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Detroit’s bankruptcy hearing – Day 5

On Tuesday Detroit’s emergency manager Kevyn Orr returned to the witness stand to be grilled by creditor attorneys. This is likely to be some of the most important testimony of the eligibility trial.

 

Detroit’s bankruptcy hearing – Day 4

In day four of Detroit’s bankruptcy eligibility hearing some big issues with both state and federal ramifications were addressed. It was the first time in American history that a sitting governor was called to testify in a Chapter 9 municipal bankruptcy case.

The twitter handle for Michigan Governor Rick Snyder is @onetoughnerd. Detroit’s Emergency Manager, Kevyn Orr’s twitter handle is @motownem.

Detroit bankruptcy hearing – Day 2

If you want to follow Detroit’s historic bankruptcy trial, Twitter is the way to do it. The court does not provide a video or audio feed, but there is a scrum of excellent local and national reporters tweeting throughout the day. Here are some of the best tweets:

 

Detroit’s embedded time bomb

There are a lot of moving parts in the Detroit story as it goes through the largest municipal bankruptcy in U.S. history. The strangest part of the story has been the interest rate swaps that were layered onto the city’s 2005 and 2006 pension obligation bonds.

The purpose of the swaps was to lower the city’s borrowing costs by using interest-rate arbitrage. Theoretically, if financial conditions had remained “normal,” the swaps would have been beneficial for the city. Instead, Detroit’s credit rating was downgraded and the financial crisis upended the delicate conditions that underpinned the swaps.

On July 18th, when Detroit’s Emergency Manager Kevyn Orr filed for municipal bankruptcy, he also filed a proposed settlement with the swaps counterparties. Orr’s proposal would pay the counterparties – UBS and Bank of America Merrill Lynch – between 75 and 82 cents on the dollar to terminate the swaps and move them out of the picture. This action insulates UBS and Bank of America from the hatchet job that Orr plans to give to other creditors in the course of the bankruptcy process. Those unprotected creditors include bond insurer Syncora, which insured the interest-rate swaps and the underlying pension obligation bonds.

Detroit’s forsaken leaders

Being the emergency manager for bankrupt Detroit is no picnic. Coordinating the largest municipal bankruptcy in American history while simultaneously trying to restructure city operations, even with a posse of high-priced consultants, is a huge job. The current emergency manager, Kevyn Orr, wants to complete the bankruptcy and his term in 18 months. This is a recipe for inappropriate appointments, rich living and major mistakes.

Now the mayor of Detroit, Dave Bing, has weighed in with scathing comments about Orr’s performance. From The Detroit News:

Mayor Dave Bing reiterated Wednesday his growing frustration with how consultants and Emergency Manager Kevyn Orr have taken over City Hall and sidelined his team.

Will Stockton go the way of Vallejo?

Late Friday, the City of Stockton, California released its “Plan of Adjustment” for how it intends to treat its creditors in bankruptcy. The plan has been in the works since the city filed for protection under chapter 9 of the United States Bankruptcy Code on June 28, 2012. Stockton’s City Council will vote on the plan this week, on October 3rd.

On inspection, the plan looks a lot like the failed adjustment for formerly bankrupt Vallejo, California, which continues to suffer massive operating deficits. The lead bankruptcy attorney for both Stockton and Vallejo is Sacramento-based lawyer Marc Levinson, who seems to be failing both cities by not using bankruptcy to create a stable fiscal base. If it is approved by Federal Bankruptcy Judge Christopher Klein, the plan will keep Stockton perennially saddled with massive pension liabilities. I wrote in May about Vallejo:

The structural fiscal problems, which [Vallejo] could have addressed through the bankruptcy process and chose not to, remain. Even after spending an estimated $12 million on bankruptcy and legal fees, the city has fiscal problems. Standard & Poor’s Gabriel Petek led a cost benefit analysis on Vallejo’s bankruptcy and determined (emphasis mine):

How safe are GO bonds?

Detroit’s Emergency Manager Kevyn Orr and Michigan Governor Rick Snyder have told some bondholders that they will not be repaid at 100 cents on the dollar in Detroit’s bankruptcy plan. Lamentations ring out across the nation. This treatment of general obligation (GO) bonds – the gold standard for municipal securities – has rocked the market.

Here is the formal description of GO’s from the MSRB (emphasis mine):

[General obligation] typically refers to a bond issued by a state or local government that is payable from general funds of the issuer, although the precise source and priority of payment for general obligation bonds may vary considerably from issuer to issuer depending on applicable state or local law.

Most general obligation bonds are said to entail the full faith and credit (and in many cases the taxing power) of the issuer, depending on applicable state or local law. General obligation bonds issued by local units of government often are payable from (and in some cases solely from) the issuer’s ad valorem taxes [property taxes], while general obligation bonds issued by states often are payable from appropriations made by the state legislature.

Where is Detroit’s sales tax?

I have read about 5,000 stories about the collapse of Detroit. I keep searching for some useful or novel idea for fixing the city, and what I haven’t seen is any discussion of raising taxes.

I wrote yesterday about Stockton, California putting a 3/4 cent sales tax increase on the ballot. The city intends to use the new revenue to put more police on the streets. I thought about how little of Detroit’s revenues came from sales tax, and I wondered why a tax couldn’t be implemented to lift the city out of bankruptcy.

According to the Detroit News, Detroit has the highest property tax rate in the country:

Stockton proposes sales tax hike to put police on the street

Stockton, California was a topic on Morgan Spurlock’s Inside Man program on CNN this week. The focus was on the increase in crime since the city slashed spending on police and fire in its bankruptcy proceeding. 70 percent of the city’s budget is spent on “safety” needs, and the city is broke.

After the housing crisis cut property tax collections, the ax in Stockton had to fall on the next-largest area of spending. City employee payrolls were cut 25-30 percent for public safety and 40 percent for non-safety positions. Now the city has a 3/4 cent sales tax increase on the ballot for November to add police to the streets. The proposed tax would raise an estimated $28 million dollars the first year. It’s an excellent idea, but not a panacea for the city’s deep fiscal problems.

Stockton pays very high salaries to city employees, especially to fire and police workers. As I wrote in March:

The real history of public pensions in bankruptcy

There appears to be a frenzy of comments lately that public retirees receive excessive pensions in the current economy and that they need to be reduced. Many in the media have taken a brief look at Detroit and decided that costly pensions were the cause of the city’s bankruptcy. Nothing could be farther from the truth. Detroit pays a relatively modest median pension of $19,000 a year to general government retirees and $30,000 to police and fire retirees. Detroit’s pension system was funded at 82 percent in 2011 (and at 99 percent for its police and fire retirement system). That is higher than the national median of 74 percent. But public benefits make easy targets for critics. Let’s take a tour of pensions in bankruptcy through the years.

Attorneys Kenneth E. Noble and Kevin M. Baum describe Prichard, Alabama:

Prichard, Alabama, which experienced a population decline of approximately 50 percent over the past 50 years, filed for bankruptcy in 1999 after it was unable to pay approximately $3.9 million in delinquent bills. In addition to the unpaid bills, Prichard also admitted to not making payments to its employees’ pension funds and, even though the city had withheld taxes from employees’ paychecks, the city failed to submit such withholdings to the state and federal governments.

While in bankruptcy, the city successfully revised its budget so that it no longer operated at a deficit. However, Prichard was still unable to meet its pension obligations. In 2009, Prichard filed for bankruptcy for the second time in order to stay a pending suit brought by its pensioners after it failed to make pension payments for six months. In its chapter 9 petition, the city claimed that during the previous year it had operated a $600,000 deficit on its $10.7 million budget. Further, Prichard had failed to make a $16.5 million payment to its pension fund under its previous plan of adjustment.

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