December 11, 2014
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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.”