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Let’s Watch Those Attorneys’ Fees: Another First in Detroit

Judge Steven Rhodes, who is overseeing Detroit’s Chapter 9 bankruptcy, appears set to take the unprecedented step of appointing an examiner to review professional fees in the case. 

Judge Rhodes proposed the use of an examiner prior to a hearing held on August 2, and, following that hearing, entered an order opening up a one week comment period in which parties could make suggestions for who the examiner should be. The use of fee examiners is on the rise in complex bankruptcy cases, having been used in the Lehman Brothers and General Motors bankruptcies, among others. 

The move by Judge Rhodes is notable because reviewing the retention and fees of a Chapter 9 debtor’s professionals is generally not within a bankruptcy court’s power. In most bankruptcy cases, a debtor must apply to the bankruptcy court for authorization to retain professionals, including attorneys, financial advisors and accountants. Once retained, those professionals may generally be paid out of a debtor’s estate, and...

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Can P3s Save the Public Sector?

Detroit’s recent bankruptcy filing, the largest Chapter 9 filing in U.S. history, highlights the potential consequences faced by our nation’s increasingly cash-strapped municipalities. Municipal bankruptcy filings remain relatively rare; approximately 40 governmental bodies (including utility authorities and special districts) have filed for Chapter 9 protection since 2008, which tracks the average of 8 filings per year since 1937. Nevertheless, Detroit’s experience proves that even major cities can quickly succumb to the pressures imposed by dwindling revenues and rising debt.

Given the country’s sluggish recovery from the Great Recession, as well as unrelenting increases in public pension and other long-term municipal debt, many public agencies are revisiting the viability of public-private partnerships, or “P3s,” as a financial salve. Structured correctly, a P3 can help a municipality maximize financing resources, increase return on investment, and expand and modernize services and...

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Detroit’s Bankruptcy Case Gets Murkier With Other Collateral Lawsuits

On July 23, 2013, the Michigan Court of Appeals ordered a temporary halt to three lawsuits that seek to stop Detroit from filing for bankruptcy. The lawsuits were filed by city workers, retirees, and pension funds earlier this month, prior to Detroit’s bankruptcy filing on July 18, 2013

The suits anticipated that, in a bankruptcy, Detroit  would seek to cut retirement benefits. After filing the petition for relief under Chapter 9 of the Bankruptcy Code, Detroit’s emergency manager  requested an extension of the Chapter 9 automatic stay to include a freeze on legal actions such as those filed by the city workers, retirees, and pension funds. This is the first in what will certainly be many interesting events in the case of the nation’s largest city to have filed for Chapter 9. 

On Friday, the Michigan Circuit Court ruled that the state law that allowed Michigan Governor Snyder to approve the bankruptcy filing violated the Michigan Constitution. The Court ordered Kevyn Orr, the...

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Judge Orders Detroit Bankruptcy Filing Withdrawn

On Friday, Michigan State Circuit Court Judge Rosemarie Aquilina ordered the city of Detroit’s emergency manager, Kevyn Orr, to withdraw a federal bankruptcy petition filed on behalf of the city earlier this week, calling the law which allowed Michigan Gov. Rick Snyder to authorize the filing “unconstitutional.” The ruling was issued as part of a lawsuit  filed by  two retirement systems for the city to block the Chapter 9 filing.

On Thursday, July 18, 2013, the city of Detroit filed for the largest municipal bankruptcy in history, with an estimated $18 billion of debt. Mr. Orr, an attorney brought in by Gov. Snyder, recommended the filing. Mr. Orr has stated that he hopes to have Detroit emerge from Chapter 9 by later summer or early fall.  He previously characterized Detroit’s general obligation bonds as unsecured debt.

 

 

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Detroit Files for Chapter 9

The city of Detroit filed for bankruptcy protection in the Bankruptcy Court for the Eastern District of Michigan on Thursday. Detroit’s bankruptcy is the largest Chapter 9 case in U.S. history. The filing comes just over three months after Governor Rick Snyder appointed Emergency Manager Kevyn Orr to try to solve the city’s apparently intractable debt woes.

As Orr stated in a declaration filed with the Court, “[a]fter decades of fiscal mismanagement, plummeting population, employment and revenues, decaying city infrastructure, deteriorating city services and excessive borrowing that provided short term band-aids at the cost of deepening insolvency, the city of Detroit today is a shadow of the thriving metropolis that it once was.” The city’s debt had swollen to over $18 billion by Orr’s count, with 38 cents of every city dollar going to service legacy debt. The city’s filing will give it an opportunity to formulate a proposal to make its debt burden more manageable.

A fight over the...

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SEC Charges Harrisburg, PA with First Ever Municipal 10(b) and 10(b)(5) Violations

Politics undoubtedly influence the public narrative surrounding a municipality’s slide into bankruptcy. Last week, however, the Securities and Exchange Commission served notice that public officials need to be careful of what they say. For the first time ever, the SEC charged a municipality, Harrisburg, Pennsylvania, with violations of Section 10(b) of the Exchange Act and Rule 10(b)(5) for making materially misleading statements.

While Harrisburg filed a Chapter 9 petition in October of 2011, the petition was dismissed on the grounds that the bankruptcy filing was not authorized under Pennsylvania law. Instead, a receiver was appointed to implement a “recovery plan” and take control of the city’s finances. The city remains under the control of the receiver.

The charges from the SEC cover a two-year period, from January 2009 through March 2011 and relate to statements made by Harrisburg officials, including a “State of the City” address made in April 2009 by the mayor. According to the...

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CREW Los Angeles Panel Recap

Goodwin Procter partner and MuniBK contributor Deborah Schrier-Rape recently acted as a moderator for the Commercial Real Estate Women Los Angeles (“CREW Los Angeles”) panel entitled, “Public Finance in a Sea of Challenge: A Look at What Has Come and What is to Come.” The panelists discussed what public financing transactions are getting done with tax laws in flux and cities contemplating municipal bankruptcy, and what the prospects are for public finance going forward.

Speakers at this CREW Los Angeles monthly luncheon included: Marla Bleavins, Project Manager at Los Angeles World Airports; Stephen E. Heaney, Managing Director of Stifel Nicolaus & Company, Incorporated; Barbara Lloyd, Managing Director of KPMG Corporate Finance LLC; and, Andrea Caruso Townsend, Of Counsel at Squire Sanders. 

Please click here to access a portion of the power point presentation that guided the discussion.

CREW Los Angeles is an organization seeking to advance the careers and success of women...

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Goodwin Procter Partner Lewis Feldman to Speak at 9th Annual Wharton Restructuring and Distressed Investing Conference on February 22

On February 22, Goodwin Procter partner and MuniBK contributor Lewis Feldman will participate in the 9th Annual Wharton Restructuring and Distressed Investing Conference entitled, “Health of Nations: Distress, Recovery, or Revival”  which is the largest restructuring and distressed investing-focused school-run conference in the United States. This year the conference will be held at the Hyatt at the Bellevue in Philadelphia, Pennsylvania.

Lewis will be featured as a speaker in the panel entitled, “Financial Restructuring: Muni Storm on the Horizon” along with Jamie Baird, Managing Director, Blackstone; Sean Gumbs, Senior Managing Director, FTI Consulting; James E. Pass, Managing Director, Portfolio Manager, Guggenheim Investments; and, Rebecca Rhynhart, Budget Director, City of Philadelphia. William J. Nolan, Senior Managing Director, FTI Consulting will moderate the panel which will discuss the indicators of distress, venues, key players, legal framework and municipal bond markets, and...

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Goodwin Procter Partner Deborah Schrier-Rape To Moderate Commercial Real Estate Women Los Angeles Panel on February 13

On February 13, Goodwin Procter partner and MuniBK contributor Deborah Schrier-Rape will moderate the Commercial Real Estate Women Los Angeles (“CREW Los Angeles”) panel entitled, “Public Finance in a Sea of Challenge: A Look at What Has Come and What is to Come.” The panel will discuss what public financing transactions are getting done with tax laws in flux and cities contemplating municipal bankruptcy, and what the prospects are for public finance going forward.

Speakers at this CREW Los Angeles monthly luncheon will include: Marla Bleavins, Project Manager at Los Angeles World Airports; Stephen E. Heaney, Managing Director of Stifel Nicolaus & Company, Incorporated; Barbara Lloyd, Managing Director of KPMG Corporate Finance LLC; and, Andrea Caruso Townsend, Of Counsel at Squire Sanders.

CREW Los Angeles is an organization seeking to advance the careers and success of women in commercial real estate by providing opportunities for business development and professional growth.

To find...

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CalPERS Slams San Bernardino Bankruptcy as “Sham”

CalPERS has fired back at the city of San Bernardino and its pendency plan for operating during the Chapter 9 case, calling it  “criminal” and a “sham.” A copy of the pendency plan can be found here. Since filing for bankruptcy, the city has stopped making its bi-weekly payments to CalPERS. As a result, San Bernardino now owes CalPERS approximately $8 million. 

While CalPERS may cast aspersions on the city’s motivation, financially, the city is faced with either making the CalPERS payment or making its payroll. Even though the hit to CalPERS is 0.00329% of its overall portfolio, CalPERS has a legitimate concern that any acquiescence to San Bernardino’s refusal to pay will set a negative precedent for future Chapter 9 cases. As there are pending municipal bankruptcies underway throughout the state, CalPERS does not want to undermine its position that it is a priority creditor for the municipalities of California. 

The legal issue is whether the pensions of government workers take...

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Bond Buyer California Public Finance Conference Video Recap Part IV

In the final segment of MuniBK’s panel, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference, panelists examine and discuss:

  • Consensus building, compromise and deal-making;
  • Constraints on parties’ ability to make a deal because certain provisions key to Chapter 11 are inapplicable to Chapter 9;
  • Whether states can help municipalities avoid Chapter 9;
  • How municipal bankruptcies impact bond pricing;
  • Jurisprudential impact of Chapter 9 decisions on bankruptcy courts; and
  • How to judge success of municipal bankruptcy cases.
     

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Bond Buyer California Public Finance Conference Video Recap Part III

The third video segment of MuniBK’s panel, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference focuses on:

• Challenges faced by municipalities that have a “top line” problem;
• An analysis of certain types of municipal debt and a municipality’s willingness to pay;
• Elements of "fairness" including pension reform and retiree benefits;
• The “firewall” between general obligation bonds and special revenue bonds in Chapter 9; and
• Legal fees and other costs of restructuring.
 

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Bond Buyer California Public Finance Conference Video Recap Part II

The second video segment of MuniBK’s panel “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference focuses on the nuts and bolts of a Chapter 9 filing including:

  • The ability of a municipality to impair contracts in Chapter 9;
  • The limitations on a bankruptcy court in a Chapter 9 proceeding;
  • Some key differences between Chapter 9 and chapter 11;
  • Challenges to eligibility in a Chapter 9 case;
  • Creditor negotiations and benefits of filing;
  • A discussion about the Jefferson county filing; and
  • What do to once a municipality is determined to be a valid Chapter 9 debtor.

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Bond Buyer California Public Finance Conference Video Recap Part I

Goodwin Procter recently sponsored the Bond Buyer’s 22nd annual California Public Finance Conference and led a breakfast round table discussion on current topics in Chapter 9 municipal bankruptcy cases. Over the next few weeks, the MuniBK blog will post video segments from the panel entitled, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”

The first video segment introduces the panelists and moderator:

Lewis Feldman, Partner, Goodwin Procter LLP

Emanuel Grillo, Partner, Goodwin Procter LLP

Christopher Klein, Chief Judge, United States Bankruptcy Court for the Eastern District of California, overseeing Stockton's current Chapter 9 filing

William Nolan, Senior Managing Director-Corporate Finance, FTI Consulting Inc.

Part I also examines:

  • Chapter 9 cases owing to project failure vs. “top line" problems;
  • Roles “typical” distressed investors may play in chapter 9 cases; and,
  • How quickly distressed municipalities can recover and move forward.

 

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Can Detroit Get Its Groove Back?

Detroit is in a state of crisis. In addition to the “traditional” municipal financial woes of decreasing revenue, legacy pension burdens, and an increased demand for services, Detroit has several more practical and unique problems. 

First, according to the Wall Street Journal, there has been a mass exodus from the city of Detroit. Almost 25% of Detroit’s total population left the city between 2000-2010. The resulting smaller tax base has led to a “top line” revenue problem for the city. 

This exodus has also contributed to a second problem. From a land mass perspective, Detroit is simply too large with only 713,000 residents spread across 139 square miles. This geographic sprawl makes providing basic municipal services inordinately expensive. There are neighborhoods with literally more abandoned houses and buildings than residents.

Consequently, Detroit mayor, former NBA star Dave Bing, has proposed plans for the revitalization of certain areas, including the city’s waterfront, in the...

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Pension Wars Round 3: Bondholders Enter the Ring

Last week, MuniBK reported on the objections to San Bernardino’s Chapter 9 petition filed by the San Bernardino Public Employees Association and CalPERS.

The city’s bondholders did not object to the filing, and now the holders of more than $100 million of the bonds, originally issued to fund San Bernardino’s obligations to CalPERS, have filed a pleading supporting the city’s eligibility for Chapter 9.  

It appears that these bondholders and bond insurers do not want to give CalPERS two proverbial bites of the apple: one to see how a pendency plan will treat the CalPERS’ obligations and another to later contest overall eligibility based on dissatisfaction with the treatment of those obligations under any proposed plan.

In their filing, the bondholders also urged the Bankruptcy Court to allow the Chapter 9 process to move forward quickly. A brief news report on the filing can be found here

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Will Municipalities Get Pushed Off the Fiscal Cliff?

As lawmakers discuss ways to avoid the so-called “fiscal cliff,” their short-hand for the parade of budgetary horribles (increased taxes and forced service cuts) that will take place on January 1, absent bi-partisan Congressional action, investors may want to consider the potential impact on municipal bonds.  Since Congress, in part, will focus on ways to raise revenue (taxes) without across-the-board tax increases, the tax exempt status of municipal investments may come into question. 

Generally speaking, under the current framework, interest earned on municipal bonds is exempt from federal and state taxation. This is in contrast to investments in corporate bonds or even treasury bills, making municipal bonds a more attractive (and potentially more lucrative) investment. If this preferential tax treatment is reduced or eliminated, it would not only make investments in municipal bonds less attractive to individual investors, but also reduce the appetite for investments in mutual funds...

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Is a Turnaround on the Horizon for Local Governments?

As Muni BK has previously reported, the Great Recession has placed enormous pressure on state and local budgets.  Decreasing revenues and increasing obligations have left many municipalities facing service cuts and/or being required to raise taxes. Other municipalities, such as Stockton and San Bernardino have been forced to consider Chapter 9 protection. 

Despite this grim outlook, new information indicates that the beginning of a turnaround may be on the horizon.  Some municipalities are forecasting modest revenue growth in 2014 and 2015. Other reports illustrate how municipalities have taken creative steps to address their ongoing budget shortfalls:

• Anaheim, California, and Luzerne County, Pennsylvania have contracted park maintenance, graffiti removal, and the collection of delinquent taxes to the private sector;
• Facing a $190 million deficit in its 2010 budget, the Dallas City Council turned over the operations of the city zoo to a nonprofit organization;
• Olathe, Kansas...

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The Municipal Sandwich

A recent report issued by The Pew Charitable Trusts American Cities Project describes how the Great Recession has sandwiched municipalities between an increased demand for services and an inability to raise the revenue required to meet the cost of current services or legacy obligations.

This problem is widespread and comes at a time when state aid to local governments has also declined. According to the report:

  • State aid to local governments fell by $12.6 billion in FY 2010, with additional cuts in 2011 and 2012.
     
  • Simultaneously, local governments lost $11.9 billion in property tax revenue in FY 2010.

The stark reality faced by municipalities is that services must be cut and legacy obligations reined in.  Privatization of services, regional partnerships, layoffs and budget cuts appear to be the only way that municipalities can begin to operate in the black.   

While municipal defaults and bankruptcies remain rare, bankruptcy, or the threat of bankruptcy, will continue to be a useful tool...

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MuniBK Bond Buyer Conference Panel Recap

The Bond Buyer’s 22nd Annual California Public Finance Conference took place last week in San Francisco. Chief Judge Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, participated in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”   The panel also included Bill Nolan of FTI, and MuniBK Blog contributors Manny Grillo and Lew Feldman.

Copies of the materials distributed by the panelists at that meeting can be found here. Video of the roundtable discussion will be posted soon on MuniBK.

The panelists discussed topics including:

• Limitations of the Bankruptcy Code in offering Chapter 9 relief to municipalities;
• Precedential impact of any Bankruptcy Court Chapter 9 decision on other pending municipal bankruptcy cases;
• The ability of states to “step in” and offer distressed municipalities other alternatives;
•...

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