Thread: Judge: Detroit eligible for Chapter 9 bankruptcy

Judge: Detroit eligible for Chapter 9 bankruptcy

By Associated Press, Published: December 2 | Updated: Tuesday, December 3, 8:58 AM


DETROIT — Detroit is eligible to shed billions in debt in the largest public bankruptcy in U.S. history, a judge said Tuesday in a long-awaited decision that now shifts the case toward how the city will accomplish that task.

Judge Steven Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

But that plan isn’t on the judge’s desk yet. The issue for Rhodes, who presided over a nine-day trial, was whether Detroit met specific conditions under federal law to stay in bankruptcy court and turn its finances around after years of mismanagement, chronic population loss and collapse of the middle class.

The city has argued that it needs bankruptcy protection for the sake of beleaguered residents suffering from poor services such as slow to nonexistent police response, darkened streetlights and erratic garbage pickup — a concern mentioned by the judge during the trial.

“This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy,” Rhodes said in announcing his decision. “At the same time, it also has an opportunity for a fresh start.”

Before the July filing, nearly 40 cents of every dollar collected by Detroit was used to pay debt, a figure that could rise to 65 cents without relief through bankruptcy, according to the city.

Emergency manager Kevyn Orr, who had testified the city’s current conditions are “unacceptable,” release a statement praising the judge’s ruling and pledging to “press ahead with the ongoing revitalization of Detroit.”

Rhodes said Tuesday that Detroit has a proud history.

“The city of Detroit was once a hard-working, diverse, vital city, the home of the automobile industry, proud of its nickname the Motor City,” he said. But he then recited a laundry list of Detroit’s warts: double-digit unemployment, “catastrophic” debt deals, thousands of vacant homes, dilapidated public safety vehicles and waves of population loss.

Detroit no longer has the resources to provide critical services, the judge said, adding: “The city needs help.”

Rhodes’ decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in the Michigan Constitution protecting public pensions isn’t a bulletproof shield in a bankruptcy.

The city says pension funds are short by $3.5 billion. Anxious retirees drawing less than $20,000 a year have appeared in court and put an anguished face on the case. Despite his finding, Rhodes cautioned everyone that he won’t automatically approve pension cuts that could be part of Detroit’s eventual plan to get out of bankruptcy.

There are other wrinkles. Art possibly worth billions at the Detroit Institute of Arts could be part of a solution for creditors, as well as the sale of a water department that serves much of southeastern Michigan. Orr offered just pennies on every dollar owed during meetings with creditors before bankruptcy.

Behind closed doors, mediators, led by another judge, have been meeting with Orr’s team and creditors for weeks to explore possible settlements.

Much of the trial, which ended Nov. 8, focused on whether Orr’s team had “good-faith” negotiations with creditors before the filing, a key step for a local government to be eligible for Chapter 9. Orr said four weeks were plenty, but unions and pension funds said there never were serious across-the-table talks.

Minutes after the ruling, a lawyer for the city’s largest union, said she would pursue an appeal at the 6th U.S. Circuit Court of Appeals in Cincinnati. City officials got “absolutely everything” in Rhodes’ decision, she told reporters.

“It’s a huge loss for the city of Detroit,” said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half the city’s workers.

Opponents want to go directly to a federal appeals court in Cincinnati, bypassing the usual procedure of having a U.S. District Court judge hear the case.

Orr, a bankruptcy expert, was appointed in March under a Michigan law that allows a governor to send a manager to distressed cities, townships or school districts. A manager has extraordinary powers to reshape local finances without interference from elected officials. But by July, Orr and Gov. Rick Snyder decided bankruptcy was Detroit’s best option.

Detroit, a manufacturing hub that offered good-paying, blue-collar jobs, peaked at 1.8 million residents in 1950 but has lost more than a million since then. Tax revenue in a city that is larger in square miles than Manhattan, Boston and San Francisco combined can’t reliably cover pensions, retiree health insurance and buckets of debt sold to keep the budget afloat.

Donors have written checks for new police cars and ambulances. A new agency has been created to revive tens of thousands of streetlights that are dim or simply broken after years of vandalism and mismanagement.

While downtown and Midtown are experiencing a rebirth, even apartments with few vacancies, many traditional neighborhoods are scarred with blight and burned-out bungalows.

Besides financial challenges, Detroit has an unflattering reputation as a dangerous place. In early November, five people were killed in two unrelated shootings just a few days apart. Police Chief James Craig, who arrived last summer, said he was almost carjacked in an unmarked car.

The case occurs at a time of a historic political transition. Former hospital executive Mike Duggan takes over as mayor in January, the third mayor since Kwame Kilpatrick quit in a scandal in 2008 and the first white mayor in largely black Detroit since the 1970s.

Orr, the emergency manager, is in charge at least through next fall, although he’s expected to give Duggan more of a role at city hall than the current mayor, Dave Bing, who has little influence in daily operations.

http://www.washingtonpost.com/business/detroit-to-get-crucial-ruling-in-bankruptcy-case/2013/12/03/e1b4fdee-5be1-11e3-801f-1f90bf692c9b_story.html

Bankrupt Detroit can cut pensions; big implications for California

By Dale Kasler - Updated: 10:28 am
In a case with major implications for California, a judge today ruled that the bankrupt city of Detroit can impose cuts to its municipal pension plans.

• Reaction to ruling in Detroit's bankruptcy case
• A look at the next steps in Detroit's bankruptcy
  Read more here: http://www.sacbee.com/#storylink=cpy

Ruling Makes Detroit Biggest City to Qualify for Bankruptcy

New York Times

- ‎14 minutes ago‎

DETROIT - Detroit is eligible to shed billions in debt in the largest public bankruptcy ever in the United States, a federal judge ruled Tuesday, while also finding that the public pensions could be reduced during reorganization despite a provision in Michigan's ...

5 pension cut scenarios. Orr mum today on extent of cuts

5:42 PM, December 3, 2013 |

By John Gallagher
Detroit Free Press Business Writer

It’s the biggest question in Detroit: How much will emergency manager Kevyn Orr try to cut pensions of retired city workers?

The first details will come in the so-called “plan of adjustment” that Orr will present in bankruptcy court by the first of the year. Orr declined to say Tuesday how he plans to spread cuts over more than 20,000 City of Detroit retirees and their beneficiaries. But here are some possible scenarios:
■ Orr might shield the city’s oldest and poorest retirees and cut deeper into the pensions of younger, somewhat better off retirees.
■ He might impose the cuts equally across the board but phase them in over a number of years, in effect offering a measure of protection for older retirees.
■ He might cap pension payments at some basic amount, requiring cuts only to those getting the biggest retirement checks.
■ Orr could leave pensions for current retirees relatively intact but impose deeper cuts on the active workers who remain years short of retirement age.
■ He might impose smaller cuts on the city’s retired police and firelighters because their pension fund, the Police & Fire Retirement System, is in somewhat better shape than the General Retirement System fund for the city’s non-uniformed retirees.
■ It is possible that unions representing city workers may defeat Orr’s plan on appeal. Many experts expect the question of whether pensions can be cut in a bankruptcy proceeding to ultimately make its way to the U.S. Supreme Court.

Orr remained mostly mum about the possibilities Tuesday after U.S. Bankruptcy Judge Steven Rhodes ruled pension cuts are allowed under federal bankruptcy law. Rhodes insisted that any cuts to pensions be “fair and equitable.” Orr later said he is “very sensitive to the human dimensions.”

It is clear that no pensioner will lose everything. Even with a dispute over how badly the city’s two pension systems are underfunded — Orr estimates the underfunding at $3.5 billion, which pension leaders say is actually less than $700 million — the two funds still have billions of dollars in actual cash to pay benefits.

For example, Orr estimated that the Police & Fire System is about 80% funded. So retired cops and firelighters should be able to continue to receive at least 80% of their current pension checks, with any cuts only to the unfunded portion.

Meeting with Free Press editors and reporters Tuesday afternoon, Orr said he didn’t know how many separate classes retirees might be grouped into or whether any of the schemes to create tiers of cuts would be in his plan.

Orr said he hopes that retiree representatives will be willing to sit down and negotiate a solution, although up to now the city’s municipal unions have resisted any attempt to reduce pensions.

http://www.freep.com/article/2013120...-of-adjustment

Detroit Bankruptcy Could Affect City Workers Nationwide

The latest ruling could set a precedent for municipal employees in many other cities

By DANIELLE KURTZLEBEN
December 3, 2013

A federal judge is announced Tuesday Detroit would be eligible to declare bankruptcy
A judge has ruled that the largest municipal bankruptcy in U.S. history can proceed, but the fight is nowhere near over, and not just for Detroit. Detroit workers have vowed to press on, but the ultimate ruling could have a significant impact on the security of pensions for city workers around the country.

[READ: The Cities That Have Bounced Back the Most From the Recession]

Federal Judge Stephen Rhodes on Tuesday determined that the city is insolvent and eligible for bankruptcy, meaning outstanding pension liabilities could be among the debts the city will be able to discharge.

Creditors had claimed the city could not cut accrued pension benefits, as the Michigan constitution expressly says state and city workers' pensions and retirement benefits "shall not be diminished or impaired."

However, the judge saw it differently.

"Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy," Rhodes said, as reported by the New York Times.

That means municipal workers in other financially troubled cities – even cities in the seven states with constitutional pension protections – could see their pensions cut in the case of a bankruptcy.

"Anyone who has a city pension where the city has significant financial trouble has to worry about whether or not the city will resort to a bankruptcy filing as a way to adjust or modify an existing pension obligation," says Manny Grillo, chair of the financial restructuring practice at New York-based law firm Goodwin Procter. "I would characterize it as the first really significant opportunity for a major change in outstanding pension obligations."

Detroit's bankruptcy has been long in coming. At the start of 2012, Michigan Gov. Rick Snyder appointed a review team to inspect city finances. That team later found the city to be in "severe financial distress." In early 2013, Snyder appointed Kevyn Orr as Detroit's emergency manager. In June, Orr presented a proposal to creditors, estimating that pension liabilities totaled $3.5 billion, or around one-fifth of the city's debt, which totals more than $18.5 billion. One month later, the city filed for bankruptcy.

[PHOTOS: Detroit 2013: Portrait of a Bankrupt City]

Rhodes found the city did not negotiate in good faith with creditors, meaning in this case it did not give them ample time to object to the proposal.

"They basically didn't really negotiate, only giving 30 days. They basically said, 'Here's what we're going to do, take it or leave it,'" explains Robert Novy-Marx, assistant professor of finance at the Simon Business School at the University of Rochester. However, the court also found that good-faith negotiations with over 100,000 creditors would have been "impracticable."

There is still a chance the ruling could go in unions' favor; Sharon Levine, the attorney representing the American Federation of State, County, and Municipal Employees, told the AP the ruling was "a huge loss for the city of Detroit" and said the union plans to appeal the ruling.

(The Michigan AFSCME council has not yet responded to request for comment.)

But if after that and any subsequent appeals the bankruptcy is allowed to proceed, it could mean shifts ahead for how unions and cities approach negotiations.

"I do think it's incredibly important," says Novy-Marx. "I think it's the beginning of the end of the current system, really, because I think it completely changes the incentives of the worker."

He says that rather than ask for more generous pensions in the future, public workers may instead simply ask that cities better fund existing pension systems.

"I envision public sector workers starting to ask for full funding and under a more reasonable accounting regime," says Novy-Marx.
Chicago is one city with large unfunded pension liabilities – in fact, according to Moody's Investor Service, it has the largest liabilities in the nation, at 678 percent of revenue. Jorge Ramirez, president of the Chicago Federation of Labor, an organization of Chicago unions, says the Detroit ruling's implications do not worry him about Chicago workers' future because Chicago is not facing bankruptcy. However, he adds that he believes cities have an obligation to fulfill what they promised to their workers.

[ALSO: The 10 U.S. Cities With the Highest Real Incomes]

"The most sacred relationship that a government can have is with their citizens and their employees. To default on the obligations they have to them means they didn't prioritize their commitments," says Ramirez.

Not only should pensions get special treatment, he says, "they should be given the ultimate treatment or protection."

For its part, Detroit faces a difficult road, and mayor-elect Mike Duggan inherits a fiscal and political crisis. He alluded to the challenges ahead in a statement released Tuesday.

"This is a day in Detroit's history that none of us wanted to see," he said in a statement, as reported by the Associated Press. "I'm going to do everything I can to advocate on behalf of Detroit's future in this process. We need to make sure the retirees are treated fairly on the pensions they earned and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve."

http://www.usnews.com/news/articles/...ers-nationwide

RELATED

http://www.alipac.us/f19/illinois-le...system-293265/

This ruling gives all cities, counties and states with pension problems the ability to FIX the problem by filing bankruptcy and then cutting pensions.

RELATED

http://www.alipac.us/f19/california-...reform-293275/

This story is part of
DETROIT FINANCIAL CRISIS

Christie's estimates Detroit-bought art at $866 million
Judge: Detroit can cut employee pensions
Detroit becomes largest U.S. city to enter bankruptcy

Detroit bankruptcy judge releases 150-page order

Nathan Bomey, Brent Snavely and Alisa Priddle, Detroit Free Press8:17 p.m. EST December 5, 2013
U.S. Bankruptcy Judge Steven Rhodes authorized the city's bankruptcy filing Tuesday.


(Photo: Carlos Osorio, AP)

STORY HIGHLIGHTS

• Judge Rhodes said pensions can be cut because they are contracts
• Judge didn't blame creditors for failing to negotiate
• Detroit filed for Chapter 9 bankruptcy protection July 18

DETROIT — The 150-page order filed Thursday byU.S. Bankruptcy Judge Steven Rhodes that details his legal reasoning for authorizing the City of Detroit's bankruptcy filing provides guidance on rarely raised Chapter 9 issues.

Though the Rhodes ruling is not binding on municipalities in other states, the expectation is it will be picked through carefully, especially given the judge's expertise and thoroughness, said attorney Doug Bernstein.

STORY: Detroit becomes largest U.S. city to enter bankruptcy
STORY: Judge: Detroit can cut employee pensions

"This is an opinion from a well-respected judge who is active nationally," said Bernstein.
Wayne State University law professor Laura Beth Bartell agrees.

"I know from my days when I was clerking, if a judge is well respected in the community, his or her opinions carry more weight. And Judge Rhodes is very well respected — not just here but across the country. So citing a judge Rhodes opinion is something other courts are likely to do."

Rhodes on Thursday issued the formal Order for Relief for the city to be a debtor under Chapter 9 of the U.S. Bankruptcy Code.

In a separate filing, he expounded on the summary he gave in court Tuesday with a detailed ruling, saying pensions can be cut because they are contracts. He also urged the city to be cautious about "one-time" sale of assets unless it contributes to the city's "operational revenue."

“Any such contingency in the governor's authorization letter would have been invalid, and may have rendered the authorization itself invalid.”— Bankruptcy Judge Steven Rhodes

"It will have some influence on those California judges trying to decide whether pensions can be cut," said Wayne State University law professor Laura Beth Bartell.

Rhodes also reiterated his assertion that the city did not have to negotiate at all with creditors because fair talks were "impracticable."

By July 18, the day Detroit filed for bankruptcy, the city was being bombarded by lawsuits, facing dwindling cash flow and failing to deliver vital services — adding credence to the city's argument that reaching a deal with more than 100,000 creditors would have taken too long.

Still, Rhodes refused to blame creditors for failing to negotiate. He said a month-long window between Detroit emergency manager Kevyn Orr's June 14 proposal to creditors and the bankruptcy filing was not enough time for "good faith" talks.

"The city argues that these meetings were intended to start negotiations and that they expected counter-proposals from the creditors," Rhodes wrote.


U.S. Bankruptcy Judge Steven Rhodes(Photo: Courtesy of Detroit Legal News Publishing)

"Even as a first step, these meetings failed to reach a level that would justify a finding that negotiations had occurred, let alone good faith negotiations," he wrote.

Bernstein said he thinks the unions will have a hard time finding errors upon which to base an appeal. He noted Rhodes worked to find a balance between moving the case along quickly while still allowing all parties to have their say.

"That makes it tougher to appeal on the grounds they were not given an opportunity for their day in court," he said.

Creditors also argued that Michigan Gov. Rick Snyder should have forced Orr to attach a contingency to the bankruptcy filing that would protect pensions under all circumstances. Snyder rejected his own attorney's advice to attach a contingency.

But Rhodes said contingencies could have undercut the bankruptcy.

"Any such contingency in the governor's authorization letter would have been invalid, and may have rendered the authorization itself invalid," he wrote.

http://www.usatoday.com/story/news/n...order/3884519/