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Moody's Investors Service said yesterday that investors holding defaulted municipal bonds sold by Alabama's Jefferson County and other local governments will recover less than the average 80 cents on the dollar of recent decades, Reuters reported yesterday. In addition to Jefferson County, whose sewer system creditors have signed off on a pending agreement that promises bondholders about 60 cents on the dollar, Moody's analysts led by Cristin Jacoby said that recoveries in Detroit, Harrisburg, Pa., and California's Stockton and San Bernardino will likely fall short of 80 percent. Bondholders appear to be losing expected safeguards when competing with other creditors in municipal bankruptcies, Moody's said.

The possibility that the most significant decisions affecting Detroit will not be made in bankruptcy court elevates the motor city to “Case of the Week” status on this week's bankruptcy video with Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle. To watch, please click here.

Detroit's emergency manager is considering ending health insurance coverage for city retirees under age 65 and giving them a modest stipend to purchase insurance from the health exchanges being established under Obamacare, according to a lawyer who represents two associations of public workers, Reuters reported yesterday. Brian O'Keefe, an attorney who represents associations of Detroit police, firefighters and other city employees, said yesterday that Emergency Manager Kevyn Orr is considering offering a stipend of about $125 a month for retirees under age 65. Those over 65, who now get city-paid health insurance to supplement their Medicare coverage, would get only Medicare.

Detroit’s retired workers joined city unions in attacking the city’s record-setting $18 billion bankruptcy, claiming that the law that lets cities seek court protection from creditors violates the U.S. Constitution, Bloomberg News reported yesterday. A court-approved committee for retired workers filed papers in bankruptcy court yesterday saying that Emergency Manager Kevyn Orr filed the case in July with the intention of cutting pensions for retired city workers. Those workers aren’t eligible for federal Social Security benefits, “rendering their entire economic existence dependent upon retirement compensation promised by the city,” the committee said in its objection. In an effort to have the case thrown out at a hearing next month, the retirees and unions plan to question Michigan Governor Rick Snyder under oath about his role in authorizing the bankruptcy. The groups point to a line in the Michigan Constitution that says public worker pensions are a contractual right that cannot be undone.

Syncora Guarantee Inc., the bond insurer caught up in the battle over Detroit's casino tax revenue, is appealing a bankruptcy judge's decision that has allowed millions of dollars of those taxes to continue flowing into the city during its historic $18 billion bankruptcy, Dow Jones Newswires reported yesterday. The one-page appeal, filed in bankruptcy court on Tuesday, doesn't explain why Syncora Guarantee officials are protesting the Aug. 28 ruling from Judge Steven Rhodes, who had concluded that the bond insurer doesn't have the power to block the stream of casino tax money because of U.S. Bankruptcy Code rules that have protected the 700,000-resident city's "property" since it filed for chapter 9 protection in July. Prior to that decision, Syncora Guarantee attorneys argued that they had the power to "trap" that money while protesting a larger settlement.

California's third-largest city, San Jose, and its employee unions presented final court arguments yesterday in a case that has major implications for other cash-strapped local authorities wanting to cut pensions, including bankrupt Detroit, Reuters reported yesterday. Even though voters in San Jose overwhelmingly backed a measure last year that would cut pensions for new workers and force current employees to contribute more to their retirement benefits, the city's unions sued, claiming that the reforms were unconstitutional. Both sides, following a judge's request made at the end of a five-day trial last month, filed voluminous closing arguments and summaries yesterday, much of which will likely be reprised in the litigation between unions and city authorities in Detroit, which filed for the biggest municipal bankruptcy in U.S. history in July. San Jose's pension overhaul was promoted by Democratic Mayor Chuck Reed and approved by 70 percent of voters in 2012. Reed believed that filing was the best way to alleviate an acute budget shortfall and a rapidly growing unfunded pension liability, which sits at nearly $3 billion, and to save further cuts to essential city services. City workers, led by San Jose's police union, sued, demonstrating how difficult it is for local governments in the United States -- even with a reform measure backed by voters -- to rein in soaring pension and other retirement costs.

After a testy exchange between the judge presiding over Detroit's bankruptcy and a Michigan official, attorneys for the state agreed yesterday to drop a challenge to a request by creditors' lawyers to depose Michigan Governor Rick Snyder on the city's eligibility for bankruptcy, Reuters reported yesterday. Citing executive privilege, the office of the state attorney general had filed a motion on Monday arguing that Snyder should not be deposed. Creditors' attorneys had said that they wanted the governor's deposition to determine his motivation in approving a request in mid-July from Detroit's state-appointed emergency manager, Kevyn Orr, to take the city into chapter 9 bankruptcy. Some unions have also argued in filings that Snyder and Orr arranged the bankruptcy filing specifically to target worker pay and benefits. Bankruptcy Judge Steven Rhodes took issue with the lateness of the filing on Monday and said he almost considered waiving the Tuesday hearing. Assistant State Attorney General Margaret Nelson, who appeared in court to make the governor's case, argued that the issue of deliberations on Snyder's part were not relevant to the case. But Judge Rhodes responded that since creditors had objected to the bankruptcy based in part on Snyder's motives, it was too late to cite executive privilege.

Testimony by Michigan Gov. Rick Snyder (R) and other state officials on Detroit’s eligibility for bankruptcy is not relevant and involves privileged information, the Attorney General’s Office said in a document filed late today in advance of today’s hearing on the matter, the Detroit Free Press reported today. Bankruptcy Judge Steven Rhodes will oversee a hearing at 10 a.m. today that could be politically charged with the question of whether unions have the right to depose the state’s governor and others prior to the Oct. 23 hearing on whether the city is eligible for bankruptcy protection. Lawyers for the Michigan Council 25 of the American Federation of State, County & Municipal Employees as well as the UAW say that they must be able to take discoveries of key officials, under oath, to cover all the issues of their objections to the city’s eligibility for chapter 9. Depositions were also sought for top Snyder adviser Richard Baird, Auditor General Thomas McTavish and Frederick Headen, legal adviser for the Michigan Department of Treasury. The unions also seek additional documents from the state.

A state court in Detroit will participate in the city’s record, $18 billion municipal bankruptcy, saying that it reserved its right to adjudicate “noncore” matters related to the federal case, Bloomberg News reported on Friday. Attorney John Gregg filed paperwork in bankruptcy court on behalf of Michigan’s 36th District Court asking for copies of all pleadings filed in the case. Such requests are normally only filed by creditors and other private parties that believe they are affected by a bankruptcy case. The state court handles small-claims lawsuits involving amounts less than $25,000, traffic cases and misdemeanor criminal cases. “The submission and filing of this notice and demand constitutes a ‘special appearance,’” Gregg wrote in the filing. The filing isn’t “a consent to, or a waiver of, the right to challenge jurisdiction of this Court to adjudicate noncore matters, which right the 36th District Court for the State of Michigan expressly reserves without prejudice.”

One of Detroit’s two pension funds handed out nearly $1 billion in bonus cash payments over two decades to retirees and active employees’ retirement accounts instead of reinvesting the extra earnings for the future, according to a Detroit Free Press review of city records. The payments contributed to Detroit’s financial crisis and its historic chapter 9 bankruptcy filing by increasing the amount the city needed to contribute each year to keep the pension fund solvent. Had the city’s General Retirement System held on to the excess cash, the city might not have felt the need to borrow $1.44 billion in 2005 to plug the city’s unfunded pension liabilities gap, the Free Press found. That debt has ballooned to nearly one-fifth of the city’s total debt today and played a role in pushing the city into filing the largest municipal bankruptcy in the nation’s history in July. The average annual pension for retired Detroit police officers and firefighters is about $34,000, and for retirees from Detroit’s general city pension fund the average is less than $20,000. No one is getting wealthy off of the pension checks, but the cumulative effect of distributing the bonuses to about 20,000 retirees and also as annuity bonuses for active employees over time has destabilized the funds and the city’s budget, Detroit emergency manager Kevyn Orr and others contend.