Rethinking a Post Municipal Bankruptcy Future

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December 16, 2014
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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?

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