Detroit Chapter 9 Sends Warning to Other Cities Bondholders
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Detroit Emergency Manager to Present Plan for Cuts Financial Reorganization
Now that Detroit has won the right to enter bankruptcy and even cut the pensions of city retirees, the next step comes when emergency manager Kevyn Orr presents his plan to reorganize the city’s finances and shows how deep those cuts will be, the Detroit Free Press reported today. Known as a “plan of adjustment,” the document is expected within a week or two or at least by early January. It will show in detail where Orr intends to cut and how he intends to raise new revenues for the city. Likely elements of Orr’s plan of adjustment will include what city assets, if any, he intends to sell or otherwise “monetize,” including artwork at the Detroit Institute of Arts and the city’s lucrative water system. Bankruptcy Judge Steven Rhodes cleared a major hurdle for Orr yesterday when he ruled that pension cuts are allowed in a federal bankruptcy case even if those municipal pensions appear to be protected under the Michigan Constitution. But Judge Rhodes also said he won’t approve pension cuts unless Orr’s entire plan of adjustment is equitable.
http://www.freep.com/article/20131203/NEWS01/312030085/
For an analysis by ABI Resident Scholar Prof. Kara Bruce on yesterday’s ruling in Detroit, please click here.
Alabama County Emerges from Second-Largest Municipal Bankruptcy
Alabama's Jefferson County yesterday closed on a $1.78 billion sewer bond deal and brought an end to what had been the biggest U.S. municipal bankruptcy before Detroit filed for court protection from creditors in July, Reuters reported yesterday. On the same day that Detroit won an eligibility ruling from a federal judge allowing its chapter 9 bankruptcy to proceed, Jefferson County declared an end to its $4.2 billion case filed on Nov. 9, 2011. A U.S. judge last month approved an unprecedented settlement between the county and creditors that locked in Wall Street losses easily topping $1 billon. The settlement also calls for 40 years of rate hikes for customers of a county sewer system at the heart of the county's financial crisis. County officials said they had closed on the $1.78 billion sale that had required tax-free interest rates of as much as 8 percent in early morning and formally exited chapter 9. The bond proceeds will pay off JPMorgan Chase and other owners of $3.1 billion of defaulted sewer debt at about 54 cents on the dollar.
Analysis Detroit Retirees Got Extra Interest After Their Guaranteed 7.9 Percent
The annuity savings program within the Detroit General Retirement System created a class of privileged retirees in a city where pensions average about $19,000 a year, Bloomberg News reported yesterday. The accounts got $756.2 million from the pension fund during 1985 through 2007 as extra interest, atop a guaranteed 7.9 percent backed by public money, according to municipal records. The use of money from the $2.6 billion pension to bolster the savings accounts has drawn scrutiny from Kevyn Orr, the state-appointed emergency manager, whose plan to reduce Detroit pensions through the largest U.S. municipal bankruptcy stirs outrage among 20,000 retirees. Orr may recoup what the fund paid to the savings program, said his spokesman, Bill Nowling. “There has to be a reckoning of what was legitimate interest for those annuity funds, and what was largess added by the pension board,” Nowling said. “There is some argument that that money belongs to the city, and creditors could try to claim it.” Orr has said that Detroit’s general retirement plan and its pension for police and firefighters are underfunded by a combined $3.5 billion, a figure system officials and unions call inflated.
Judge to Rule on Detroit Bankruptcy Today
The largest-ever municipal bankruptcy petition in U.S. history faces a watershed moment today as the judge overseeing Detroit's bankruptcy case is scheduled to rule whether the city is eligible for protection from creditors, Reuters reported yesterday. Bankruptcy Judge Steven Rhodes has scheduled a hearing for 10 a.m. EST today to announce his decision, which will be followed by the release of a written opinion. No matter how Judge Rhodes rules, the case could drag on through a possibly lengthy appeals process that could delay the city's plan to submit its plan of readjustment by the end of the month. The city's largest union has asked Rhodes to allow any appeal to proceed directly to the U.S. 6th Circuit Court of Appeals, bypassing the U.S. District Court in Detroit.
Judge Rules Detroit Eligible for Chapter 9 Says Pensions Could Be Cut
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Detroit Lighting Decision Put Off Due to Possible Attorney Conflict
The judge overseeing Detroit's bankruptcy case on Wednesday postponed deciding whether the city can redirect utility tax revenue to help fix its broken street lights, citing a potential conflict of interest among attorneys representing the city's Public Lighting Authority, Reuters reported on Wednesday. Law firm Miller Canfield represents the lighting authority, but also represents Detroit in other matters in the city's bankruptcy proceedings. Bankruptcy Judge Steven Rhodes asked attorneys from all parties involved to submit briefs by Dec. 4 to address the potential conflict of interest and whether Miller Canfield should be disqualified from representing the Public Lighting Authority. Judge Rhodes said that he will subsequently issue a written ruling. The potential conflict came to light when attorney Jonathan Green, a lawyer for Miller Canfield who represented the lighting authority in proceedings before Judge Rhodes on Wednesday morning, introduced himself in court.
Buffett Says Right Plan Would Restore Market for Detroit Debt
Investor Warren Buffett said yesterday that he expects the market for Detroit's debt to pick up again and bond insurers to begin backing the debt once the city submits an appropriate recovery plan to bankruptcy court, Reuters reported yesterday. Buffett's Berkshire Hathaway Assurance Corp. re-insures more than $380 million of Detroit's secured sewer debt that was originally insured by Financial Guaranty Insurance Co. The city, which is awaiting a decision from a federal judge on whether it is eligible for bankruptcy, has $18.5 billion in debt and liabilities. Detroit still has assets that appeal to investors, Buffett said. "The resources in terms of the people, the businesses, the history and the culture are all here to have a great city in the future," he said. "And it will require probably some sort of plan to readjust the debt of the past and ongoing expenses."
Detroit Retirees Drop Objection to Interest-Rate Swap Deal
The committee representing Detroit's retirees in bankruptcy proceedings yesterday withdrew its objection to a deal Detroit reached to end some interest-rate swap agreements, Reuters reported yesterday. The agreement that Detroit's emergency manager, Kevyn Orr, signed with swaps dealers Merrill Lynch Capital Services and UBS AG would end the interest-rate swap agreements at a discount rate of as much as 25 percent. In exchange, Detroit would save more than $70 million and the city would be able to stop making monthly payments from casino tax revenue to the counterparties. The city so far is offering retirees and other creditors far less than it has offered the swap counterparties. Detroit and other parties involved in the bankruptcy case, including the retiree committee, have been involved in mediation since September to try to resolve some of the issues in the case outside of court.
Detroit Creditors Push Court to Value Art Collection
A group of the largest creditors in Detroit's chapter 9 case are pushing for an independent valuation of the Detroit Institute of Arts' 66,000-piece collection, Reuters reported yesterday. The creditors include Financial Guaranty Insurance Company, Syncora Guarantee Inc. as well as the city's largest labor union, American Federation of State, County and Municipal Employees Council 25, according to the filing. In a motion filed yesterday, the creditors asked Judge Steven Rhodes to appoint a committee that will consider "a wide range of potential options to monetize the art." Earlier this year, the city of Detroit hired auction house Christie's to value the art, but creditors said in the filing that the city has not taken steps to "test the market value" of the artwork, which includes works by Vincent van Gogh, Henri Matisse and Rembrandt.