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Settlements in the Detroit bankruptcy case are arriving quickly. I thought that it might be useful to have a scorecard to tally the pieces. I took the chart above from the Detroit’s June 13, 2013 Proposal to Creditors (page 98). It lists the unsecured creditor claims. So far, Detroit has settled four unsecured liabilities valued at $4.107 billion for $1.213 billion, or 30 percent.
Here are four announced settlements with numerous caveats.
UTGO settlement: Detroit originally argued that the unlimited tax general obligation bonds (UTGO) were unsecured. This interpretation flew in the face of established muniland legal precedents and was watched closely by market participants. In its settlement with the bond insurers who wrapped these bonds, the city reversed its stand and agreed to acknowledge that the debt was secured by a specific lien on property tax revenues. Bond insurers will be paid 74 cents on the dollar and bondholders will be made whole by the insurers. The property tax lien will continue to be collected by the city and 26 cents on the dollar will go to a fund to help the lowest income retirees. It will cost the city $287 million to resolve $369 million in liability with the bond insurers.
Pension unfunded liabilities: Detroit originally estimated that its two pension systems were underfunded by $3.4 billion. Morningstar and others argued that the city had over-inflated the pension liability. They were right. Retirees will not face big cuts. The city has reached agreements with pension leaders. Detroit expects contributions from the state, private foundations and the Detroit Institute of Art to further fund the pension systems in exchange for preservation of the city’s art collection. The Detroit News has the pension settlement details:
Detroit reached tentative deals with two pension funds late Tuesday that would lead to modest reductions in monthly pension checks, free up cash to revitalize city services and speed the end of the biggest municipal bankruptcy in U.S. history.
The technocratic governor of Michigan, Rick Snyder, and the emergency manager he appointed to restructure Detroit, Kevyn Orr, spoke at an event sponsored by the Manhattan Institute for Policy Research this week. Their relentless positivity contrasted with the creditor mess they had left behind in Detroit.
Orr insisted, as he has in other media appearances, that Detroit creditors must rapidly concede to proposed settlement terms so that the largest bankruptcy case in American history can be concluded. Bloomberg reported:
After studying Detroit’s wrecked finances for several years, it was never clear if the city has been collecting the taxes it was entitled to within the law. Now a new report from the Michigan Municipal League suggests that the state gobbled up a portion of Detroit’s share of the state sales tax, adding severe stress to an already weak budget.
Detroit has no local sales tax, according to the Michigan state website. Michigan has no city, local, or county sales tax. The state sales tax rate is 6 percent.
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Bondholders in Detroit’s $18 billion bankruptcy must feel like they’re in a mirror universe. A restructuring plan filed by the city’s emergency manager would effectively turn bankruptcy precedents upside down by paying equity holders – in this case, ordinary Detroiters – at the expense of secured creditors. Such a shareholder-friendly approach might save the city and anoint Judge Steven Rhodes a hometown hero. But it may yet come at a market price.
The stream of analysts blasting Detroit's proposed treatment of creditors summarized in 3 words: This is unprecedented! Yes. But is it fair?
— Nathan Bomey (@NathanBomey) February 24, 2014
Detroit’s proposed treatment of general obligation bondholders has turned muniland upside down. Here is what Fitch Ratings says:
Detroit Institute of Art (DIA)
Various foundations contributing to save the DIA
Residents of Detroit
The state of Michigan
A showdown between bond insurers and city attorneys in Detroit’s bankruptcy highlights the level of protection that secured bondholders have in Chapter 9 bankruptcy. Detroit attorneys argued that federal bankruptcy law trumps Michigan state law and that “secured” bonds could be impaired. From Chad Livengood of the Detroit News:
[Bond insurers] Ambac Assurance Corp., Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp. want [federal bankruptcy judge Stephen] Rhodes to order the city to segregate special property taxes Detroit voters approved for economic development, cultural and recreation projects and public safety facilities and resume paying bondholders the full amount owed.
Having watched six municipal bankruptcies happen before Detroit filed for Chapter 9 protection, it was never clear why Michigan Governor Rick Snyder and Detroit Emergency Manager Keyvn Orr thought that they could conclude court proceedings in only fourteen months. Previous bankruptcies were much smaller and less complex, and each took several years to conclude.
Detroit’s bankruptcy leaders have set an aggressive schedule to resolve difficult elements of the case. Reuters reported:
There is a shadowy part of muniland. It is populated by liabilities that are absent from balance sheets and municipal debt that was contracted by circumventing the law.
Muniland’s biggest unknown liabilities are unfunded pensions and retiree health care benefits that until recently were not required to be on issuers’ balance sheets. The information related to these often enormous future expenses had previously only been reported in footnotes. Muniland’s accounting overseer said in 2012:
from The Great Debate:
For the second year in a row, the issue of economic inequality was featured in President Barack Obama’s State of the Union Address. Even some Republican lawmakers have now dared to speak the “i-word.”
Though Obama predictably avoided comparisons between the earnings held by the top 1 percent and the 99 percent of Occupy Wall Street fame, the message was familiar: The widening income gap between the very rich and everyone else is a stain on the social compact and a serious problem for future economic growth.