February 3, 2014
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Getting Ready to Roll. Today is not just scheduled to be frigid in Atlantic City, but also a critical day for the city to test the credit markets—as it seeks to refinance $12.8 million in debt due today—a task made more challenging with its quasi two headed leadership uncertainty between Mayor Don Guardian and the State of New Jersey. The Mayor has scheduled a special Atlantic City Council meeting for this morning to vote on repayment of the $12.8 million, which has a 1.75 percent interest rate and was used to pay for repairs after Hurricane Sandy in 2012. With Gov. Christie in the United Kingdom, it will be Mayor Guardian who reports he will be arranging an agreement to sell $12 million in short-term notes—after reporting at a statewide Republican convention that his city had been unable to sell the debt until receiving three offers last Friday―one in which the interest rate was too high, another which required the city to pledge state aid, and the winner—albeit he declined to give specifics of the offer or say which banks were involved. Of the three lenders who had expressed interest in making the loan, one wanted to charge 12 percent interest, another was willing to lend at a lower rate but wanted a state guarantee, which the state rejected, according to Mayor Guardian. The Mayor reported the City Council will vote today on a separate plan by which the city would come up with $800,000 to cover the final portion of the one-year notes that have come due, adding that Atlantic City could have repaid the full loan with cash—and was unwilling to accept loan terms deemed too expensive, adding: “It’s a great interest rate given our situation…We had a verbal agreement on Saturday and it should be coming through tonight or tomorrow morning and we’ll sign it.” The last minute refinancing comes in the wake of last week’s downgrading by Moody’s of $344 million in Atlantic City debt to Caa1 from Ba1, with the credit rating agency citing Governor Christie’s decision to install an emergency-management team that includes Kevin Lavin and Kevyn Orr.
The Role of Leadership in Recovering from Municipal Bankruptcy. Motor City Mayor Duggan, who is scheduled to deliver his State of the City address a week from this evening, was left to skipper a ship he had neither built nor set the course for when U.S. Bankruptcy Judge Steven Rhodes approved former emergency manager Kevyn Orr’s plan of debt adjustment early this winter. A key difference among the states which have enacted legislation permitting municipalities to file for federal bankruptcy protection is with regard to whether—as in, say Alabama or California―the municipal elected leaders remain in command, or, as in say Michigan or Rhode Island―where the Governor designates a receiver (Rhode Island) or emergency manager, as in Michigan. Thus, for Mayor Duggan, he has been thrust into the unique position of implementing a recovery plan of debt adjustment—under state oversight—on which he—as the chief elected official—was given no role. That is a remarkable challenge. Nevertheless, as Amy Haimerl of Crain’s this week writes, Mayor Duggan has already earned high marks—even as the challenges now turn more complex. She writes:
Mike Duggan has juice. In his first year as Detroit mayor, he has shown that he’s got the power to move the intractable, to make the impossible possible. He’s got a way to make people believe, to step in line. When he stood up at his invocation last January and told the gathered crowd “we are not going to tolerate this kind of service in the city of Detroit,” it stood in ovation, agreeing and believing. One week in, the mayor had already impressed by getting trash picked up and roads plowed during a polar vortex. That required classic Duggan: a tactical mind, a no-nonsense demeanor and a willingness to play enforcer. He assumes anything can get done, and holds those around him to the same exacting standards he sets for himself.
He is also a man who lionizes the underdog, the one who speaks truth to power. But now he is the mayor. He is the power. And he doesn’t always appreciate truth-telling.
Ms. Hammerl beautifully quotes one executive who, understandably, was unwilling to be named, writing: “‘The mayor gets the highest marks from me…But he’s a tough S.O.B., and I wouldn’t want to be on the wrong side of him,’” noting that the Mayor “arguably has more to deal with than any mayor in America and, so far, he’s excelling at triaging the problems and pushing forward on solutions. But with speed comes the risk of haste and missteps.” Unsurprisingly, there is considerable anticipation – now that his feet are snow-broken—about what his long-term vision for the Motor City is—and, critically, how he will take on the still intractable problems. At the same time, Ms. Hammerl noted another integral part of municipal crisis leadership, quoting the CEO of the Kresge Foundation, Rip Rapson, referring to the Mayor: “He has rebalanced the machinery of democratic governance…The fact that we now take for granted the relationship between the mayor and council is nothing short of astounding. There was so much residual bitterness, and he navigated us to a place where it seems normal and right. If he’d accomplished nothing but that in his first year, it would have been a success.”
It is amazing, really, to think about. In Washington, where dysfunction is the rule of the day and where, notwithstanding the threat of ISIS, Congress appears ready to allow the U.S. Department of Homeland Security funding to expire this month, Mayor Duggan has had to deal with more than 500 water main breaks in the dead of winter; the Detroit Water & Sewerage Department shutting off the taps at thousands of homes; a devastating flood; and the snowiest winter on record. Part of it, of course, as former Cleveland Mayor, Ohio Governor, and U.S. Senator George Voinovich once said: ‘I have never been able to distinguish between a Republican versus a Democratic pothole: it’s just something that has to be fixed.” Nevertheless, for Mayor Duggan the list “to be fixed” is long, complex, and withering―or as Ms. Hammerl describes it: “If year one for Duggan was about speed and solving tactical problems, year two is about complexity and long-range thinking. The projects to be tackled are of a higher order and require nuanced solutions and collaboration. That doesn’t happen just with speed and determination, the two traits that served him well in year one.”
Selling Rats. The Securities and Exchange Commission has filed a motion for summary judgment in its securities fraud case against two former JPMorgan bankers who were involved in Jefferson County’s sewer deals and swaps. In its 50-page filing filed at the end of last week, the agency wrote that that its evidence is sufficient to prove that Charles LeCroy and Douglas MacFaddin, former directors of JP Morgan Securities, violated the securities act by failing to disclose payments to others who did no work on swaps between the county and JPMorgan―swaps which imposed significantly higher fees, and cost sewer system customers higher rates. The SEC also determined that the pair failed to disclose information about payments which would have been material to bond investors even if the payments did not increase the Jefferson County’s costs: “Any reasonable investor would have wanted to know that bonds in which he or she was investing were being offered by an underwriter who had procured the county’s business through a corrupt process of paying off friends and associates of [county] commissioners.” The approximately $3.2 billion in odoriferous sewer deals are viewed by most as at the heart of the complex municipal bankruptcy – indeed, described by many as a crime perpetrated against the county and its tax and ratepayers. In its motion, the SEC also wrote the bankers had a duty to disclose the improper payments, and that there are numerous undisputed facts upon which the court should also rule affirmatively. U.S. District Judge Abdul Kallon, who is scheduled to preside, has set an opening date for the trial of Bastille Day, July 14th. The scheduled trial comes in the wake of an SEC civil suit filed against the former bankers in November of 2009, alleging they made more than $8 million in undisclosed payments to close friends of certain county commissioners and broker-dealers to obtain Jefferson County’s business for JPMorgan. The case was delayed several years because the men sought to depose Douglas Goldberg, the senior vice president of CDR Financial Products Inc., and Jefferson County’s swap advisor. Mr. Goldberg was charged with conspiracy and wire fraud in a lengthy Department of Justice investigation into muni bid-rigging unrelated to Jefferson County; he was not allowed to give any statements under oath while the case against him was pending; and he was sentenced in May.