Municipal Bankruptcy & Alternatives for Distressed Cities

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April 15, 2015
Visit the project blog: The Municipal Sustainability Project

Fire in the Hole. The union representing San Bernardino’s firefighters has sued the city in a pair of lawsuits, alleging city officials are violating San Bernardino’s charter in an ongoing pay dispute. The union had so threatened last October in the wake of San Bernardino’s imposition of changes in their public pensions—a critical issue the city has to address as part of any plan to exit municipal bankruptcy—but where its ability to do so has been threatened not only by the legal objections, but also by charter requirements that make San Bernardino the only city in the State of California which must base its police and firefighter pay on the average of 10 similarly sized cities (all, however, larger in this instance)—a mandate or requirement, nevertheless, which a majority of the city’s voters, last November, rejected the opportunity to change, when they voted by a 55% majority to reject a change which has left the city as the only one in the state to set police and firefighter salaries by comparison with other cities, rather than by collective bargaining. At the time, the Mayor had urged voters to adopt the new measure, arguing that the bankrupt city could ill afford to pay wages dictated by the wealthier cities that are used to setting police and firefighter pay under Charter Section 186. San Bernardino’s fire union chief, in a press release, noted: “We want to stop these violations and ensure that city leaders follow the laws that they have pledged to uphold.” In the suits, filed late last week in U.S. Bankruptcy Court in Riverside, the union asks the federal court to roll back last fall’s changes. San Bernardino City Manager Allen Parker noted, referring to the fire union: “They threatened to do this, and it was just a matter of time…They have been unhappy with the rulings of the bankruptcy court all along, and the bankruptcy court judge is the one who approved the action, so they ought to be angry with the judge, not us.” The intriguing intergovernmental clash before the U.S. Bankruptcy Court, following in the wake of Judge Meredith Jury’s ruling last September that San Bernardino could reject its then-existing contract with the firefighters—but not granting the city’s request that it be granted the authority to impose its own contract—has created a kind of legal limbo. Only, this time, the legal limbo and suit add still another legal hurdle to the city’s ability to cobble together its plan of adjustment to meet U.S. Bankruptcy Judge Meredith Jury’s May 30th deadline to submit its plan of debt adjustment.

Chapter 9 Municipal Bankruptcy & Alternatives for Distressed Municipalities & States. In an unprecedented session hosted by the New York Federal Reserve yesterday, and co-hosted by the Volcker Alliance and the George Mason Center for State & Local Leadership, the three U.S. Bankruptcy Judges of the largest municipal bankruptcies in U.S. history spoke of the lessons learned from Detroit, Stockton, and Jefferson County: with Judges Steven Rhodes (Detroit) and Christopher Klein (Stockton) noting the critical appointment of the “right” mediator, Judge Rhodes driving home the importance of what he termed “pedal to the metal,” and noting that an ‘adversarial process will not work,’ so that the appointment of a “feasibility” expert was invaluable. With Judge Klein noting the “dynamic” nature of municipal bankruptcy resolution, Judge Thomas Bennett, who oversaw the Jefferson County bankruptcy, spoke of the importance of “long-term municipal sustainability” as a key outcome of any successful municipal distress outcome—in addition to an effective restructuring of a city or county’s debt. For municipal leaders, Judge Rhodes noted that any such long-term sustainability had led him to abjure Detroit’s citizens to “remember your anger,” as we discussed the uncertain future of this generation of cities and counties that have—or appear to be en route—to emerging from municipal bankruptcy to what Judge Bennett defined as “long-term sustainability,” a plan which must entail a structuring of a recovering municipality’s pensions and debt service, and which Judge Klein noted might mean there ought to be consideration of some sort of “enforcement mechanism.” Judge Klein, noting that “bond financing is a really good business,” suggested this might be an arena in need of adult supervision, echoing concerns expressed by both the Urban Institute and Judge Bennett (speaking of states which do not give home rule authority to municipalities—a decision, he noted, which precipitated Jefferson County’s historic municipal bankruptcy), and warned could become especially problematical for municipal leaders in ‘no new tax states.’

Municipal DNA. The participants concurred that while there are commonalities or a DNA that connects all municipalities amongst distressed and bankrupt cities and counties; nevertheless, each is unique: in almost every instance, there has been a slow, gradual decades-long demise which begins with the governing body—council or board—based upon financial dealings with labor, developers, financiers—and not with the eyes on long-term fiscal sustainability—or, as one of the experienced federal bankruptcy judges explained it, how, in a triangle of employees, finances, and taxpayers: who has to give up what? –especially, in an era, as Judge Rhodes noted, when the challenge of valuing liabilities of a municipality is its most difficult hurdle with such signal consequences towards a municipality’s long-term fiscal sustainability. The judges emphasized that critical steps required that elected leaders of a bankrupt municipality had to take ownership of a resolution; the value of the adversarial process of municipal bankruptcy; and—in stark contrast with a business, as opposed to municipal corporation bankruptcy; chapter 9 is a “dynamic” process in which the goal is, as Judge Bennett explained, “long-term sustainability,” echoing the guidance of the Boston Federal Reserve’s important paper about the exceptional challenge of state and local leaders “[W]alking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?”

At the session, we were treated to the municipal leadership perspective from the bird’s eye view of Atlantic City Mayor Don Guardian, Syracuse, N.Y. Mayor Stephanie Miner, and former San Jose Mayor Chuck Reed—with Mayor Reed warning of reverse incentives for municipal leaders in the budget process—a process governed by too much secrecy, and Mayor Miner describing the real world consequences that fall on an urban Mayor whose city has already experienced 130 water main breaks so far this year—a year in which the state has continued a long-term process of disinvestment in its municipalities—but her city has seen a 400% increase in its pension and OPEB liabilities—imposing a greater and greater burden on communicating with her constituents, noting: “The truth shall set ye free’”—albeit potentially encumbered by ever increasing legacies of debt. Mayor Guardian spoke eloquently of what it means to be a newly elected Mayor of a city with an 88% reliance on the property tax—but where the assessed value of his city’s properties have declined by 85 percent.

Federal Reserve Bank of New York President and chief executive officer William Dudley opened yesterday’s historic session by warning that municipalities are getting into fiscal trouble by borrowing to cover operating deficits: “When a jurisdiction borrows to invest in infrastructure, the cost of the debt to local residents — and those considering locating in the jurisdiction — is offset by the value of the services that the infrastructure provides. This tradeoff is part of the ‘fiscal surplus’ that a jurisdiction offers: the value of the services minus the tax price that residents have to pay. A well-run capital budget will match these costs and benefits over the life of each project to ensure that the jurisdiction remains attractive to current and future residents.” Nevertheless, Mr. Dudley warned that some municipalities are putting themselves in trouble by borrowing to cover operational deficits and achieve “balanced” budgets, just as New York City did in the 1970’s leading up to its famous fiscal crisis: “The key distinction between these two types of borrowing is that in the former case an asset is producing services that help to offset the cost of the debt, but this is not so in the latter case…Indeed, using debt to finance current operating deficits is equivalent to asking future taxpayers to help finance today’s public services.” Mr. Dudley said that residents of a municipality managing its finances that way could react by leaving, shrinking its tax base and exacerbating its fiscal problems; he directed significant focus to the underfunding of public pensions, a practice which the Securities and Exchange Commission has targeted for enforcement actions, and which regulators and market participants alike have said could be a serious threat to state and local finances and bondholders in the future—noting that the need to compromise with pensioners during Detroit’s recent bankruptcy proceedings, for example, cost the insurers of the city’s bonds millions of dollars—and, warning participants that the Motor City’s experience, as well as that of Stockton, Ca., could be emblematic of more systemic problems: “While these particular bankruptcy filings have captured a considerable amount of attention, and rightly so, they may foreshadow more widespread problems than what might be implied by current bond ratings…We need to focus our attention today on addressing the underlying issues before any problems grow to the point where bankruptcy becomes the only viable option: state and local governments have enormous financial obligations, as well as critical service delivery responsibilities. Managing their liabilities in such a way as to ensure that these vital services continue to be provided, and citizens’ view[s] that they are getting appropriate value in exchange for their taxes is a daunting challenge.”

The Tests of Exiting Municipal Bankruptcy

November 6, 2014

Visit the project blog: The Municipal Sustainability Project 

Is the Motor City Poised to Take Off? With U.S. Bankruptcy Judge Steven Rhodes poised to issue his ruling on the Motor City’s proposed plan of debt adjustment tomorrow afternoon, Detroit posted a proposed order which it hopes could serve as a template. Judge Rhodes will determine whether the plan’s proposed elimination of nearly $7 billion in debt it owes to its creditors and $1.7 billion it is proposing to invest in the city’s long-term sustainability and economic future is equitable and balanced. The 163-page proposed order [see a portion below] outlines the legal arguments in defense of the plan. A key issue for Judge Rhodes in rendering his decision will be whether the city’s 8^th version of its plan, under which its retirees would benefit from higher recoveries than its other unsecured creditors, is fair and reasonable, attorneys argue, for several reasons. Among them are that bondholders, as sophisticated investors, or, as the city, in its proposed order, suggests: “It would be practically impossible to confirm a workable plan without discriminating among unsecured creditors because, with respect to the pension claims in particular, the city’s recovery will turn in large part on its ability to marshal the support of its residents in general and its retirees, employees and their labor unions in particular.” (Detroit’s plan proposes that its retirees would receive a diminution of benefits of about 5 percent, but the proposed, draft order omits a specific amount.) In its draft proposal, the city suggests that Judge Rhodes that “[C]ritical business considerations justify the differential treatment of pension claims,” including the need for the city to maintain a “stable and motivated” workforce, address the “expectations of creditors” under the Michigan Constitution, and the need to confirm a workable plan of adjustment. The city’s plan proposes, in contrast, that the Motor City’s unlimited-tax general obligation bondholders would receive for 74% of what they are owed, and limited-tax general obligation bond holders would receive roughly 34%. The holders of $1.5 billion of the city’s pension certificates of participation, who were the last holdout creditors in the case, are proposed to receive a 14% cash recovery supplemented by various real estate development deals, vacant land, and long-term leases on city assets. In suggesting verbiage for Judge Rhodes to use, Detroit’s attorneys suggested: “The reasonable expectations of creditors further demonstrate that the differential treatment of pension claims is fair and reasonable because, while many of the city’s institutional creditors affirmatively chose to invest in the city and possessed both the experience and sophistication necessary to evaluate the risks related to such an investment, individual holders of pension claims had no meaningful opportunity to protect themselves from such risk because they had little control over how much the city contributed to pensions, how pension assets were invested and how the retirement systems were operated.” With regard to Detroit’s perennial concerns about revenue, the draft, proposed order notes that because tax increases could be counterintuitive to economic revival, the city’s plan of adjustment instead proposes to raise “multiple” sources of new revenue―chief among those derived from the so-called “grand bargain,” under which $816 million in public and private funds are proposed to protect public pension benefits and ensure the retention of the Detroit Institute of Arts in the city as an independent trust. The draft notes that the proposed plan to reinvest $1.7 billion over the next decade into the city’s sustainable future will be critical to “arrest the reinforcing trends of population loss, declining property values and declining revenues if adequate services are restored, blight is remediated and the city becomes a more attractive place to live and work.”

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The City of Detroit (the “City” or the “Debtor”) having proposed its Eighth Amended Plan for the Adjustment of Debts of the City of Detroit (October 22, 2014) ([as modified by the Modifications,] the “Plan” or the “Eighth Amended Plan”), a true and correct copy of which (without exhibits) is attached hereto as Appendix I [, as modified by errata notices/modifications (collectively, the “Modifications,” true and correct copies of which are annexed hereto as Appendix II])]; the Court having conducted a 24-day evidentiary hearing to consider confirmation of the Plan on August 18, September 2-5, September 8-9, September 15-18, September 29 to October 3, October 6, October 14-16, October 20-22 and October 27, 2014 (the “Confirmation Hearing”); the Court having conducted a hearing on July 15, 2014, at which 46 individuals who (i) filed objections to Confirmation of the Plan with the Court and (ii) appeared in the Chapter 9 Case pro se made presentations with respect to such objections to the Court (the “Pro Se Hearing”) and the Court having considered the arguments of such parties at the Pro Se Hearing; the Court having conducted hearings on certain On May 5, 2014, the City filed its Fourth Amended Plan for the Adjustment of Debts of the City of Detroit (May 5, 2014) (the “Fourth Amended Plan”), which version of the Plan was included in the contents of the solicitation packages distributed to creditors entitled to vote thereon. All capitalized terms used but not defined herein have the meanings given to them in the Plan. See Notice of Hearing to Individuals Who Filed Plan Objections (Docket No. 5264) (June 10, 2014). Legal issues related to confirmation of the Plan on July 16, 2014 and August 19, 2014; the Court having considered: (i) the testimony of the 41 witnesses called at the Confirmation Hearing, as well as the affidavits and declarations included among the 2,327 exhibits admitted into evidence at the Confirmation Hearing; (ii) the arguments of counsel presented at the Confirmation Hearing; (iii) the pleadings filed by the City in support of the Plan.

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Plan B in San Bernardino? With final votes still to be tallied in San Bernardino, it appears voters narrowly rejected a measure, Measure Q, which would have modified the mechanism which determines how the bankrupt city pays police and firefighters (For Measure Q, the “no” vote led 55.32 percent to 44.68 percent for “yes” as of yesterday, a difference of 1,692 votes.): it means that San Bernardino will be mandated to continue to set public safety salaries based on the average of 10 cities of similar population instead of by collective bargaining—likely dealing a blow to the city’s efforts to put together a plan of debt adjustment to present to U.S. Bankruptcy Judge Meredith Jury, as the apparent rejection means San Bernardino will be required to pay at least $1.3 million more for police salaries this year than budgeted, according to City Manager Allen Parker. In addition, the vote could impose higher cost burdens on firefighters’ pay and on overtime and benefits that increase alongside base salary—all of which carry implications for putting together a revised municipal bankruptcy exit plan, not to mention relations between the city and its public safety employees. The heads of both the police and fire unions, as well as many of their supporters, released statements after the apparent defeat of Measure Q calling it a mandate for public safety to be a priority. San Bernardino fire union President Jeff English said the city must now focus on bringing more money into the city: “The defeat of Measure Q is strong signal to the mayor and city manager to scrap their ‘budget cuts only’ approach to fiscal management…It’s time for city leaders to immediately begin working on solutions that will generate new revenues and economic development for the city.” Similarly, Councilwoman Virginia Marquez, a longtime proponent of setting pay by collective bargaining, said economic development could accelerate now that City manager Parker had specialists in his office to bring in businesses. She has also received calls from prospective businesses herself, she said, but the budget remains a challenge: “These are challenging times,” she said. “I believe that public safety is a priority. We have to have some kind of law and order in the city to maintain stability, but (the level of spending) is just not sustainable. So we need to change the way we do business.” Now a council-appointed citizen charter committee is scheduled to meet a week from Tuesday to study possible charter changes—a daunting task, given that when it met last May, it had recommended five amendments, including the two that became Measure Q and Measure R. Measure R, which changes the city charter so that terminated city employees are no longer paid while they wait for an appeal of their employment, was, as of yesterday, ahead 54.76 percent to 45.24 percent. That likely change is scheduled to take place after the City Council approves a resolution to that effect, which will come after San Bernardino County certifies the results, according to the City Clerk’s Office. The county’s legal deadline to certify the results is December 2^nd.

Taking Stock in Stockton: Moody’s yesterday opined that U.S. Bankruptcy Judge Christopher Klein’s ruling approving Stockton’s plan of debt adjustment, because it does not impair pension obligations, is a credit positive for the California Public Employees Retirement System―CalPERS, adding that it is likely to set a precedent under which public pensions will realize better treatment than other debt in California municipal bankruptcy cases: “The inclusion of pension cuts in Stockton’s bankruptcy exit plan, in and of itself, would not have materially impacted CalPERS’ financial health, because Stockton would have been obligated to pay a substantial termination fee…However, it would have stood as the first pension impairment in a California Chapter 9 bankruptcy and established a new landmark precedent.” Such a ruling would have increased the risk that other distressed California municipalities would file for bankruptcy in an effort to extract cuts to pension liabilities, which would have had a negative effect on CalPERS’ financial health. It would also have had longer-term negative credit implications because it would have critically damaged the notion that CalPERS is an arm of the state and therefor exempt from federal bankruptcy court jurisdiction, Moody’s said. “Favorable outcomes for CalPERS in the Stockton, CA and San Bernardino, CA bankruptcy proceedings lend further support to CalPERS improving financial profile because it reduces the likelihood that other CalPERS contracting employers will race to declare bankruptcy to reduce growing pension liabilities,” the report said. CalPERS is rated Aa2 by Moody’s, after an upgrade from Aa3 in July. The upgrade was based on the system’s improving credit profile of the retirement plan’s main sponsor, the State of California, as well as the steps taken by CalPERS to increase contribution rates in an effort to remediate its funding gap over time. Moody’s said in a previous report that while Chapter 9 filings will remain rare, Judge Klein’s oral ruling that pensions can be impaired will give other local governments more negotiating leverage with labor unions. Standard & Poor’s also said Stockton’s experience with municipal bankruptcy is unlikely to cause other municipalities to view Chapter 9 as an attractive option.

What Constitutes Fair & Equitable in Municipal Bankruptcy?

October 15, 2014

Visit the project blog: The Municipal Sustainability Project 

Is Detroit Contagious? Despite some apprehensions that Detroit’s bankruptcy might be contagious to other municipalities in Michigan, the Center for Local, State, and Urban Policy at the University of Michigan reports that an increasing percentage of municipalities (36%) report they are better able to meet their fiscal needs this year—and that improving fiscal health of municipalities is reported by jurisdictions of all sizes across the state. According to the report, this marks the first time in the Michigan Public Policy Survey’ studies that Michigan’s local governments have reported they are better able to meet their fiscal needs this year than the previous year. The report found the improvement to be broad—with improvement reported by jurisdictions of all sizes, with the exception, however, of municipalities with populations between 10,000 to 30,000, where less fiscal gains (42%) were reported than last year (48%). Overall, nearly 25% or 440 local governments reported declining fiscal health. The majority of municipalities reported two key areas of improvement: property tax revenues and state aid. Tom Ivacko, the Center’s Director and a co-author of the report, notes that the improvements constitute “a slow trend, [which] still leaves more than 400 jurisdictions here in fiscal decline.” This year’s survey does mark a continuing, overall improvement: from the surveys’ earlier years as Michigan’s 1,856 cities, townships and counties struggled with the effect of the national recession and the state’s grim recession. The study reported steep declines in local finances in 2009 and 2010, followed by a general trend of improvement through 2012—a trend which has continued, according to the report, but at a decelerating pace; nevertheless, the report found that for the first time since the report was initiated, more local governments have passed a “tipping point” of fiscal health, with 36% of jurisdictions saying they are better able to meet their fiscal needs this year compared to 24% who said they are less able to do so. According to the report, the municipalities reporting distress are:

• more likely to have experienced cuts in property taxes and state and federal aid,
• more likely to have taken on debt,
• more likely to report growing employee health care costs and increased infrastructure needs,
• a majority — 56% — are still facing falling property tax revenues.

According to the report, 36% are seeing an increase in property tax revenue, up from 8% in 2010. Another 38% of local governments said they continue to see a decrease, compared to 78% that saw decreasing property taxes in 2010. Part of the story of improving finances, according to the report, is the result of local governments reducing wages and services—leaving them less fiscally able to withstand another serious recession, but better equipped if the economy continues to improve.

 

A Final Bankruptcy Agreement? Detroit attorneys hope to present an agreement between the Motor City and its last remaining holdout creditor, FGIC, or the Financial Guaranty Insurance Co., tomorrow in court before U.S. Bankruptcy Judge Steven Rhodes. Thomas Cullen, a Jones Day attorney representing Detroit in its historic bankruptcy case, testified yesterday in court that the Motor City had a “firm and active faith” that such an agreement would be completed by then. Counselor Cullen’s testimony came in the wake of closed door sessions in New York City under the aegis of U.S. Judge Gerald Rosen, as FGIC attorney, Alfredo Perez, told the court that the NYC overseen negotiations had permitted the parties to “make a lot of progress.” Judge Rhodes then granted FGIC’s request to hold off on bringing in its witnesses until tomorrow. The status update before Judge Rhodes came as the parties prepare to call witnesses prior to the trial’s closing arguments, which are expected as early as next week. The NYC discussions have been with regard to addressing FGIC’s claim on some $1.1 billion, stemming from a disastrous pension deal backed by former—and now convicted and imprisoned―ex-Mayor Kwame Kilpatrick. The closed door, federally overseen private negotiations are intended to accelerate an end to the nation’s largest municipal bankruptcy. In response to the potential agreement, Judge Rhodes yesterday inquired if an agreement with FGIC would require “yet another round of projections,” to which Mr. Cullen responded no. The Detroit News reported last week that the city was considering leasing most of Detroit’s public parking facilities to bond insurers — including the Joe Louis Arena garage and one underneath the old Hudson’s site along Woodward — as part of these key settlement negotiations, under which FGIC could end up leasing three parking garages, receive riverfront land, and cash. FGIC could also sign an agreement to develop city-owned land. Under the emerging outlines of the potential settlement, FGIC would recover more than under the Motor City’s pending plan of debt adjustment before the federal court, but less than what rival bond insurer Syncora Guarantee Inc. received under its court-approved settlement last month. Syncora and FGIC were two of the largest holdout creditors that have been obstacles to Detroit’s emergence from municipal bankruptcy. The firms insured $1.4 billion in troubled pension debt which were key to the sordid deals under now-convicted former Mayor Kwame Kilpatrick’s reign that were used to prop up Detroit’s pension funds in 2005. Under Detroit’s pending plan of debt adjustment before the federal bankruptcy court, the Motor City has proposed paying FGIC as little as 6 cents on the dollar. Under the emerging settlement offer, FGIC could receive nearly 14 cents on the dollar, or a total of $400 million. In comparison, the plan proposes 46 cents on the dollar for Detroit’s retirees on their $3.1 billion claim. FGIC has argued before Judge Rhodes that the city’s proposed debt adjustment plan violates the U.S. Bankruptcy Code, because it proposes paying some creditors more than others (please note immediately below). If FGIC settles, Detroit’s last potential hurdle could come from a regional water district which is suing over a botched project and a handful of former city employees and residents who are not represented by lawyers.

Let the Hearings Continue.  With the closed door negotiations between Detroit and FGIC behind closed doors, Detroit’s historic bankruptcy case continued yesterday with Judge Rhodes taking testimony from others opposed to Detroit’s current proposed plan of debt adjustment. William Fornia, a pension consultant, challenged the claim under the city’s pending plan of adjustment that Detroit retirees would recover 60 percent or less of what they are owed, telling the court the city’s calculation flawed. Mr. Fornia testified pensioners are more likely to recover about 75 percent. According to FGIC and many of the city’s municipal bondholders, such a recovery for retirees should be rejected by the federal court, because of its significant inequity—with thee gross disproportionate recovery proposed of only about 11% for the city’s municipal bondholders versus  75% for its pensioners. Today the case, In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan, is scheduled to resume with witnesses who oppose the Motor City’s pending plan of debt adjustment, but who are not represented by attorneys.

 

Conditional Approval. The New Jersey Local Finance Board officials has approved Newark Mayor Ras Baraka’s budget for this calendar year, although the director of the state’s local government-services division warned that the FY2015 fiscal gap may be as yawning as $60 million. The Board has ordered $1.3 million of cuts to benefits, salaries, and other expenses from the $815 million budget that the Newark City Council approved last week. The Local Finance Board’s unanimous vote was the last step needed for adoption of Newark’s budget—a key step in the wake of the $93 million deficit Mayor Baraka inherited when he took office last July―a gap which Finance Board Chairman Thomas Neff noted was the “largest structural imbalance—probably in the state,” adding that if there were no appreciation of the problem, the city would not take the necessary steps to act. The Local Finance Board, which oversees municipal finances in the state, voted last week to supervise Newark’s finances as a requirement of Mayor Baraka’s plan to spread out a $30 million deficit from 2013 over the next decade—a budget which now includes $10 million of state transitional aid. Most of the board’s cuts, $1 million, are for health care. The city has failed to collect higher benefit contributions since Governor

Chris Christie signed a 2011 law requiring public workers to pay as much as 35% of the cost of their premiums, up from a flat 1.5 percent of salary, according to Chairman Neff.

Not a Georgia Peach. A Georgia businessman accused of bribing former Detroit Mayor Kwame Kilpatrick and several Motor City pension fund officials accepted a plea agreement minutes before standing trial yesterday in federal court. Under the agreement, the businessman, Roy Dixon, will enter a guilty plea at 2 p.m. to conspiracy to commit honest services mail and wire fraud―the same federal statute under which former Virginia Governor Robert McDonnell and his wife were convicted earlier this year―a 20-year felony that also carries a $250,000 fine. Mr. Dixon was one of four people charged with looting Detroit’s pension funds along with former Mayor Kilpatrick’s fraternity brother Jeffrey Beasley and three others. Mr. Dixon was charged with embezzling more than $3 million with the help of former Detroit Lions wide receiver Mike Farr and spending some of the cash on an $8.5 million mansion in Atlanta, making him the third person to plead guilty to a federal crime in the corruption case and the latest during a years-long corruption probe that has, to date, netted 35 convictions. It was not immediately clear whether Mr. Dixon agreed as part of his deal with federal prosecutors to cooperate or if he will testify against his former co-defendants during a trial that will resume tomorrow. The other two guilty pleas in the pension fund case came from former City Council aide George Stanton and businessman Chauncey Mayfield, who are awaiting sentencing and expected to testify during the Mr. Beasley’s trial. The underlying accusation against Mr. Dixon had alleged that he paid bribes and kickbacks to former Mayor Kilpatrick, Mr. Beasley, three pension fund trustees, and a municipal official—with the charge that he paid the bribes to secure investment money from the pension funds, according to prosecutors—with the money for those investments made available in the wake of the former Mayor’s backing for a controversial Wall Street deal that started injecting $1.4 billion into the city’s pension funds in 2005. In 2006, months after the Detroit City Council approved that deal, Mr. Dixon formed the private-equity firm Onyx Capital Advisers, which was based in Detroit—with the new firm seeking to act as a private equity firm which would invest Motor City pension fund money in a real estate deal in the Turks and Caicos Islands and a Georgia company that sold automobiles to people with bad credit. That company, mayhap appropriately named Georgia-based Second Chance Motors, was owned by Mike Farr, a former NFL Detroit Lions player, whose father was ex-Lion Mel Farr Sr., the “superstar,” Detroit-area auto dealer who pitched cars in commercials while wearing a red cape and pretending to fly. By June 2007, the Detroit pension funds and one in the city of Pontiac had agreed to invest $25 million in Onyx. That was exactly one year after Detroit received the final infusion from Mr. Kilpatrick’s Wall Street deal. To secure the investment, prosecutors allege Mr. Dixon paid bribes and kickbacks to Messieurs Kilpatrick, Beasley, three other pension trustees, as well as others. In addition, Mr. Dixon and an unnamed business partner allegedly contributed $45,000 to Mr. Kilpatrick’s nonprofit, the Kilpatrick Civic Fund. In court documents, Mr. Dixon testified that Mr. Beasley and other pension officials extorted money and gifts from him — a claim likely to be repeated if he testifies during the trial. The indictment and a probe by the U.S. Securities and Exchange Commission (SEC) allege Mr. Dixon fueled a lavish lifestyle with money loaned on behalf of Detroit’s retirees. By 2008, Mr. Dixon was financing the construction of a stone mansion in Atlanta. The FBI and SEC analyzed bank and financial records and alleged that he arranged for Mr. Farr to pay three construction companies $521,000 in pension fund cash, according to prosecutors. The investment in the 2.5 acre plot was for a seven bedroom mansion with a mere ten bathrooms, a pool, and an exercise room, library, and four fireplaces—a former home, I should write, as it was headed for foreclosure last year. By the time of his indictment last year, federal prosecutors said the Detroit pension funds had lost the entire $20 million investment in Onyx; Pontiac’s public pension fund had lost $3.8 million. The current pension fund corruption trial is the first major public corruption case since former Mayor Kilpatrick was convicted and sentenced last year to 28 years in federal prison. This one which involves the Motor City’s former Treasurer and Mr. Kilpatrick’s former fraternity brother , as well three others who either worked for Detroit’s pension funds or received millions in pension loans. Meanwhile, Mr. Kilpatrick is an unindicted co-conspirator in a complex criminal case that will attempt to explain what happened to money from a $1.4 billion Wall Street deal blamed for helping plunge Detroit into bankruptcy, with federal prosecutors alleging the funds lined the former Mayor’s pockets in a federal trial that spans 2006 through April 2009 and alleges pension fund corruption cheated retirees out of more than $84 million. That amount must be considered in addition to the money-losing Wall Street deal Kilpatrick backed. Federal prosecutors allege city pension officials started approving a series of corrupt investments with businessmen in January 2006, six months after the Wall Street deal. Flush with cash, pension fund trustees loaned more than $200 million to businessmen accused of paying bribes and kickbacks, according to federal prosecutors. Kilpatrick is an unindicted co-conspirator because Beasley, 45, of Chicago, allegedly pressured people to contribute money to the ex-mayor’s nonprofit group in order to get pension fund loans. The defendants deny being influenced by perks that allegedly flowed during business dealings and trips to Las Vegas, England and the Caribbean. The four defendants are Beasley, Dixon and two former pension officials: trustee and former vice president of the Detroit Police Officers Association Paul Stewart and Ronald Zajac, 70, of Northville, former top lawyer for two municipal pension funds.

 

 

12.6.13

        Detroit’s Bankruptcy Eligibility

U.S. Bankruptcy Judge Steven Rhodes late yesterday afternoon released his 143-page written opinion making clear that when “a state consents to a Chapter 9 bankruptcy, the 10^th Amendment does not prohibit the impairment of contract rights that are otherwise protected by the state constitution,” and that the “residents of Detroit will be severely prejudiced if this case is dismissed.”

12.5.13

Pit Stops in the Motor City. Long before U.S. Bankruptcy Judge Rhodes issued his written opinion finding the Motor City eligible for federal bankruptcy protection, Detroit’s biggest municipal union, the American Federation of State,

12.4.13

Staring their Engines in the Motor City. Almost before Judge Rhodes had completed his oral summary finding Detroit eligible for federal bankruptcy protection yesterday, the Michigan Council 25 of AFSCME filed a notice of appeal.

12.3.13

B-Day in Motown. U.S. Bankruptcy Judge Steven Rhodes this morning determined the city of Detroit is officially eligible for Chapter 9 bankruptcy, and that the case “should not be dismissed…Certainly the court must conclude that the bankruptcy filing was a foregone conclusion, at least in 2013.”

12.3.13

B-Day in Motown. U.S. Bankruptcy Judge Steven Rhodes will issue his oral decision with regard to the City of Detroit’s eligibility for chapter 9 municipal bankruptcy protection this morning at 10:00 a.m.

11.15.13

Motor City Transition & Power Sharing: Detroit Emergency Manager Kevyn Orr yesterday gave approval to a request from Mayor-elect Mike Duggan

11.5.13

Today is election day, with a key focus on Detroit and San Bernardino, where voters will select new leaders for what