STUMP » Articles » Detroit Bankruptcy Watch: What, exactly, is up? Down? Whatever? » 3 August 2014, 04:04

So on Wednesday (July 30), I watched a webinar from S&P about the one-year anniversary of the Detroit bankruptcy. I learned a lot of detail that people in the investment space are interested in, though a few of the political issues came up as well.

The thing is, while there is a bankruptcy judge overseeing this all, people don’t realize the deals currently being made, with current retirees, with active and “separated” employees (no longer working for Detroit, but not yet retired), with bondholders, etc. etc. is being done one-on-one-ish. The Judge supervises the process, and may say some creditors are being unfairly, so try again, but in general the Judge doesn’t impose a workout solution.

I am not a bankruptcy lawyer, but it’s clear that in general the judge doesn’t proclaim who gets what, but oversees the process, and may allow or disallow based on some major principles: creditors being treated equitably and that the particular promises made in the bankruptcy are doable and won’t have the parties back in court in a few years.

Creditors being treated equitably doesn’t mean everybody gets cut the same, but that people are cut to the extent of the promises made — ignoring the pension issue, some bonds had stronger credit protections in place than others, and the “senior” bonds are getting 70+% of principal back, and the limited “junior” bonds are getting more on the order of 34%… mind you, the investment folks are taken aback by the how deep the “junior” General Obligation bonds are getting whacked, but that’s not final.

So now is the time on STUMP in which I copy & paste, because I can’t type much more.

Tuesday (July 29), Judge said time was short:

A federal appeals court judge late Tuesday challenged creditors to decide within 48 hours if they’ll continue to contest Detroit’s eligibility for bankruptcy and its plan to cut pensions.

The judge’s letter came after four creditor groups on Tuesday postponed Wednesday’s planned appeal over aspects of the city’s July 2013 Chapter 9 filing. Judge Julia Smith Gibbons, heading a three-judge panel that was to hear the arguments, wrote that she was pleased that settlement negotiations were progressing, but that time was running out.

“The panel does not consider further delay in rendering a decision an option at this time,” Gibbons wrote. She explained that the judges need time to rule before a federal bankruptcy judge decides on the fairness of Detroit’s exit plan. She gave creditors until the close of business Thursday to decide whether they would drop their challenges to U.S. Bankruptcy Judge Steven Rhodes’ prior rulings in the city’s favor.

While the postponement was one sign Tuesday of apparent progress toward a negotiated settlement, one legal challenge in the nation’s largest municipal bankruptcy will proceed Wednesday.

Detroit’s fiercest creditor will appear before the 6th Circuit Court of Appeals in Cincinnati to argue that the city should not have access to a coveted $15 million pot of monthly casino taxes.

Attorneys for Syncora Guarantee Inc. will make their case over an issue the bond insurer has been fighting since even before the city took legal shelter in bankruptcy court.

At issue is whether Detroit should have unfettered access to its casino taxes — the bankrupt city’s most reliable revenue source — after the city defaulted on debt backed by gambling tax receipts.

Syncora is one of two companies that insured the underlining debt former Mayor Kwame Kilpatrick’s administration used to prop up the city’s pension funds. The financial giant has argued the casino tax revenues should be used to make payments on the $1.4 billion in pension debt so the company doesn’t have to pay insurance claims.

The three-judge appellate panel will hear Syncora’s appeal just three weeks before Detroit’s bankruptcy exit plan is set to go on trial. The hearing is scheduled for 1:30 p.m. today

Remember that second big principle I talked about: not having the parties come back after the bankruptcy is supposedly done because the financial plan was unworkable.

Yeah, about that… the plan on the table would require years of monitoring:

Detroit could be under prolonged and apparently unprecedented court oversight if the city successfully emerges from bankruptcy court this fall, according to a plan proposed Friday.

In response to concerns raised by U.S. Bankruptcy Judge Steven Rhodes, the city’s legal team proposed he appoint a monitor to oversee compliance with Emergency Manager Kevyn Orr’s plan to shed more than $7 billion in debt.

The so-called “plan monitor” would file quarterly reports with the court and have power to subpoena records and answers from the mayor, City Council, pension fund trustees and officials overseeing health-care trusts.

The “plan monitor” details are included in a revised version of the city’s debt-cutting plan filed Friday in bankruptcy court.

The post-bankruptcy monitoring proposal was included in the revised plan to give Rhodes an option for long-term oversight, but Detroit’s bankruptcy legal team is open to other ideas, Orr spokesman Bill Nowling said.

“What form any of it takes is up to the judge,” Nowling said Friday.

Attorney James Spiotto, a municipal bankruptcy expert in Chicago, said it would be unprecedented in the nation’s handful of Chapter 9 cases to have the city remain under the court’s oversight for years to come.

That is not exactly a good precedent to set. If the city requires that much babysitting, perhaps it shouldn’t be a city anymore, eh?

Various Detroit retirees/employees voted yes on the pension cuts, but other creditors are unhappy:

DETROIT — Companies that insure Detroit bonds and stand to lose millions repeated a pledge Tuesday to aggressively challenge the city’s bankruptcy plan, a day after retirees endorsed pension cuts and qualified for a bailout led by the state.

Syncora and Financial Guaranty Insurance said retirees and city workers are being given special treatment that’s unfair to other creditors.

…..
General retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. Some also have to repay a portion of generous annuity earnings from the last decade. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise.

The city said the cuts would be worse without $816 million in aid from the state of Michigan, foundations and the Detroit Institute of Arts. Money from the so-called grand bargain would prevent the sale of city-owned art and avoid deeper pension reductions.

No other creditors qualify for the money. Judge Steven Rhodes still would need to bless the deal after a trial on Detroit’s overall bankruptcy plan, which starts Aug. 14.

“We are not surprised at the vote, given the grand bargain’s illegal diversion of highly valuable assets to the very creditors who voted yes,” James Sprayregen, an attorney for Syncora, said Tuesday. “We look forward to the confirmation hearing and demonstrating to the court that the plan cannot legally be confirmed given its unfair discrimination against financial creditors and other serious infirmities.”

I would have to go back to some older stories, but while many were declaring their amazement that the public employees agreed on the plans, said employees/retirees were threatened with unilateral cuts if they didn’t agree. Also, agreeing to the plan didn’t take away their ability to sue against the cutting of pensions.

So they figured to go along with the plan to avoid more immediate pain. They were already getting cut, the matter, as far as they were concerned, was to keep said cuts as minimal as possible in the short-run, and then clawback all the goodies over time, whether by court or political means.

Now, what’s interesting to me is how many people on the leftish side agree with those on the rightish side: some of the spending going on in Detroit even while the bankruptcy is going on is disgusting.

Like the new sports stadium:

As states and cities grapple with budget shortfalls, many are betting big on an unproven formula: Slash public employee pension benefits and public services while diverting the savings into lucrative subsidies for professional sports teams.

Detroit this week became the most prominent example of this trend. Officials in the financially devastated city announced that their plan to slash public workers’ pension benefits will move forward. On the same day, the billionaire owners of the Detroit Red Wings, the Ilitch family, unveiled details of an already approved taxpayer-financed stadium for the professional hockey team.

Many Detroit retirees now face big cuts to their previously negotiated retirement benefits. At the same time, the public is on the hook for $283 million toward the new stadium.

The budget maneuvers in Michigan are part of a larger trend across the country. As Pacific Standard reports, “Over the past 20 years, 101 new sports facilities have opened in the United States — a 90 percent replacement rate — and almost all of them have received direct public funding.” Now, many of those subsidies are being effectively financed by the savings accrued from pension benefit reductions and cuts to public services.

In Chicago, for instance, Mayor Rahm Emanuel recently passed a $55 million cut to municipal workers’ pensions. At the same time, he has promoted a plan to spend $55 million of taxpayer money on a hotel project that is part of a stadium development plan.

In Miami, Bloomberg News reports that the city “approved a $19 million subsidy for (a) professional basketball arena” and then, six weeks later, “began considering a plan to cut as many as 700 (librarian) positions, including a fifth of the library staff and more than 300 police.”

In Arizona, the Phoenix Business Journal reports that regional governments in that state have spent $1.5 billion “on sports stadiums, arenas and pro teams” since the mid-1990s. Meanwhile, legislators are considering proposals to cut public pension benefits.

In New Jersey, Gov. Chris Christie is blocking a planned $2.4 billion payment to the pension system, at the same time his administration has spent a record $4 billion on subsidies and tax breaks to corporations. That includes an $82 million subsidy for a practice facility for the Philadelphia 76ers.

As noted, this bad behavior is not just a Detroit matter.

And to wrap this up, I will have Canadian Leo Kolivakitis on his take:

I’ve said it before and I’ll say it again, Detroit is a shit hole. Only third-world countries cut off water to their residents and even they do a better job than Detroit in managing their public services. The public outrage spawned the Detroit Water Project, a platform to help donors pay the delinquent water bills of people in Detroit.

Pay close attention to what’s going on in Detroit because it’s coming to a city near you. And while Americans for Tax Reform founder Grover Norquist goes on CNBC to blast Obama and Democrats on tax reform, he conveniently fails to mention how America’s plutocrats, which now include overpaid hedge fund managers, are skirting their fair share of taxes using questionable practices.

But hey, as long as America has nice sports stadiums, who cares about public pensions? Oh well, at least King James is going back home to Cleveland to give that proud city a fighting chance at an NBA championship. Go Cavs go! :)

I am also against sucking up to the pro sports teams, mainly because I get no benefit from it. How about kicking a little back to the local opera house? (Note: I am kidding. Don’t give those profligates money. They’ve got to figure out how to make it work.)

Of course, calling Detroit a shithole basically makes the point that the whole area should be razed a la Sherman on Atlanta (best thing to happen to Atlanta) and start over.

People tend not to take well to such comments, though.

But I don’t agree with one thing Leo has in the post:

It doesn’t take a genius to figure out why defined-benefit plans boost economic activity. As the demographic shift continues, more and more people are retiring with little or no savings. But those retiring with a known pension payout are able to plan better, spend more and contribute to economic activity and state sales taxes.

No. No, it doesn’t boost economic activity, unless you’re ignoring the economic activity it is taking away by the money taxed away from taxpayers. The kind of analysis that goes into the “multiplier effect” analyses are just as faulty as the ones used to excuse cities paying for stadiums for pro teams that could finance it themselves.

I have more to say about that later.

In the interim: PENSION OBLIGATION BONDS ARE OF THE DEVIL