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.

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The Challenges in Emerging from Municipal Bankruptcy

eBlog

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

eBlog

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.