superior Court judge sided with the recall proponents.)
Therefore, unsurprisingly, the citizens committee members remain uncertain about exactly what their mission is—much less what authority they have: what exactly is their charge with regard to studying the city’s 46-page charter—especially in the wake the City only acting on two of their previous five recommendations? Now, with two years until the next time voters can legally be asked to consider changes to the charter, committee member Rabbi Hillel Cohn would like to know if their study is still wanted, asking “Have we not ostensibly gone through the charter and those areas that we thought were in need of change or reform, (and) made those recommendations?…What else is there to do?”
With the clock running down, the committee is uncertain whether its mandate is broader and could extend to much more comprehensive questions, such as:
• Should the city’s charter be replaced?
• Should the City Manager’s Office be made stronger at the expense of the mayor’s as is common in other cities?

Post Municipal Bankruptcy Steps

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December 12, 2014

Visit the project blog: The Municipal Sustainability Project

The Motor City Takes on New Debt. On its final day in municipal bankruptcy—and one day before the U.S. House of Representatives, with the White House’s blessing, voted to reverse a key provision of the Dodd-Frank law on financial swaps and derivatives which played such fundamental roles in Jefferson County and Detroit’s municipal bankruptcies, the largest in U.S. history; the Motor City issued $1.28 billion of new municipal debt in an effort to comply with financing requirements of the State of Michigan and provisions of the federal municipal bankruptcy law with regard to creditor settlements. As the remarkable Caitlin Devitt of the Bond Buyer described it: “The four separate bond financings emerged from hours of intense negotiations with creditors, bankruptcy attorneys, and restructuring consultants who didn’t always understand the nuances of municipal finance law.” Most of the bond proceeds were used to pay off creditors, with some to be dedicated to financing Detroit’s restructuring plan. The $287.5 million dollar municipal general obligation bond was the first toe in the water to test sentiment in the wake of the Motor City’s bankruptcy, so the issuance was structured in a way to try and provide greater security for the city’s bondholders than the city had done in previous issuances, with the issuance through the Michigan Finance Authority—here diverting a pledge of some of its property tax millage to a new creditor group, as per its settlement in the bankruptcy with its unlimited tax or so-called ULTGO bond holders. In a separate issuance, the Motor City did a $275 million private placement with Barclays (the only one of the four financings to generate any new revenues for the city), setting a precedent by pledging its income tax revenues as security for the municipal bonds. In addition, the city issued $632 million of limited-tax general obligation or GO bonds which are unsecured, with new interest rates and maturities, to pay off key creditor groups. The Motor City also issued $88 million in certificates of participation (COPs), with the proceeds to be used for the insurers of its COPs or certificates of participation: this debt is to be secured by a pledge of the city’s parking revenues, another first for the city. Each of the four municipal bond offerings was a private placement, placed directly with the creditors and participants; they are refundings to the extent that they replace existing bonds; however, most of the municipal bonds issued represented new credits with new interest rates, maturities, or pledges—in effect, the new Detroit’s first toe in the post-municipal bankruptcy municipal market waters. Adding to the effort—including state support—to undertake this novel financing, the city was able to add additional security through the use of two new pledges: a fourth lien on distributable state aid the Motor City receives from the State of Michigan, as well as by specific language providing that the debt millage raised for the bonds constitutes special revenues.

Testing the Water. In issuing this new debt, Detroit naturally sought feedback from the ratings agencies. In effect, the city is trying to put its toe in the water to determine whether it is safe—or at least not too costly—to return to the U.S. capital markets. It has yet to hear back from S&P, but Moody’s gave the Assured Guaranty-insured portion of the unlimited tax general obligation bonds (UTGO) an underlying rating of A3 with a stable outlook, with the agency noting its rating was based solely on the state aid lien, adding that the Michigan state intercept feature that diverts the state aid directly to the bond trustee was an important factor. The proceeds, more than a quarter of a billion dollars, will be used to pay off the banks that acted as counterparties on the city’s interest-rate swaps, finance a new information technology system, and other capital and operating upgrades as specified in the city’s approved plan of debt adjustment by U.S. Bankruptcy Judge Steven Rhodes. From the proceeds of its $632 million of limited-tax general obligation bonds, which were unsecured, the city will dedicate the proceeds to pay off various creditors: the 30-year bonds have a variable rate structure, with debt at an interest rate of 4% for the first 20 years, and 6% for the final decade. Payments will be interest-only for the first 10 years. The city will use $482 million from the proceeds of its limited tax general obligation bonds to finance the two voluntary employee beneficiary association plans which, under the court approved plan of debt adjustment, will be responsible for overseeing Detroit’s retiree health care, while a portion will be set aside to address potential unsecured creditors with various claims pending against the city. Bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co., holders of Detroit’s $1.5 billion in COPs or certificates of participation, will receive $98 million of the proceeds. These payments—and others—will constitute part of the payments with the two bond insurers, who were the last holdout creditors in the city’s bankruptcy.

Schooling Detroit’s Post-Bankruptcy Future. As we noted yesterday, it is difficult to imagine a significant turnaround in the Motor City’s fiscal future absent a reversal of its nearly two-thirds population decline – and any reversal is almost certain to require a very different perception of its public school system. Now an independent coalition of local business, foundation, religious and community sectors, the Coalition for the Future of Detroit Schoolchildren, has formed to look for ways to try and address—and turn around―Detroit’s long-troubled educational system. The coalition plans to meet regularly over the next 90 days to examine Detroit’s public and charter school systems as well as those operating as part of the Education Achievement Authority; it will examine how the city’s fragmented school systems impact student outcomes and efficiency in operations; it will seek to tap education experts from Detroit and across the country in identifying the best ways to improve the city’s broken education system. The leaders of the 31-member Coalition, which is scheduled to meet next week, include: Skillman Foundation President and CEO Tonya Allen; the Rev. Wendell Anthony, Fellowship Chapel and president of the Detroit branch of the NAACP; David Hecker, president of AFT Michigan/AFL-CIO; John Rakolta Jr., CEO of Walbridge Aldinger Co.; and Angela Reyes, executive director of Detroit Hispanic Development Corp. The coalition reports it plans during the next 90 days to issue its findings and make recommendations for making Detroit’s school system more equitable, accessible, and successful for all Detroit children, or, as Ms. Allen stated: “We share a common belief that Detroiters should have a say in coming up with solutions that can make Detroit schools work for kids, and that now, as the city is recovering in so many other ways, is the time to make real change happen.” The coalition’s efforts, so very critical for Detroit’s future economic revival hopes, are critical—as the term for the state-appointed emergency manager for the Detroit Public School system expires next month. Mr. Rakolta yesterday put it well: “… Detroit is on the road to economic recovery, but it won’t be a real recovery if people don’t have confidence in the city’s education system, Detroit’s vitality and global competitiveness is linked to its schools, which are educating our future workforce.”

The Road to the Motor City’s Sustainable Future?

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December 11, 2014
Visit the project blog: The Municipal Sustainability Project

The Motor City Takes the Checkered Flag. “We’re going to start fresh tomorrow and do the best we can to deliver the kind of services people expect,” Motor City Mayor Mike Duggan said yesterday at a press conference with Michigan Governor Rick Snyder and outgoing Detroit Emergency Manager Kevyn Orr, with the announcement that the largest municipal bankruptcy in the history of the U.S. officially ended at 12:01 AM this morning—triggering the commencement of U.S. Bankruptcy Judge Steven Rhodes’ approval of the city’s plan of debt adjustment, including payments to bond insurers and other creditors as part of the settlement of $12 billion of debt. The announcement also signaled the formal transfer of power back to the city’s own elected officials—and, likely, more careful studies of the lessons learned, albeit, as Governor Snyder said yesterday at the press conference: “This was truly unique, and no one should draw precedents from this in terms of other Michigan municipalities…Don’t plan on bankruptcy as part of your planning process…but in this case, we had a unique outcome that’s very positive.” Mayor Duggan stated that while this was the end of a long and draining process, it marked the beginning of the task of improving the city: “We’ve got to rebuild a water department, a bus department, computers, and a financial system.” Indeed, the task looking ahead is likely to prove far more challenging than the months of bankruptcy, because the city faces not just a mountain of legal and consulting fees to pay for the costs of getting out of bankruptcy, but also the task of constructing a sustainable fiscal future. Nevertheless, Mayor Duggan expressed great optimism: “If the city hits all the budget targets, and we successfully raise revenues in multiple areas over 10 years, there will be $1.7 billion in new services…“It’s a framework that says we’ll be able to provide services that people in a city our size expect.” Outgoing (yes, a pun) Mr. Orr yesterday said his parting would be bittersweet: “We’ve been working toward this point so this is a culmination…The city is moving forward and that gives me a great deal of pride and satisfaction,” adding that officials will spend the next day or two filing final documents, including transferring payments to creditors. The Motor City will also close a $275 million exit financing with Barclays and issue $280 million of bonds to help pay off creditors. He was also clear that it ain’t over until it’s over: federal court-ordered mediation over the contested, enormous attorney and consulting fees continues. For his part, Gov. Snyder yesterday claimed the state’s emergency manager process is working in other Michigan municipalities that are now or have been under state control: “We’ve exited Benton Harbor and Pontiac successfully, and we’re talking about exiting Flint in the next few months…So we’re seeing success through the whole emergency manager process and having people working together.” At the same time, however the Governor said he is of the view that the state has controlled the troubled Detroit Public Schools system for too long (six years and counting), and that officials need to figure out how to improve the city’s schools as part of its overall recovery, noting: “This is a case where emergency managers have not been as effective as they have been in municipalities.” Indeed, it is difficult to imagine Detroit’s ability to reverse the outmigration of residents that contributed so significantly to its bankruptcy absent the perception of a solid public school system.

The Draining Costs of Municipal Bankruptcy. While the Motor City has officially benefited from a federal process which permitted the city to eliminate nearly $7 billion of its debts, the city and its taxpayers still confront large and growing costs to non-Detroit lawyers, consultants, and others―costs, moreover, that are projected to continue to rise in the coming months, even as the city is struggling to get back on its feet and direct its resources to the city’s future. So, even though most of those costs it owes to its creditors were expected to be resolved by late last night, U.S. Bankruptcy Judge Steven Rhodes has some additional work to do before he can retire to his rhythm guitar, with more court hearings where Detroit’s attorneys will seek to protect the city’s fisc in dealing not only with individual creditors, but also with the big kahunas, such as Ernst & Young and Conway MacKenzie, two of the major firms that have provided financial and restructuring guidance. Mayor Duggan last month warned the city’s taxpayers that total fees paid to law firms such as Jones Day and consultants who have represented the city and retirees in Detroit’s historic bankruptcy could be in the $200-million range. It is those costs, much of which would go to non-Detroit recipients, who have been the subject of federally mediated talks that began earlier this month and resumed yesterday, with the mediation confidential under the order of Judge Rhodes. Mr. Orr yesterday noted that some attorneys will have to stay on to deal with the remainder of the issues in Detroit’s bankruptcy, but that the burden of assessing those costs and benefits will now shift to Mayor Duggan and the City Council to decide whether and how long to retain financial consultants—experts, according to the mayor, who are helping the city manage cash flow, but whom he intends, ultimately, to replace with municipal employees in a revamped finance and budget operations shop under the stewardship of the city’s CFO John Hill. The federally approved plan of debt adjustment set aside a reserve of $177 million to pay fees for lawyers and consultants—or, as Mr. Orr described it yesterday: “It’s a lot of money.”

Roller Coaster. The governance roller coaster ride in San Bernardino, a city in its 29th month of municipal bankruptcy, that is risking the city’s ability to focus on completing and submitting its plan of debt adjustment by the deadline imposed by U.S. Bankruptcy Judge Meredith Jury continued this week, with the fate of the City Manager, Allen Parker—whom Mayor Carey Davis had asked to resign―safe for now in the wake of a closed-session performance evaluation yesterday—a session to which Mr. Parker was not invited. The Council called for the closed-door session in the wake of Mr. Parker’s refusal of Mayor Davis’ request that he resign—in part, it seems, because of frustration at the slow pace of putting together the city’s plan of debt adjustment to get approved for submission to Judge Jury. Mayor Davis’ request, however, did not seem to sit well with the Council: a two-thirds vote from which marks the threshold. A majority of the Council have said publicly the mayor’s request was premature and that Mr. Parker should not be held solely accountable for the bankruptcy’s pace. The vote marked the second in a week to indicate increasing tension within the city’s elected leadership, coming shortly after the Council formally rejected an extension to the contract of his chief of staff, Michael Mckinney—even though Mayor Davis said: “One had nothing to do with the other one…They are completely unrelated, and if there’s anyone that is trying to connect the two, it is absolutely incorrect.” Yesterday’s session marked another day of difficulty in obtaining the consensus which will be critical if the city is to put together a plan of debt adjustment, with Councilmember Henry Nickel noting: “I think it was a teachable moment for the mayor…I think it was two hours of (asking) what is a fair way to evaluate (Manager Parker). It is my firm belief that we are the policymakers. I think it’s still difficult for some from, say, the corporate world, to understand how that works if you haven’t been in public office for any length of time.”

Governor Clears Detroit to Exit Bankruptcy

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December 10, 2014

Visit the project blog: The Municipal Sustainability Project

At Last! Gov. Rick Snyder has accepted a recommendation from Detroit’s emergency manager, Kevyn Orr, that the Motown municipal bankruptcy is over and the city is set to rise again. In a letter to city’s financial crisis has ended and it should emerge from receivership. Gov. Orr wrote back yesterday to accept Mr. Orr’s resignation and said he would announce today that the city’s financial emergency is officially over—meaning that he will use his unique authority under the state’s Public Act 436 to lift the city’s financial emergency status. The news comes as U.S. Bankruptcy Judge Steven Rhodes has scheduled a federal court hearing next Monday to determine Detroit’s official bankruptcy exit date—which will be the date Mr. Orr’s termination will take effect. In his epistle to the Governor, Mr. Orr wrote the city had taken “significant steps” to restructure its finances and operations, writing: “Over the past 16 months, the Chapter 9 process has allowed the city to take and implement critical steps towards restructuring its existing obligations and lay[ing] the foundation for substantial reinvestment in the city — that is, to correct in a sustainable fashion the financial conditions that prompted my appointment.” Mr. Orr noted the extraordinary challenges, including its inability to service its debt and provide core services to residents. He also lists the critical settlements, restructuring, oversight and funding commitments forged through bankruptcy, that he says will enable the city to retain its financial and operating recovery for years to come. In his announcement yesterday, Gov. Snyder noted: “While there is clearly much more to do to ensure the citizens of Detroit have a necessary level of service, there is a remarkable improvement in the lives of citizens that clearly supports a finding that receivership should be ended upon the city’s exit from bankruptcy.”

For his part, Mr. Orr noted that “[R]eaching the effective date of the plan of adjustment is a milestone, but it also is just one step in a journey…There remains much work for the city to complete and much yet to accomplish. I hope and firmly believe that the city’s leadership can continue to build on the solid foundation the restructuring process has created for them….If the city takes advantage of this unique opportunity to shed the problems of the past and stays on the path that has been blazed in the restructuring, Detroit is poised to grow and thrive for the benefit of its residents and this state for many years to come.” Mr. Orr is optimistic that the Motor City will realize a fiscal surplus of about $100 million by the end of FY2015—a sharp turnaround from the $300 million-plus deficit the city faced when I met with him just after his appointment in Detroit last year. More importantly, Mr. Orr said Detroit will realize a positive cash flow and it will have the benefit of established financial practices. Nevertheless, Mayor Mike Duggan was more cautious, warning that the surplus is largely based on “one-time accounting issues related to the bankruptcy,” and that it is unclear that new, additional revenues will be pouring over the transom yet, although the city is currently projecting it will realize approximately $1 billion in revenue annually, but spend in the range of $960 million-$970 million annually.

What Is the Role of States in Municipal Bankruptcy?

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December 9, 2014
Visit the project blog: The Municipal Sustainability Project

The Federalism Differences in Municipal Bankruptcy

Municipal bankruptcy is unique in that it is authorized in federal law—but only if a state enacts legislation providing the right for a municipality to seek federal bankruptcy protection through the federal court system. Unsurprisingly, between the 12 states that specifically authorize municipal bankruptcies, the 12 which conditionally authorize municipal bankruptcies (and the three with limited authorization); states have created very different models. A key difference has to do with governance: does the state authorization retain municipal decision-making or governance authority—or does it usurp it? And, now with greater experience from the post-Great Recession spate of municipal bankruptcies, are there lessons to be learned from the different choices?

As the issue of governance appears to be disrupting San Bernardino’s ability to achieve consensus on how to agree upon a plan of debt adjustment to present to U.S. Bankruptcy Judge Meredith Jury—indeed now taking so long that Judge Jury has imposed a May 30 deadline—the governing dysfunction is threatening not only to add to the costs to the city and its taxpayers, but also raises the question about whether the Michigan and Rhode Island models which provide for the appointment of a receiver or an emergency manager might not offer greater efficiency and celerity to enabling a municipality to get back onto its own two feet. In California, as in Alabama, the respective state enabling statutes leave the respective municipally elected leaders to remain in charge. But it is the fraying process in San Bernardino―where the City Council has set a special meeting for tonight to discuss the performance of City Manager Allen Parker in closed session, in the wake of Mr. Parker’s refusal of Mayor Carey Davis’s request that he resign―where we can begin to see some questions emerge.

San Bernardino filed for federal bankruptcy protection under chapter 9 of the United States Bankruptcy Code on August 1, 2012 (The case was filed in the Court’s Riverside Division and was assigned case number 6:12-bk-28006.), or more than 28 months ago—so that a growing tab has been accruing and taking away from resources vital to not only providing essential public services, but also for investing in the city’s future. In contrast, Detroit exited in seven months and Central Falls, Rhode Island, in just over 13 months—compared to Stockton’s 15 months, and Jefferson County’s 23 months.

The comparisons bear consideration, because of the very different models: Under Rhode Island’s municipal bankruptcy enabling legislation, the Governor may appoint a receiver; in Michigan, the Governor appoints an emergency manager: in Michigan and Rhode Island, therefore, the respective municipalities’ elected leaders were effectively stripped of any governing authority. In contrast, in Jefferson County, Stockton, Vallejo, and San Bernardino; the respective Mayors and Councils remained in power with full responsibility for pulling together and putting into effect—with the federal bankruptcy court’s approval — so-called plans of debt adjustment in order to obtain U.S. judicial approval to exit municipal bankruptcy.

The process of putting together a proposed municipal bankruptcy plan of adjustment has now consumed so much time that U.S. Bankruptcy Judge Meredith Jury has taken the unprecedented step of imposing a deadline for the city to submit such a plan. In the seeming soap opera in San Bernardino, the City Council last week rebuffed Mayor Davis when it refused to extend his chief of staff’s contract. City Manager Parker said Mayor Davis asked him to advocate for the chief of staff, but he said that would be inappropriate. Thus, the attempt to force out the San Bernardino City Manager days later appeared like retaliation to many, including Councilman Fred Shorett, who notes: “Anyone would be really hard-pressed to think this isn’t somehow retaliatory or somehow connected to Monday night’s vote…I just find that hard to believe.” The chief of staff, Michael McKinney, did not respond to calls from the press last night, but earlier said the Mayor would not comment, because it was a confidential personnel matter. Similarly, City Council members have said they cannot comment; nor, it seems, will City Attorney Gary Saenz.

For his part, Mr. Parker said he would not have a problem working for a mayor who had requested his resignation, but he said it was important for the Mayor and Council to get on the same page: “What’s important to me is that the council and mayor continue to work together…Obviously, I’d like to continue be part of the team. I think that having them working together is more critical…There obviously was a schism that became apparent at Monday’s meeting, and that needs to be worked through by the Council and the Mayor.” Under San Bernardino’s city charter, the city manager can only be dismissed at the request of the mayor—together with a two-thirds vote of the City Council. The discussion evaluating Manager Parker’s performance will be private, but it will be preceded by an opportunity for members of the public to give their thoughts, this evening.

Is the Music Returning to Motown?

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December 8, 2014

Visit the project blog: The Municipal Sustainability Project

The Unmanageable Challenges of Municipal Bankruptcy. San Bernardino Mayor Carey Davis stunned City Manager Allen Parker last Friday by requesting his resignation and blaming him for the slow progress in the city’s bankruptcy case―and Mr. Parker refused to quit. Indeed, under San Bernardino’s charter, the city manager may only be legally removed by the City Council at the request of the mayor—a request now anticipated for next Monday’s closed session, with Mayor Davis not commenting on the reasons, because, according to his chief of staff, it is a personnel matter. Meanwhile, Manager Parker said a number of factors had impeded the city’s progress in putting together its bankruptcy plan of adjustment, and that the mayor had not previously expressed dissatisfaction with his work: “There’s a lot of things that could be going on that I have no knowledge of. I don’t know…I was a little shocked when he said that to me because it absolutely came out of nowhere. My hope is I have enough credibility with the council that they’ll keep me on.” Last summer, two City Council members had requested a performance review of Mr. Parker in the wake of both the manager and then-City Finance Director David Cain missing the final budget hearing because of a scheduled vacation; however, that evaluation never happened—in part, it seems, because, according to Mr. Parker, he was never given written standards by which to judge his performance. City Councilman John Valdivia, who put the request for an evaluation on the closed-session agenda that month, said: “I think the time to act was then, but (Mayor Davis) didn’t have his bearings on the issue and didn’t bother to ask my opinion of where I was going with it…Fast forward six months, and the mayor’s deciding in a vacuum we need new leadership.” Councilmember Valdivia said he needed to hear the Mayor’s perspective and mull it over before deciding whether he should be asked to leave; yet he also wonders whether this was the best time to eliminate the top non-elective position: “We had David Cain leave: he was the director of finance; and we’ve had a few mid-level managers, then McKinney (Michael McKinney, Mayor Davis’ former Chief of Staff)…What does this mean for the [city’s municipal] bankruptcy?” Mayor Davis was rebuffed by the council last week, when it voted 5-2 against extending Mr. McKinney’s contract. Mr. Parker said the Mayor had asked him to advocate for Mr. McKinney to the council, but that he felt such action would have been inappropriate, adding the Mayor was “blaming me for the state of the bankruptcy that we haven’t pulled out yet, etc. etc….I’m taking him at face value. However, I think the Mayor is in error. I find it very difficult to attribute the state of the city’s bankruptcy to me. It took a long time to get into bankruptcy.”

Windy City Municipal Bankruptcy Blues. At its 101st annual league meeting, the Illinois Municipal League in held a session, “Finance: Lessons from Detroit and Pension Cases,” leading Better Government Association writers Andrew Schroedter and Patrick Rehkamp to note: “At the very least, these leaders are now, more than ever before, openly questioning if bankruptcy is a viable option to reorganize or slash their growing financial obligations, including public pensions for retirees and current workers,” even though—absent a change in state law—Illinois municipalities have very limited authority to seek such federal relief. Nevertheless, the increasing concerns about fiscal sustainability—especially on the public pension front—and the proximity of the events in Detroit have led to greater discussion in the league and in Springfield in the state legislature about options to modify the current Illinois law. Rockford Mayor Larry Morrissey, the elected leader of the state’s third largest city, has emerged as a strong proponent of bringing Illinois’ chapter 9 law in line with Michigan’s and many other states, noting: “I’m a big advocate of giving municipalities the same tools that have helped the private sector bounce back and reset…If it’s good enough for Chrysler and GM to restructure and become profitable again, it should be good enough for municipalities.” It appears that mounting public pension obligations, combined with flat or declining municipal tax revenues, are forcing municipalities into increasingly fiscally unsustainable futures. In the short term, they have little option but to sharply reduce public services, increase fees and taxes, and increase their debt load via increased borrowing. Last summer, the Illinois Better Government Association, after completing a review of the finances of 217 police and fire pension funds in suburban Cook County with collective assets of nearly $5 billion, determined the funds had a collective unfunded liability of $3.3 billion. Moreover, the Association’s research led it to find that dozens of these municipal funds are in immediate financial peril. However, absent judicial or state legislative changes, Illinois elected municipal officials lack any legal authority to make and implement public pension changes to reform the local police and fire pension systems. According to the Association, Rockford’s unfunded pension and post-employment benefit liabilities increased 15 percent to $217.4 million in 2013, from $188.8 million in 2008, even as the city’s pension contributions increased, records show. In Cook County, the most populous local jurisdiction in the state and the home to 40 percent of all Illinois residents, and the second largest county in the nation, with a population larger than that of 29 states—not to mention the quasi-parent of some 135 incorporated municipalities partially or wholly within its boundaries―the Association reports municipal fire and police pension debt is spiking, even as governments dump more cash into the systems, leaving less to spend on parks, roads and other important assets: thus, pressing the state legislators to create a clearer option for municipal bankruptcy protection has risen on the Illinois League’s radar screen. Nevertheless, the legislation to remove some of the obstacles offered by Illinois Sen. Kimberly Lightford with support from the Illinois Municipal League failed to garner much support; nor, it appears, does there seem to be a groundswell of support to reintroduce the bill.

Good Gnus? Maybe, with Motown scheduled to exit municipal bankruptcy as early as today and Emergency Manager Kevyn Orr to actually go home to suburban Maryland and reacquaint himself with his family, there is some good news: The Detroit Free Press reports that, at least in and around downtown Detroit, rents are rising, because the demand for apartments at all price ranges in downtown, Midtown and Corktown that still exceeds the supply of available units, and that’s despite what the paper describes as “a mini-boom of construction and building rehabs,” adding: “According to local experts, the going rent for newly built or newly restored Class A apartments is up to about $1.70 per square foot in Midtown and $2 per square foot in downtown. It was only five years ago that $1.25 was a common number.” Sue Mosey, president of the nonprofit Midtown Detroit Inc. notes that tenants in existing market-rate buildings in Midtown experienced rent hikes this year averaging about 5% and about 14% over the past three years. Landlords raised rents 3% to 10% this year in some market-rate apartment buildings as new, high-profile redevelopment projects opened with rents that “would have been unimaginable just three years ago.” The Free Press reports the momentum is carrying over into Detroit’s once-stalled condo market, which experienced similar price increases this year and saw the conversion of some former rental units—leading one tenant—who is paying $1,415 a month for a roughly 670-square-foot one-bedroom unit and a parking spot―to label the per-square-foot price “outrageous.” The condo market in greater downtown Detroit is also regaining momentum that it lost in the recession, when half-sold buildings had to convert vacant units to rentals. Now many of those rentals are going back up for sale, or, as Austin Black, the founder and president of City Living Detroit brokerage, put it: “The rents are going up to the point that many people now renting are converting over to ownership…At $2 a square foot that is $2,000 a month for a 1,000-square-foot unit, and you can get a decent condo with that kind of money.” One of the biggest Motor City projects in the pipeline is Orleans Landing, which calls for 278 apartments in 19 all-new buildings that will rise along the riverfront east of the Renaissance Center: its developer, McCormack Baron Salazar of St. Louis, is also a partner with Midtown Inc. for a total renovation of the old Strathmore Hotel in Midtown on Alexandrine Street into 129 units. (40% or more will be set aside as affordable.)
How Detroit rents compare:

■New or newly renovated building in Midtown Detroit: $1.70 per square foot
■Newly renovated in downtown Detroit: $2 per square foot
■New or newly renovated in downtown Cleveland: $1.75 per square foot, $2 for high-end building
■Typical rent in downtown Cincinnati: $1.50 to $1.70 per square foot, $2 for new construction
■Newly renovated in downtown Toledo: about $1 per square foot
■Average rent in downtown Chicago: $2.66 per square foot, $2.80 and above for luxury

The Long (seemingly unending) & Costly Road of Municipal Bankruptcy

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December 4, 2014
Visit the project blog: The Municipal Sustainability Project

The Seemingly Unforgiveable Costs of Municipal Bankruptcy. Motor City Mayor Mike Duggan yesterday confirmed that Detroit will have to pay more than $20 million to investment banking firm Miller Buckfire & Co. for its work in Detroit’s municipal bankruptcy in line with the company’s contract, renegotiated last June by Kevyn Orr, which specified the firm be paid a flat $28 million fee for its services in negotiating agreements tied to city water and sewer debt and securing Detroit loans to finance the city’s operations during its municipal bankruptcy and meet some of its obligations to creditors. Mr. Orr’s spokesperson, Bill Nowling, told the Detroit News that Miller Buckfire has been working for the city below “market rate for restructuring services,” adding that the fact the firm twice renegotiated its contract “is unusual for banks to do,” and telling the News that had Detroit been a regular customer, it likely would have owed upwards of $100 million. The numbers matter, because U.S. Bankruptcy Judge Steven Rhodes has given Mayor Duggan standing to challenge the legal bills. For his part, Mayor Duggan yesterday said: “We are in mediation and I’m under a gag order…I’ve expressed my opinion that I think the bills are too high, that they need to come down. There are huge dollars at stake.” As of late October, the bankrupt city had paid Miller Buckfire $5.76 million for its services, which have included negotiating debt settlements with financial creditors and pursuing opportunities for monetizing the city’s water department. Mr. Nowling noted the valuable services rendered by the firm in securing exit (from bankruptcy) financing and a quality of life loan at market rate, and with regard to assisting Detroit to restructure its debt on the Detroit Water and Sewer Department municipal bonds at a “substantial savings,” noting: “This is all a result of the work of our investment bank,” noting that refinancing its debt at a lower interest rate saved the city almost $2 billion in interest payments. Meanwhile, Jones Day, the city’s lead bankruptcy law firm, had billed Detroit $52.3 million as of late October, while Detroit’s accounting firm, Ernst & Young, billed the city some $19.9 million, and restructuring firm Conway MacKenzie billed Detroit’s taxpayers $17.2 million in fees. Mayor Duggan yesterday indicated he has been advised that just the tab for Detroit for legal fees will be at least $177 million before the city’s bankruptcy is over—and assuming there is not, as in Jefferson County (please see below) appeals: “That is money that is not going to services for the people of the city of Detroit…So I didn’t think those numbers were reasonable. In mediation, we’re going to see how the process plays out and I really can’t say anything.” As of late October, the city had $140 million in bills for attorneys and consultants, $130 million of which had already been paid out, according to a city report.

The Costly & Seemingly Unending Process of Exiting Municipal Bankruptcy. U.S. District Judge Sharon Blackburn yesterday ruled that Jefferson County can appeal her refusal to reject a lawsuit appealing the county’s approved plan of debt adjustment by a group of unhappy sewer customers. In successfully securing approval from U.S. Bankruptcy Judge Thomas Bennett a year ago yesterday―after completing the refinancing of its sewer debt, which was the linchpin of its exit plan, a group made up mostly of local elected officials appealed Judge Bennett’s decision to approve the county’s chapter plan of debt adjustment, telling the federal court the plan would impose unreasonably higher rates for sewer customers for decades to come. In response, Jefferson County had sought to have Judge Blackburn reject the appeal—in large part because, they pled, the appeal was moot, since the county’s bankruptcy exit plan had already been implemented. Judge Blackburn, however, wrote, in rejecting the County’s position: “The fact that the (bankruptcy) Confirmation Order has taken effect ― the new sewer warrants have issued and the old sewer warrants have been retired ― does not extinguish the controversy, although it may limit the scope of relief available.” In her order, however, Judge Blackburn gave permission for Jefferson County to make an interlocutory appeal to the 11th Circuit Court of Appeals with regard to whether the sewer ratepayers’ challenge of U.S. Bankruptcy Judge Bennett’s confirmation of the bankruptcy exit plan is moot, “either constitutionally, statutorily, and/or equitably,” based on consummation of the plan or the sewer customers’ failure to obtain a stay of the sewer refinancing pending appeal. Judge Blackburn, however, acknowledged in her order that an immediate appeal by Jefferson County of her September order could accelerate resolution of the sewer customers’ appeal, “especially if the Circuit Court finds in favor of the County, thus ending the ratepayers’ (sewer customers’) appeal of the Confirmation Order. Although some issues will remain, the heart of the ratepayers’ dispute concerns the constitutionality of certain terms of the confirmation order.” Judge Blackburn, however, denied a separate request by the county to certify another issue for interlocutory appeal – whether, under constitutional and federal law, and without the county’s consent, a federal judge has the authority to strike a selected provision of a Chapter 9 plan of adjustment (the county’s bankruptcy exit plan). Judge Blackburn, in her September order, had ruled that she legally could scrap the schedule for future sewer rate increases called for under that plan. Similarly, in her September ruling, Judge Blackburn had acknowledged that Jefferson County had already issued new sewer warrants to retire the outstanding debt, and that some parts of the county’s approved bankruptcy recovery plan “may be impossible to reverse;” nevertheless, Judge Blackburn had rejected the county’s contention that the appeal was moot just because it had been largely consummated; in addition, she had written she would consider the constitutionality of the plan that cedes the county’s future authority to set sewer rates to the bankruptcy court—in effect the cornerstone of Jefferson County’s exit plan, especially in the wake of its issuance of $1.8 billion of sewer refunding warrants to write down $3.2 billion of outstanding sewer debt in order to exit the nation’s second-largest municipal bankruptcy. Thus, Judge Blackburn, in her opinion, wrote that Jefferson County may frame its appeal to the 11th U.S. Circuit Court of Appeal to ask “whether the ratepayers’ appeal of the confirmation order is moot either constitutionally, statutorily, and/or equitably,” because the plan had been consummated. In addition, Judge Blackburn determined that the appellate court could decide if the appeal were moot because the ratepayers failed to obtain a stay from the U.S. bankruptcy court that would have delayed implementation of the plan as they sought an appeal. Jefferson County Commissioner Jimmie Stephens, who was reelected last month along with four other board members who were involved in the bankruptcy filing—and who was selected by his colleagues on the Board as Board President last month, noted: “Jefferson County looks forward to a speedy resolution of this matter.” The ever prescient godfather of municipal bankruptcy Jim Spiotto noted that the issue before the 11th Circuit is whether federal bankruptcy courts, in confirming a municipal bankruptcy plan of adjustment, can be the final determiner of issues that involve certain rights of citizens and state powers over utilities rates if the plan is not stayed on appeal and implemented, noting that in recent Chapter 11 court decisions, judges have determined that issues on appeal are moot after implementation of a plan that has not been stayed by the court. In addition, he noted there are also provisions in the federal bankruptcy code guiding Chapter 11 cases with respect to state regulatory approval of utility rates under state law. Those cases require that a utility commission approve of rate changes in a confirmed plan or that the plan be subject to the commission’s approval—noting that on the municipal or chapter 9 side of the aisle, Judge Blackburn’s decision seeks to clarify the limits of the federal bankruptcy court’s jurisdiction over sewer rates set by elected leaders of local governments: “The district court appears to be saying that you have constitutional and state statutory rights, and you have the 10th Amendment limitation over the jurisdiction of the bankruptcy court in Chapter 9 as opposed to Chapter 11, therefore can constitutional or a state statutory issue be mooted by the bankruptcy court’s confirmation of a plan and the implementation of that plan precluding any review at the district court or appellate level…The plan [of adjustment] just can’t run over those rights given the limitations of the jurisdiction of the bankruptcy court regarding constitutional and state statutory issues.”

Rethinking State Tax Policies & Transportation Finance. The FBI yesterday charged the Puerto Rico Highways and Transportation Authority Treasurer Silvino Cepeda-Ortiz with accepting bribes―just one day after the Puerto Rico House of Representatives had passed a bill bringing Puerto Rico closer to selling a $2.9 billion bond to support the authority. Mr. Cepeda-Ortiz was charged in United States District Court in San Juan with bribery concerning programs receiving federal funds: according to U.S. Attorney Rosa Emilia Rodríguez-Vélez in Puerto Rico, he solicited and received two kickbacks of $5,000 each for contracts with the authority. Ms. Rodríguez-Vélez stated: “Public officials who abuse their positions of trust for personal financial benefits, undermine the integrity of our public agencies and the availability of federal funds used to finance important projects, such as our highway infrastructure…We will not relent in our efforts to combat this type of corrupt scheme, whereby a public official requests bribes in order to pay for services duly rendered by third parties to an agency.” The arrest came in the wake of an FBI raid last week on the Puerto Rico Aqueduct and Sewer Authority headquarters in which no arrests were made and in the wake of this week’s action by the Puerto Rico House of Representatives to pass, 26-23, a bill to prop up the transportation authority through an oil tax increase. (The tax raise will increase taxes per barrel of oil to $15.50 from $9.25.) Currently all the tax goes to the PRHTA. Revenue from the new higher tax would go to the PRHTA, the Puerto Rico Infrastructure Finance Authority and the Integrated Transportation Authority, which operates Puerto Rico’s public transportation. If the legislation is adopted by the Senate and signed into law, Puerto Rico will replace its existing sales and use tax with a value added tax, paving the way for the territory to finance its commitment to eliminate income taxes for individuals with incomes of less than $35,000 or families with incomes less than $70,000.If adopted, in future years the tax would be adjusted upward for inflation.

Gambling on a City’s Future. Atlantic City Mayor Don Guardian is scheduled to address a New Jersey Assembly committee about the city’s future and the gambling industry—a city which is on the precipice of bankruptcy in the wake of experiencing some 8,000 workers lose their jobs so far this year after four of the city’s 12 casinos closed. Garden State Senate President Stephen Sweeney and state Sen. James Whalen have proposed a plan that would give the city certain revenue and casinos predictable tax bills: the plan would let casinos collectively pay $150 million in lieu of taxes for two years, and then $120 million a year after that, assuming gambling revenue stays at a certain level. As the aptly named Mayor Guardian prepares to testify this morning, New Jersey’s political and business leaders have become increasingly engaged in discussion about the future of New Jersey’s gaming industry and Atlantic City in particular. Yesterday, New Jersey Senate President Stephen Sweeney introduced several bills as part of these ongoing efforts to address the transitions in Atlantic City and New Jersey’s gaming industry, including:
• S2572 – Major Changes to Casino Property Taxes: Atlantic City’s casinos pay the majority share of the city’s property taxes, based on the assessed value of the property. Over the last several years, many casinos have successfully appealed the assessed value of their properties, because of the sharp downturn in Atlantic City’s gaming market—ergo, the amount of property tax revenues to the City of Atlantic City (which then must distribute a share to the School District and Atlantic County) has declined. The bill would dramatically change the property tax structure for Atlantic City casinos: It would provide that every casino property in Atlantic City would be exempt from traditional property taxes: the casinos will be organized into the Casino Operators’ PILOT Council (PILOT standing for Payment In Lieu Of Taxes). The members of the Council would agree to make a PILOT payment to the City of $120 million in 2015, adjusted for inflation thereafter. However, if annual gross gaming revenue were between $2.6 billion and $3 billion, the PILOT payment would increase to $130 million; $150 million if revenue were between $3 billion and $3.4 billion; and $165 million if revenue were between $3.4 billion and $3.8 billion. If revenue fell below $2.2 billion, the amount would be proportionally decreased.(Each casino’s share of the payment would be calculated by a formula that takes into account, in equal parts, (a) the amount of land in acres owned by the casino; (b) the number of hotel rooms and (c) the property’s gross gaming revenue. For next year and 2016 only the casinos would be obligated to pay an additional $30 million per year. If new casinos open or existing casinos close, the formula would be adjusted to reflect that.
• S2573 – Mandatory Health Benefits for Casino Employees: would require that a casino licensee submit proof to the Division of Gaming Enforcement that “all agreements it has entered into with each majority representative of its employees for collective bargaining purposes provide for suitable health care benefits and suitable retirement benefits for all full-time employees covered by such agreements.”
• S2574 – Aid to Schools: this bill would create a new form of state aid called Commercial Value Stabilization Aid: this aid would be made available to the Atlantic City school district. If the Commissioner of Education determined, based on a needs assessment, that the aid were warranted, then the Commissioner could authorize state aid to defer the school portion of the municipal tax levy. This aid would only be available until such time as assessed property values in Atlantic City return to the levels they were at in 2008.
• S2575 – Reallocation of Investment Alternative Tax: this bill would reallocate Casino Reinvestment Development Authority (CRDA). Currently, in addition to an 8% gross revenue tax, Atlantic City casinos pay 1.25% of gross gaming revenue to the CRDA. Until 2011, the funds collected by CRDA were used to invest in various projects around the state. Since that time, the funds are to be used exclusively to fund projects in Atlantic City. This bill would reallocate all CRDA funds paid by casinos to the City of Atlantic City for the next 15 years and would require that the City use those funds exclusively to pay down its municipal debt.
• S2576 – Elimination of the Atlantic City Alliance: this bill would eliminate this non-profit corporation funded by the casinos to serve as a public-private partnership to market Atlantic City.

When it Rains, it Pours. Garden State Superior Court Judge Julio Mendez yesterday ruled that Atlantic County’s government broke its own pay-to-play rules by giving a contract to an accounting firm that made political contributions to the county sheriff in his 2013 campaign for the state Senate. Judge Julio Mendez also disqualified Ford-Scott & Associates from receiving any contracts from Atlantic County for four years, but denied county Democrats’ request to block payment for work on a county auditing contract that the Ocean City-based firm has already finished. Judge Mendez, in his ruling, found “that the political contributions made by Ford-Scott to the State Senate campaign of Sheriff (Frank) Balles are subject” to the county’s pay-to-play ban, which the Board of Chosen Freeholders passed in 2007. The decision came in the wake of the suit by County Democratic leaders last May, claiming that the $4,600 contribution by Ford-Scott to a county official and an $88,000 county auditing contract for the firm violated Atlantic County’s 2007 pay-to-play law—a law, which they said was designed to ban the practice of rewarding political donors with government contracts.