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Michigan Governor Rick Snyder (R) said that investors holding $1.5 billion of bonds from Detroit’s distressed schools would be fully repaid under a plan by the state to split the system in two, Bloomberg News reported on Friday. The proposal, which passed the state Senate last month, establishes a new district responsible for educating students and running the schools, while the existing district’s only task is to collect taxes and repay all obligations except pensions. Moody’s Investors Service said in a report on Thursday that while the plan could be “a significantly positive event for bondholders,” the split doesn’t mean a default or bankruptcy is off the table. Detroit’s school district is reeling from the same population decline that pushed the city into the largest U.S. municipal bankruptcy. The system, which has seen enrollment drop by nearly 100,000 students in the past decade, is overseen by Emergency Manager Steven Rhodes, the judge in Detroit’s chapter 9 proceedings. Moody’s gives it an issuer rating of Caa1, the fifth-lowest rank. Snyder last week signed an emergency funding measure for the schools, which would send $48.7 million to the district to keep doors open through the end of the school year. The Senate passed a $720 million bill that would break the system into two last month. Read more. 

Can a financially distressed government unit restructure its pension obligations over retiree objections? Prof. Amy Monahan of the University of Minnesota Law School joins ABI Resident Scholar Melissa Jacoby to explore this difficult topic on an ABI Podcast. 

The impact of public pension debt on the economy will be the focus of a special "Eye on Bankruptcy" panel before a live audience on April 16 at ABI's Annual Spring Meeting in Washington, D.C. Register today! 

Detroit’s record bankruptcy hasn’t solved one financial problem that’s plagued the city for at least a decade: Getting its annual financial report done on time, Bloomberg News reported yesterday. Detroit Mayor Mike Duggan’s administration will miss a March 31 deadline for releasing audited statements for the fiscal year that ended in June, the city said in a regulatory filing. The report is expected to be ready by May 31, the city said, because of holdups from the water and sewer department and library system. Such delays are legion in the $3.7 trillion municipal market, especially when it comes to distressed borrowers at the greatest risk of defaulting. That’s in part because the Securities and Exchange Commission has no direct power to crack down on governments that drag their feet in making routine disclosures, unless it finds evidence of fraud.

Retired Bankruptcy Judge Steven Rhodes says that there is no alternative plan for addressing the debt crisis in Detroit Public Schools, and lawmakers need to act soon to provide the additional cash the district needs to reorganize and pay its debts — a necessity given the district is expected to run out of money this spring, the Detroit Free Press reported today. Judge Rhodes, whom Gov. Rick Snyder officially announced yesterday as the new transition leader for the district, said that pushing for the passage of legislation is a key priority. Also on his list: hiring a superintendent who will oversee academics. Rhodes said that it would be ideal — but he's not sure whether it's necessary — for that person to have an education background. He said he hopes to make the decision by as early as next week.

Mayor Mike Duggan in his State of the Union address on Tuesday said that city lawyers are looking into litigation against high-paid consultants who underestimated pension debt during the city's bankruptcy case, MLive.com reported yesterday. It was Duggan's third State of the City speech, but his first after running day-to-day operations for a significant amount of time. Duggan took office at the start of 2014, when the city was still in bankruptcy and under control of a state-appointed emergency manager. Emergency management ended in December 2014 after Detroit exited bankruptcy, and while a financial advisory board maintains budget oversight, Duggan controlled city government throughout 2015. Early in the speech, Duggan lamented a costly miscalculation that occurred during the city's bankruptcy case. After a 10-year post-bankruptcy honeymoon period ends in 2024, the city will have to pay $193 million in contributions to the city's old pension systems, far more than the $111 million projected in the bankruptcy plan.

Michigan state officials said that Detroit’s public schools have reached their borrowing limit and won’t be able to take on more debt to pay bills when money runs out in April if Michigan lawmakers don’t restructure some of its $2 billion of obligations, Bloomberg News reported today. Though the district has borrowed when it ran out of money before, it has reached the statutory limit of its ability to do that, said Terry Stanton, spokesman for Michigan’s Treasury Department. This month the amount of state aid that’s siphoned off to service debt will jump to roughly what is spent on salaries and benefits, pressuring the district’s ability to pay its bills in April. The district may have to stop paying workers if lawmakers fail to reach an agreement, said Peter Wills, chief of staff to state Senator Goeff Hansen, the Republican sponsor of restructuring legislation.

Retired U.S. bankruptcy Judge Steven Rhodes said yesterday that he will not run the Detroit Public Schools, the Detroit Free Press reported today. “I am in discussions with the governor’s office about what role I can play in helping to execute the governor’s plan,” Rhodes said. “I can tell you with complete confidence that that will not include me being any kind of superintendent for the school district because that is not a job I am at all qualified to do. And the governor’s office accepts that." Rhodes, who oversaw the city of Detroit’s bankruptcy, spoke after a news report claiming that a decision had been made for him to be the emergency manager. Rhodes' comments came as lawmakers continue to debate legislation that would transform the landscape of education in the city. There are a few key sticking points between what legislators are debating and what local leaders want, including whether a Detroit Education Commission should oversee the opening and closing of all public schools, including charter schools, in the city. Gov. Rick Snyder's spokesman, Dave Murray, said no decisions had been made regarding an emergency manager for DPS.

The Detroit Water and Sewerage Department is washing off the taint of its city’s notorious financial reputation as it refinances debt a year after emerging from the worst-municipal bankruptcy on record, Bloomberg News reported yesterday. The $324 million in tax-exempt revenue bonds sold through the Michigan Finance Authority on Wednesday were priced at a top yield of 3.71 percent for securities maturing in July 2035, according to preliminary data compiled by Bloomberg. That’s about 1 percentage point more than 20-year benchmark municipal bonds.

Detroit began filing lawsuits this week against dozens of vendors with the aim of recovering about $50 million in city payments made in the months before its historic bankruptcy filing, Reuters reported yesterday. Chuck Raimi, Detroit's deputy corporation counsel, said that 185 lawsuits are being filed in bankruptcy court against vendors that received "preferential" city payments on past-due bills during a 90-day period before Detroit's July 2013 bankruptcy filing. The city exited the biggest-ever U.S. municipal bankruptcy in December 2014, shedding about $7 billion of its $18 billion of debt and other obligations. Raimi said that the money is recoverable under the Code because the pre-bankruptcy payments to vendors resulted in higher recoveries than those obtained by other similarly situated creditors during the bankruptcy. He added that the city hopes to settle the cases, which were filed ahead of a Dec. 5 deadline imposed by the Code.

The city of Detroit is on track with its sweeping restructuring and reinvestment plan rolled out almost one year ago when the city exited the nation's largest municipal bankruptcy, according to a new commission report, the Detroit Free Press reported today. In a biannual report to Gov. Rick Snyder, the Detroit Financial Review Commission concluded that the city has been in compliance with the plan in its first year by providing commission members with updated financial plans. The commission has reviewed and approved 237 city contracts and one collective bargaining agreement between the city's transportation department and a transit union. In addition, the city has amended its budget and issued new debt with the review and consent of the commission, according to the report.

The city's balloon payment due in 2024 for its two pension funds has risen to $195 million, or about 71 percent above the original $114 million projected under the city’s bankruptcy exit plan approved by a federal judge last year, the Detroit Free Press reported today. The unexpected jump could challenge funding behind the city's financial road map approved as part of the nation's largest municipal bankruptcy. Actuaries for the city's two pensions funds say that the lower estimate used in the bankruptcy plan was based on outdated information, including projections that didn't allow for the longer life expectancy of retirees or that the city would be hiring new employees after filing for bankruptcy who would need to become part of the pension system.