MuniLand

Will Stockton get pension reform in bankruptcy?

 

Although the Detroit bankruptcy case gets the lion’s share of media attention, the bankruptcy proceedings in Stockton, California might have longer-term implications for muniland.

Detroit’s federal bankruptcy judge Stephen Rhodes quickly determined in his eligibility ruling that the city may reduce retiree pensions. But Stockton’s judge, Christopher Klein, has been making his way to a decision about the legality of cutting pensions for two years. Klein has set October 1 as the next date to possibly rule on the issue.

In Detroit there are essentially two parties involved in a reduction of pensions: the city and the retirees. Technically there are also service corporations, but in reality these are just legal shells to pass the city’s pensions payments through.

In Stockton there are three parties involved in the pension issue: the city, the retirees and a powerful state retirement system [CalPERS]. CalPERS has fought against a reduction of pensions in Chapter 9 bankruptcy proceedings in three California cities: Vallejo, Stockton and San Bernardino. CalPERS has even gone so far as to file an amicus brief for an appeal in the Detroit case.

Kevyn Orr’s misinformation campaign

Detroit emergency manager Kevyn Orr appeared at Michigan’s annual Mackinac Conference, the gathering place for Michigan’s political elite. Orr (@MotownEM) had some stunning things to say:

 

 

Detroit’s wildly accelerating bankruptcy process

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:

Detroit Emergency Manager Kevyn Orr said time is running out for creditors to reach an agreement with the city on a plan to resolve the biggest U.S. municipal bankruptcy by reducing $18 billion in debt.

‘There is no lien, there is no property interest, these creditors are like all others’

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.

‘These monies were raised solely for repaying the bonds and no other purpose,’ Guy Neal, attorney for National Public Finance Guarantee, said in court Wednesday.

Is it time to replace Detroit’s emergency manager?

In a stunning decision, bankruptcy judge Steven Rhodes refused to approve a $165 million settlement proposed by Detroit emergency manager Kevyn Orr to pay off Bank of America/Merrill Lynch and UBS for dubious interest rate swaps. Orr’s swap proposal has been contentious since Detroit formally filed for bankruptcy on July 18th, 2013. The Detroit News reported:

U.S. Bankruptcy Judge Steven Rhodes on Thursday denied a deal that would have allowed Detroit to pay two banks $165 million to terminate a troubled pension debt deal blamed for pushing the city into bankruptcy.

The market reaction to Detroit’s bankruptcy ruling

Fitch Ratings managing director Amy Laskey talked to Fox Business about how Detroit is a unique story in muniland. Fitch published a research note on the bankruptcy ruling and concluded that Detroit’s ruling would not lead to a “spate” of local bankruptcies in Michigan:

Although the judge ruled that pensions could be adjusted, Fitch does not believe the ruling grants Detroit’s emergency manager unlimited freedom to adjust these obligations. The city must submit a plan of adjustment to the bankruptcy court, which must be deemed ‘fair and equitable’ by the presiding judge. The emergency manager expects to submit the plan to the court by year-end. Fitch does not believe that the judge’s decision on pensions will lead to a spate of additional bankruptcy filings in Michigan.

The New York Times, on the other hand, suggested that the Detroit’s ruling could impact other cities:

Detroit bankruptcy hearing – Closing arguments

Tweets from the final day in the federal trial to determine if Detroit is eligible for Chapter 9 bankruptcy protection:

 

Detroit bankruptcy hearing – Day 8

It was the last day of testimony in Detroit’s bankruptcy eligibility hearing. Here are some tweets leading up to the closing arguments on Friday:

 

Detroit bankruptcy hearing – Day 7

It is a real hand-to-hand fight in Detroit as creditors seek to establish that emergency manager Kevyn Orr did not conduct “good faith” negotiations prior to filing Chapter 9 bankruptcy for the city. It’s surprising that the city is not arguing that there were too many creditors to negotiate. The bankruptcy code allows a debtor to use this provision to escape conducting negotiations. Here are tweets from Tuesday:

 

Detroit bankruptcy hearing – Day 6

The sixth day of Detroit’s bankruptcy eligibility hearing was about whether the city negotiated in good faith with creditors. Detroit’s emergency manager Kevyn Orr (@MotownEM) returned to the stand to continue his testimony. Orr was appointed emergency manager on March 14, 2013. Here is the coverage from journalists and others on Twitter:

 

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