Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Tuesday, December 3, 2013
Detroit Bankruptcy confirmed as Judge Steven Rhodes rules Detroit eligible for immediate bankruptcy protection. Pension cuts will be allowed as pension debt no different from other debt - so do the Unions and pensioners just " eat their peas " ? Detroit now the blueprint for struggling Cities and States here in the US with huge unfunded pension obligations ?
JUDGE: DETROIT ELIGIBLE FOR IMMEDIATE BANKRUPTCY PROTECTION
DETROIT TO REMAIN UNDER BANKRUPTCY COURT PROTECTION, JUDGE SAYS
As somewhat expected - though hoped against by many Detroit union workers - Judge Steven Rhodes appears to have confirmed Detroit is eligible for bankruptcy protection (after pointing out that the city's accounting was accurate and it is indeed insolvent) making this the largest ever muni bankruptcy.
JUDGE RHODES SAYS HE WILL ALLOW PENSION CUTS IN DETROIT'S BANKRUPTCY
DETROIT JUDGE: NOTHING SEPARATES PENSIONS FROM OTHER DEBT
The city will now begin working toward its next major move - the submission of a plan to re-adjust its more than $18 billion in debt - including significant haircuts for pension funds (possibly 16c on the dollar recovery) and bondholders. With Detroit as precedent, we can only imagine the torrent of other cities in trouble that will be willing to fold.
He did provide an "out" though:
RHODES WARNS THE CITY THAT JUST BECAUSE PENSION RIGHTS CAN BE IMPAIRED, DOESN'T MEAN HE WILL APPROVE A PLAN WITH STEEP CUTS
Via Bloomberg,
Before the bankruptcy, Orr proposed canceling $3.5 billion in future pension obligations and at least $1.4 billion in unsecured bonds. The debts would be replaced with a $2 billion note paying 1.5 percent interest.
But, of course:
Detroit must ask “what is necessary to invest to attract business?” Spiotto said in a phone interview.“If you don’t solve the systemic problem, you are just going to repeat it.”
Summary from Reuters:
Detroit is eligible for the biggest municipal bankruptcy in U.S. history because the city is broke and without Chapter 9 bankruptcy would continue on the path that has led it to insolvency, a federal judge ruled on Tuesday.
The judge also ruled that while the city did not negotiate in "good faith" with creditors, there were too many of them to make such negotiations practical.
Appeals are expected, but the ruling by U.S. Judge Steven Rhodes sets the stage for Detroit to file a plan of financial readjustment by March 1. The city's attorneys said they were not sure if the filing would occur before the end of the year.
The ruling came 25 days after the end of an eligibility trial during which Detroit's labor unions, retirees and pension funds argued against the city's July 18 bankruptcy filing.
Fears for the future after Detroit bankruptcy ruling
Protesters gathered outside the federal courthouse earlier today, as a judge ruled that Detroit could file for bankruptcy. Many employees fear their pensions and benefits will be cut.Rebecca Cook/Reuters
DETROIT — David Meadows is a 20-year veteran of the police force here, but Tuesday morning he was part of a crowd of more than 70 demonstrators circling the street in front of the federal courthouse, where a judge had just ruled that the city is eligible for Chapter 9 bankruptcy protection.
Many of those gathered toted placards or chanted in support of city employees, whose fears about the future were confirmed with the news. "Bail out people, not banks!'' read one sign, while another proclaimed "STOP debt service to banks that destroyed Detroit.''
"Pension is all we got, and now they want to cut that," said Meadows, 42, after pointing out that neither police officers nor firefighters pay into Social Security.
In addition, he's also worried about his mother, a retired Detroit bus driver with medical problems who is too young for Medicare.
Now that Detroit may enter bankruptcy, emergency manager Kevyn Orr is expected to present his plan to reorganize the city's finances by year's end. The so-called "plan of adjustment" will detail how to mitigate some $18 billion in debt, including what assets, if any, he intends to sell. Among the assets reportedly up for possible sale: the collection at the Detroit Institute of Arts and the city's municipal water system.
U.S. Bankruptcy Judge Steven Rhodes also opened the door to pension reductions, saying Detroit pensioners had only contractual rights to their benefits. Rhodes warned Orr, however, that such cuts would not be considered lightly.
"I'm struggling''
Detroit Fire Department retiree Del Williams, who takes five medications daily after heart bypass surgery, is scared out-of-pocket health-care costs will increase, straining an already austere budget. "I'm thinking about getting a side job, but who in this economy is going to hire a 58-year-old?'' he said.
Tony Gilbert, a former DFD captain who retired in 1998, lost his downtown condo to foreclosure late last year, shortly before Orr was appointed Detroit's emergency manager and the prospect of bankruptcy was broached. Health related-expenses for both he and his wife have wiped them out, he said.
"Now this," he said of the ruling. "I'm struggling."
Al Buford, a mail clerk who works in the Coleman A. Young Municipal Center, said the ruling was a foregone conclusion. "They already got it mapped out the way they're going to do this," he said, smiling wanly while loading boxes of inter-office mail into a car trunk. "I'm very concerned, but no use losing sleep, I guess."
Alvin Coleman, who works in the city's water and sewerage department, said he doesn't know what going to happen but believes he'll at least keep his job. "Maybe the city can get back on track now, but I don't know. Nobody knows how bad it's going to get before it starts to get better."
Amru Meah had his own future in mind, and he doesn't like what he sees. The former buildings and safety engineering employee, and cancer survivor, fears deep pension and health-care cuts. "Costs are rising everywhere. How am I going to pay my bills? How am I going to make my mortgage payments?"
Meah, 57, retired in 2009 after 32 years. His wife does not work. "When I retired I determined what my income would be. And now ... I don't know how I will survive," he said, shaking his head. "Maybe I'll file for bankruptcy, too."
Emergency Manager Kevyn Orr called Tuesday for the city’s labor unions to negotiate reforms with the city even though they are appealing U.S. Bankruptcy Judge Steven Rhodes’ decision that Detroit is eligible for bankruptcy protection.
Orr said he wants to file a plan of adjustment for reducing the more than $18 billion in debt by the first week of January and said time is short to tackle the task. He said he would let creditors and unions see the plan before submitting it.
“We have a lot of work ahead of us, but I would ask our creditors and our labor partners to come forward with us and take this opportunity even in the process of litigation and appeals to try to get at the sorely needed reform that this city has got to achieve so that we can move forward to a new day,” Orr said at a press conference Tuesday afternoon.
Later, in an interview with The Detroit News’ editorial board, Orr was more blunt about saying the unions should try to reach agreements with the city before debt-cutting solutions are imposed on them in bankruptcy court.
“Whether we have consensual agreements or not, we’re moving forward,” he said, adding at one point that “we are going to have to impose a settlement because we have to.”
“Now the heavy lifting starts. Now it’s for real,” Orr said.
Any debt-cutting plan of adjustment will include cuts to city pensions, the emergency manager made clear. Whether the city’s pension funds are underfunded by $1.5 billion, as the city pension funds contend, or $3.5 billion estimated by Seattle firm Milliman, he said, “It still doesn’t change the fact: There is no money.”
Rhodes’ ruling that pensions are contractual obligations that could be reduced makes sense, Orr said, because federal bankruptcy courts routinely break contracts to settle debt obligations. Attorney General Bill Schuette, labor unions and retiree groups argue the state’s Constitution protects pensions from cuts.
The emergency manager called for negotiating agreements on pensions, much like what has been achieved with some creditors.
“The game is afoot,” Orr said. “Now it’s time to really sit down across the table and come up with some form of consensual agreement. I would hope other parties would jump on board. We very much want to take this as an overture for us to get together and reach a substantive resolution to these questions before we have to impose it.”
He said he soon hopes to announce agreements with unions or creditors such as the emergency medical technicians and Bank of America. “I would hope the other parties would jump on board,” he added.
But Orr wants to be strategic in making sure everything isn’t cut.
“You want to address the crushing debt obligation (and) unfunded pension liability, but you also want to leave the city in a position to be revitalized and to grow,” Orr said.
City pensioners are expected to share in the cuts along with other creditors, but Orr said the city will be strategic about that as well will be done. The city is a part of the mediation process and figures about proposed cuts are confidential, Orr said. The health care plan that was pushed back about two weeks ago will not be rolled out until March 1, Orr said.
“There’s not been a restructuring where some contracts have not been adjusted,” Orr said. “It’s just that the contracts here have a human dimension because they are pensions and that’s very concerning. ... We’re going to be thoughtful, measured and humane about what we’re going to do.”
During Tuesday’s press conference, Orr said he is pleased the city is making some headway in restoring city services such as garbage collection, public lighting and working with Police Chief James Craig to reduce crime.
We remain concerned about the need to adjust the city debt, to improve the level of services for citizens and to prepare for the city to exit this receivership in a fashion that restores democracy to the city,” he said.
In a single ruling, U.S. Bankruptcy Judge Steven Rhodes overturned a 50-year belief that vested public-sector pensions are protected by the state constitution under Chapter 9 and allowed the largest municipal bankruptcy in American history to proceed.
Rhodes’ ruling on pensions, certain to be appealed, will reverberate nationwide. With cities, even states, grappling with ballooning unfunded pension liabilities, there are growing concerns that the obligations promised to public-sector retirees associated with municipalities could be discharged in Chapter 9 bankruptcy.
The decision, among others in the 140-page opinion, clears the way for Detroit Emergency Manager Kevyn Orr to propose a “Plan of Adjustment” expected to mirror a June proposal to creditors that envisioned exchanging $11.5 billion in unsecured creditor claims for pro rata shares in a $2 billion note.
“Pension rights are contract rights under the Michigan constitution,” the judge said today, declaring the city insolvent and eligible for bankruptcy. “It has long been understood that bankruptcy law entails the impairment of contracts.”
It’s hard to overstate the reach of Rhodes’ ruling on pensions and what it portends for the ability of Detroit to push ahead with a bankruptcy. The process is likely to grow even more contentious as serious negotiations — and mediation under a team of federal judges — get under way in advance of the city filing a restructuring plan with the court, as early as the end of the month but no later than March 1.
“The city needs help,” Rhodes said. “The city no longer has the resources to provide its citizens with basic services. Was Detroit bankruptcy a foregone conclusion? Of course it was.”
On balance, Rhodes’ ruling arguably represents a qualified win for Orr, Gov. Rick Snyder and their decision to file Chapter 9 bankruptcy under a revised emergency manager law, Public Act 436, that Rhodes deemed constitutional. Even as he declared Detroit eligible for bankruptcy, Rhodes scolded Orr for perfunctory negotiations following his “vague” June 14 proposal to creditors, as well as the emergency manager’s misleading statements on the status of pensions.
The judge’s ruling represents a chance to continue the restructuring just beginning, and to improve city services and strengthen the balance sheet. His comments also signal his thinking on the Detroit Institute of Arts city-owned collection, the sale of which, Rhodes suggested, would be a temporary fix causing permanent damage.
“Time is of the essence and we will continue to move forward as quickly and efficiently as possible,” Orr said in a statement. “We look forward to working with all our creditors — pension funds, unions and lenders — to achieve a consensual agreement on a restructuring plan that balances their financial recoveries with the very real needs of the 700,000 citizens of Detroit.”
Rhodes’ ruling is a stinging rebuke to creditors, unions and, especially, the pension funds whose financial wherewithal is vital to the city’s 22,000 retirees and 10,000 active employees. Pensions can be cut in bankruptcy, he said, but warned that he likely would not approve a plan that proposes to cut benefits too steeply.
Still, his ruling essentially ensures there will be cuts, despite Article IX, Section 24 of the state constitution. Whatever your political stripe or inclination, there is no denying the human cost likely to be associated with Detroit’s bankruptcy, the culmination of years of political dysfunction, financial mismanagement and de-industrialization.
The question, among many in the weeks and months to come, is how and whether Orr, the city and the state might soften what is likely to be a harsh reckoning for many who neither imagined nor anticipated this likely outcome. Would they even try? And how wide is the pension funding gap, still a point of strong disagreement between the city and its pension funds ?
Orr “has got to trade the promises the city can’t keep for promises he can keep,” said Douglas Bernstein, managing partner of Plunkett Cooney’s banking, bankruptcy and creditors’ rights practice group. “All the plan is is a new contract. One of the elements of confirming a plan is that further reorganization will not be necessary.”
Today’s ruling green-lights Detroit’s bankruptcy and charts a path it is likely to follow. But critical questions loom, answers to which will determine what kind of city emerges from a largely unforgiving federal process.
Rhodes ruled that pensions can be impaired, as many bankruptcy lawyers — including Orr and his legal team — already had concluded. By how much? And how much is too much for Rhodes or anyone else likely to consider an appeal ?
Will the city determine that it must press the DIA to begin a process to sell city-owned pieces to satisfy creditors? And how might a valuation being prepared by Christie’s, the global auction house, affect that decision and negotiations with creditors ?
Will Rhodes’ finding that federal law trumps state constitutional protections for pensions renew calls for some kind of governmental guarantees not available under existing law? Probably, though it’s hard to see much chance of success in Lansing or Washington.
Exactly what will Orr and his team, essentially agents of the governor, propose in their restructuring plan? They can no longer avoid putting more detailed numbers on the record — how much pensions would be cut in real-world examples, whether art or other city assets would be liquidated, how the city’s water and sewerage department could be monetized.
If there was any doubt, Rhodes’ ruling today demonstrates that Detroit’s financial collapse is real, that it will affect real people living real lives, and that bankruptcy is the only viable path back to normalcy. Sad and sobering, yes, but inevitable.
Submitted by Tyler Durden on 12/03/2013 10:53 -0500
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