Democracy & The Challenges It can Create to Municipal Bankruptcy Recovery & Sustainability

Democracy & Its Challenges to Recovery. Because of the unique governance and federalism involved with municipal bankruptcy, where a city or county may only file for federal protection—and then only if it complies with the laws and procedures dictated by the state enabling act, each city or county’s situation can be unique. In addition, of course, the role a state plays may also be a significant, contributing factor—so that, for instance, in Rhode Island and Michigan, local elected officials were preempted from any role; rather state-appointed emergency managers exercised the equivalent of dictatorial powers, but, in each state, the state itself evolved into roles of significantly contributing to resolution and eventual approval of the respective municipalities’ plans of debt adjustment by the federal courts. In stark contrast, in Alabama and California, there are no such provisions: in effect the municipalities (Jefferson County in Alabama; Vallejo, Stockton, San Bernardino, etc.) were or are left on their own to put together plans of debt adjustment. Indeed, if anything, as U.S. Bankruptcy Judge Thomas Bennett wrote in the case of Jefferson County with regard to its—at the time—largest municipal bankruptcy in the nation’s history: “The state of Alabama and its legislators are a significant, precipitating cause. Both before and after filing for its chapter 9 case, the county’s revenue-seeking activities with Alabama have been to no avail.” Thus, with a federally imposed May 30th deadline to put together its plan of debt adjustment for the U.S. Bankruptcy court, San Bernardino’s elected officials are working harder and harder through the democratic (small d) process to try through public hearings and legislating to put together a long-term strategic plan that would, in turn, create the foundation for the city’s plan of adjustment and the foundation for its fiscal and economic future. In effect, its elected leaders are seeking to put together a strategic plan which will articulate, via input from the community and guidance from leaders in the community, just where should the city be heading…and, in effect, laying the foundation for the city’s proposed Plan of Adjustment: the financial plan to set the City on course to realize those plans. So there are politics, art, and fiscal science or alchemy to determine—in a democratic process—how to return to solvency, reduce the factors that contributed to the insolvency, and agree upon a fiscal blueprint for a sustainable future. Absolutely unlike Detroit, that means the city’s leaders must figure out how to, in effect, construct a political or social infrastructure, or community involvement and leadership, so that the community itself takes ownership in this precipitous road ahead. Judge Bennett told me that one of his greatest concerns in the Jefferson County case was the absence of the county’s taxpayers from a key role in helping the county put together its exit plan—but of course, compared to Central Falls and Detroit, where taxpayers were totally excluded, Jefferson County and the California municipalities demonstrate the dual, challenging road of elected officials. Thus, in San Bernardino, the strategic plan will articulate, via input from the community and guidance from leaders in the community, just where the City should be heading. The city’s plan of adjustment will provide the financial plan to set the city on course to realize those plans. The goal is to, through this messy process of democracy, put together a process and plan about being service solvent again―in San Bernardino’s case, a plan modeled on similar strategic planning efforts by the county and San Bernardino City Unified School District, so that it will heavily borrow from the school district’s contacts and resources and require extensive meeting with the public. Or, as City Attorney Gary Saenz puts it: “We’re going to require a significant amount of engagement from all stakeholders — residents; businesses; important institutions, for example the school district…We’ve been under a gag order for much of this case… but we want to involve many more people now.” To date, work on the bankruptcy exit plan or plan of adjustment, which will expand on a usual municipal budget, detailing how the city’s creditors will be treated and include a 20-year forecast for the city — has been done behind closed doors—especially because of the pre-exiting gag order which expired at the end of last month and prohibited much of the information related to that plan from even being disclosed to City Council members. Now, with all seven council members privy to the information, Mayor Carey Davis has made clear the time for public involvement is coming: “We can’t have the strategic plan and the Plan of Adjustment pulling in two different directions,” noting that if the community wants the city’s focus to be on increasing education or reducing crime, the city’s plan of adjustment will need to fund those areas appropriately. According to San Bernardino’s timeline, a draft of the plan of adjustment will first be presented to the City Council — in closed session — in April, with the first public hearing in May. In the nonce, work will continue in parallel on the strategic plan, which is intended to be a longer-term plan of how the city should progress beyond bankruptcy and to be updated regularly. Mayor Davis reports his goal is to have four stakeholder meetings open to the public, followed by a “state of the city” in late February or early March.

San Bernardino’s Plan of Debt Adjustment Schedule
January, February
• Brief mediation judge
• Assess city organization
• Benchmark against other similar cities
• Develop staff recommendations for Recovery Plan
• Refine cost of Recovery Plan
• Develop components of Plan of Adjustment
• Check in with City Council collectively and individually
• Begin community engagement and strategic planning process
• Mediation and negotiation with creditors
March
• Finalize strategic planning/community engagement and integrate with preliminary Plan of Adjustment
• Mediation and negotiation with creditors
April
• Presentation of draft Plan of Adjustment to City Council in closed session
• Refinement of Plan of Adjustment
• Mediation and negotiation with creditors
• Ongoing public communication regarding Plan of Adjustment process
May
• Hold a public hearing on Plan of Adjustment and adopt it
• Submit the Plan of Adjustment to bankruptcy court
Source: City of San Bernardino

More Sticker Shock in the Motor City. Lazard, the global financial advisor representing city retirees during Detroit’s municipal bankruptcy, defended its fees yesterday, claiming it ate a $6 million bonus that had been promised if the city successfully exited bankruptcy court. The firm’s filing detailed the reduction the firm accepted during closed-door negotiations in the wake of Mayor Mike Duggan’s frustration about the threat that high fees could derail Detroit’s plan of debt adjustment—and waylay the city’s fiscal future sustainability. The action came with yesterday’s deadline for the vast array of the Motor City’s bankruptcy lawyers and consultants to justify the approximately $170 million in fees they have charged the city’s taxpayers—and for the ever patient U.S. Bankruptcy Judge Steven Rhodes to determine whether such charges are, in fact, reasonable. In a remarkable irony, Lazard was represented publicly by Ron Bloom, the former Obama administration auto czar. In its filing, Lazard claimed it accepted a 37 percent pay cut, which reduced its fees to $5.56 million, down from $8.44 million—under its contract with the city, Detroit was bound to pay the firm $175,000 a month plus a $6 million “success fee” payable if Detroit successfully exited bankruptcy court. The Segal Group Inc., a human resources and benefits consulting firm, also submitted a filing yesterday to defend its fees for its actuarial services to both the retiree committee and city. The firm advised the federal court that, when asked to cut its fees, it met in mediation with the city and “quickly agreed to a reduction of $99,000,” adding: “We believe that our billed amounts, coupled with the agreed-upon reduction of $99,000, were appropriate professional fees for sophisticated, high-level work that contributed significantly to the Retiree Committee’s acceptance of the Plan of Adjustment and to the successful resolution of the bankruptcy in a timeframe much shorter than initially anticipated.” The retiree committee retained Segal in September 2013 to provide consulting: Segal was initially responsible for providing financial analysis of the proposed changes to the pension and retiree health care benefits and to educate the committee on the impacts, but, as the bankruptcy progressed, the firm’s attorney yesterday told Judge Rhodes: “Our role was significantly expanded to include advising the city and serving as the pension expert at trial…We gave the Detroit bankruptcy engagement the highest priority, forfeiting other client opportunities.” In addition, Segal claimed that prior to agreeing to cuts in mediation, it had already provided a “substantial discount” in its fee structure, noting in its filing concessions of 14 percent in its overall bill of $3.9 million, not including the $99,000 reduction. Detroit’s legal and accounting tab came to some $170.2 million before a state reimbursement of $5.29 million: among the heaviest costs: the city’s lead law firm, Jones Day, at $57.9 million; investment banking firm Miller Buckfire, $22.82 million; restructuring firm Ernst & Young, $20.22 million; and operational restructuring firm Conway MacKenzie, $17.28 million. Dentons US LLP, a law firm that represented the official committee of city retirees, received $15.41 million. The city’s two pension funds paid attorneys at Clark Hill $6.25 million and financial advisers at Greenhill & Co. $5.71 million. The filing shows bankruptcy mediators were paid $980,000, although none of the money went to federal judges who served on the mediation team. Most of the money went to mediator Eugene Driker’s law firm.

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