City of Detroit Files for Bankruptcy Protection

[mwilbert]

"Without Orr's novel legal arguments, pensioners would automatically get in line behind both secured creditors and general obligation bondholders. With Orr's position, they and general obligation bondholders are on the same footing."

Interesting theory. But it's not backed up by the reality that the secured creditors of enterprise funds can depend on the revenues from those funds and the GO bondholders can go to court and force the city to levy the tax rate necessary to pay off those bonds. In neither case can the city argue that there's "no money" when there's both money and a legal mechanism to pay the debts.

Sure they can. That is exactly what they will argue. The question is will the argument work.

[TexasT]

"Without Orr's novel legal arguments, pensioners would automatically get in line behind both secured creditors and general obligation bondholders. With Orr's position, they and general obligation bondholders are on the same footing."

Interesting theory. But it's not backed up by the reality that the secured creditors of enterprise funds can depend on the revenues from those funds and the GO bondholders can go to court and force the city to levy the tax rate necessary to pay off those bonds. In neither case can the city argue that there's "no money" when there's both money and a legal mechanism to pay the debts.

That is not a sure thing. That's why it's called the full faith and credit of the city's implicit agreement to raise taxes. They've always assumed they could legally get theirs and nobody ever argued they couldn't - til Orr.

[FEO]

Assuming that city workers would have their pensions slashed under bankruptcy, would they revert back to their original pensions once Detroit came out of bankruptcy?

[Eber Brock Ward]

As another lawyer, I really want to expand upon TexasT's point about us finally getting the best.

For years, we were screwed as the best in the business swooped in from NY and Chicago and went to town on our finance and legal staff at the city. While these folks may be good at their jobs, they are not specialists, and certainly not to the extent of the aces that structure deals every day as a living.

But now the shoe is on the other foot. The pension boards tried shady tactics to stall -- and, through that, keep things worse for longer for citizens -- at the Ingham County clownshow. In turn, they were outmaneuvered by brighter minds. Instead of the city getting outmaneuvered [[or being screwed, depending on how you look at it) for a change, it was the city that was able to outmaneuver the enemies to its rebirth.

By way of quick example, lets see who signed the petition: http://www.chicagotribune.com/news/c...56283.htmlpage

Kevyn Orr - We know he's good, we've all gone over his qualifications. See Stephen Henderson's article from the freep today. A true value add, here, already, because there's no way we've already incurred as much in fees for them to do their homework as it would have costed to defend all sorts of litigation in state court. The city comes out paying less here, in the big picture.

And on the JD side:
David Heiman - Past chair of the American College of Bankruptcy
Heather Lennox - Fellow of the American College of Bankruptcy
Bruce Bennett - Orange County's BK Counsel when they filed, and he was once named #2 lawyer/runner-up in America for National Lawyer of the Year by the National Law Journal

Add in the local counsel from Miller Canfield, and you have a veritable A-Team on Board for the city, for once. Meanwhile, a lot of the local creditors are still on the same "friends and family" plan that the city had been on for so long, and are getting schooled by the pros that specialize.

It's nice to feel that the city isn't just in good hands, but is in the best hands possible.

[Novine]

"That is not a sure thing. That's why it's called the full faith and credit of the city's implicit agreement to raise taxes. They've always assumed they could legally get theirs and nobody ever argued they couldn't - til Orr."

That's because state law gives bondholders the recourse of going to court and having a judge enforce the necessary tax levy to raise the funds to pay the debt. It's why debt obligations aren't bound by statutory limits on millages. It's why a bankruptcy judge will likely give a dim view to claims that the city can't pay when there's a legal mechanism to collect the payment. Orr can go into court and claim the sky is green and the sun is blue but it doesn't make it so. As to your earlier claim about GO bonds issued without voter approval, if they're not voter-approved, they're not "General Obligation" bonds, no matter what someone calls them.

As I've said before, Orr and Snyder are playing fast and loose with the facts trying to conflate various obligations owed by various city entities in a PR effort to sell the EFM and now bankruptcy. What we'll see over time is that those distinctions matter quite a lot and that those obligations will get very different treatment when they are addressed outside of the PR spin machine.

[TexasT]

It's why a bankruptcy judge will likely give a dim view to claims that the city can't pay when there's a legal mechanism to collect the payment.

We'll see. I have a feeling the judge will see the evidence of Detroit's fallout that the bankers chose to skip to assist his or her decision as to how much raising taxes is a viable mechanism to collecting payment.

[compn]

are we going to see the other shoe drop?

republican held state CoA and state Supreme Court rules in favor of the state and against the creditors?

dunno about federal courts.

[michimoby]

It's nice to feel that the city isn't just in good hands, but is in the best hands possible.

+1.

EBW, I don't think you'll find much pushback from most rational minds on that point. It's a question around whether or not certain stakeholders view educated, accomplished professionals as a veritable threat to their personal well-being.

Often times, my dad reflects on his own pension losses due to the airline bankruptcies; the blame typically converges toward "those damn bean counters" that make economic decisions on the margin. I often have to bite my tongue; after all, many of my classmates from business school, with no desire to screw over my father nor any other pensioner, are those very "bean counters" that draw their ire.

[Eber Brock Ward]

EBW, I don't think you'll find much pushback from most rational minds on that point. It's a question around whether or not segments of the population view educated, accomplished individuals as a veritable threat to their personal well-being.

Often times, my dad reflects on his own pension losses due to the airline bankruptcies; the blame typically converges toward "those damn bean counters" that make economic decisions on the margin. I often have to bite my tongue; after all, many of my classmates from business school, with no desire to screw over my father nor any other pensioner, are those very "bean counters" that draw their ire.

Agreed. One of the most frustrating things here in SE Michigan is that a large segment of the population has an anti-educated bent, which probably is a relic of the days when you could expect to make it with a high school education or less. Lord knows how many times I've heard "college boy" or some variation of it used as an insult.

And to really drive home that point, I think people against the [[legal equivalent of) bean counters at Jones Day miss the value added in having such competent attorneys. Take, for example, the way the city filed the BK filing prior to the pensioners' hearing in state court.

On one hand, Jones Day has racked up about a $1.5 million in legal fees, per a recent freep article, a lot of which it used to prepare the filing and do a lot of the legwork that Stephen Henderson's article discussed.

On the other hand, by doing the city's homework by having that bankruptcy filing ready and being able to submit it on essentially no notice, the sophisticated attorneys of JD -- at a cost of "only" about $1.5 million so far -- have saved untold millions in legal fees on the state court level as everyone and their brother challenged the EM law, the right to file bankruptcy, and so on.

It's not easy to see that forest for the trees of "$1.5 million," though, if you're not in the business or accustomed to seeing fees like that.

[GPCharles]

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…

Folks, this is only page one of a 500 page novel. This is going to take a long time with more twists and turns than even Chas Dickens could imagine. BTW - the pension funds are not broke. The major City of Detroit pension funds have billions in assets. The amount owed are overdue contributions. Let's wait and see how this all plays out.

[corktownyuppie]

We'll see. I have a feeling the judge will see the evidence of Detroit's fallout that the bankers chose to skip to assist his or her decision as to how much raising taxes is a viable mechanism to collecting payment.

What comes to mind is an argument I was having a year ago about whether or not Detroiters really were aware of the dire financial situation. We both concluded that until "payless paydays", there might be some who never fully believe.

So for entertainment's sake, we tried to hypothesize about what would need to happen before "payless paydays"...and we concluded that -- it's impossible to get there, no matter how bad the financial situation is. You can always avoid payless paydays by continuing to reduce staffing and services, except now there's no one providing services.

Look...it takes an hour -- minimum -- for police to show up. It can take hours to get through City Hall to get a permit. Of course there are no payless paydays. There's just no services.

The legal process requiring taxation is one component of this argument. THe other is the economic reality on the ground. If you raise taxes in order to meet your legal obligations, you might end up collecting less taxes because people/businesses move out of the city.

I don't know where that "magic line" of maximal tax rates before people leave, but you can make an argument that we're already long past it, considering the departure of 300,000 residents in a decade.

Legal mechanism can only go so far. Economic realities have to kick in, too.

[corktownyuppie]

Agreed. One of the most frustrating things here in SE Michigan is that a large segment of the population has an anti-educated bent, which probably is a relic of the days when you could expect to make it with a high school education or less. Lord knows how many times I've heard "college boy" or some variation of it used as an insult.

And to really drive home that point, I think people against the [[legal equivalent of) bean counters at Jones Day miss the value added in having such competent attorneys. Take, for example, the way the city filed the BK filing prior to the pensioners' hearing in state court.

On one hand, Jones Day has racked up about a $1.5 million in legal fees, per a recent freep article, a lot of which it used to prepare the filing and do a lot of the legwork that Stephen Henderson's article discussed.

On the other hand, by doing the city's homework by having that bankruptcy filing ready and being able to submit it on essentially no notice, the sophisticated attorneys of JD -- at a cost of "only" about $1.5 million so far -- have saved untold millions in legal fees on the state court level as everyone and their brother challenged the EM law, the right to file bankruptcy, and so on.

It's not easy to see that forest for the trees of "$1.5 million," though, if you're not in the business or accustomed to seeing fees like that.

Crittendon lost any remaining credibility she had with me after stating that the fees we are paying to consultants is outrageous while the poorest among us are suffering. I don't want the poor to suffer either, and I might even be able to get on board with the idea that there are systemic injustices that need to be repaired in our economy and laws.

At the same time, remember that we are talking about $20BB in debt. Do you really think the people whom you owe $20 billion dollars to are going to cap their legal bills at $1 million? Of course not. We need the brightest and the best representing the interest of our residents [[note: residents...not employees...not retirees...not creditors), and so far, I think Orr and Co. have been the best representation the city has had in decades.

[Hermod]

If the federal bankruptcy court really puts the screws to the pensioners, you can expect to see half the localities in the US lining up at the bankruptcy court. If the pensioners get off relatively lightly, this won't happen.

[Novine]

"What comes to mind is an argument I was having a year ago about whether or not Detroiters really were aware of the dire financial situation. We both concluded that until "payless paydays", there might be some who never fully believe."

Furlough days anyone? I'm pretty sure that all of the CoD employees are painfully aware of what they've had to give up already to say nothing of what they'll likely to lose going ahead.

[ElbertHanks]

"That is not a sure thing. That's why it's called the full faith and credit of the city's implicit agreement to raise taxes. They've always assumed they could legally get theirs and nobody ever argued they couldn't - til Orr."

That's not correct. Orr was not the first. The Jefferson County, Alabama case put every creditor on notice that Full Faith and Credit may not mean what they always assumed it meant. http://www.nytimes.com/2011/12/24/bu...anted=all&_r=0

Edit: The quote was taken from a quote contained in a post by Novine. In other words these are not Novine's words.

[jiminnm]

Section 24, Constitution of the State of Michigan: "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractural obligation thereof which shall not be diminished or impaired thereby."

Strikes me that if Detroit can't fund the pension systems, it becomes a state obligation. But I'm sure that will be in the courts, too.

Ray, I would say that it all depends on how the bankruptcy court defines "accrued financial benefits."

In a corporate pension fund, the total dollars held by the fund are allocated to the present and future [[vested) pension recipients. An individual's allocation, however, likely does not actuarially equate to the actual benefit that recipient has been promised. Most pensions calculate pension amounts on other factors, such as age and years of service, not amounts allocated to them in a plan.

For example, if a corporation goes into bankruptcy or otherwise becomes unable to fund a pension plan, the Pension Benefit Guaranty Board [[PBGC) then takes over the plan. The first thing the PBGC does is to actuarially recalculate each person's pension. Most plans have built in early retirement and other incentives that are not calculated based solely on one's age. So, anyone who retired prior to how the plan defines full retirement age [[usually 65) will have their pension reduced to an actuarially calculated amount [[which could easily halve the pension). Also, future COLA will be eliminated and previously granted COLA removed.

So, if the court defines "accrued financial benefits" as an amount allocated to a recipient, or follows the PBGC process, I would expect the pension amount for most City retirees to be at risk for reduction.

[corktownyuppie]

http://www.freep.com/article/2013071...must-withdrawn

[bailey]

http://www.freep.com/article/2013071...must-withdrawn

So, per the esteemed jurist, the effect of this would be that no municipality in michigan can ever file chpt 9 [[if they have pension obligations). ok then. sounds like it'll hold up on appeal.

[michimoby]

http://www.freep.com/article/2013071...must-withdrawn

I'm pretty much fed up with all this bullshit now. Let's go down some beers and sliders at Green Dot.

[corktownyuppie]

So, per the esteemed jurist, the effect of this would be that no municipality in michigan can ever file chpt 9 [[if they have pension obligations). ok then. sounds like it'll hold up on appeal.

Not exactly. Judge says ok to file Chapter 9 as long as the reorg plan doesn't harm pensioners. Will the state bailout pensioners? The state court cannot void out the bankruptcy filing, so how does it plan to compel Snyder to un-file? So many questions.

[brizee]

Being that I'm trying to find refuge and have written Michigan off I no longer have a dog in the fight.

However I hope this leads to exposals. Snyder, Gary Brown, Orr, Bing, Andy Dillon, bring out ALL of their bullshit and backroom deals and gamesmanship and interviews with the answer.

If the city/state is going to look this foolish internationally then let's flush everything. Two elections in the next 16 months.

Votes matter.

[bailey]

Not exactly. Judge says ok to file Chapter 9 as long as the reorg plan doesn't harm pensioners. .

Well, she issued the TRO because she believes bankruptcy WILL harm pensioners and it is a certainty it will happen...hence the injunction.

Aquilina said the Michigan Constitution prohibits actions that will lessen the pension benefits of public employees, including those in the city of Detroit. Snyder and Orr violated the constitution by going ahead with the bankruptcy filing, because they know reductions in those benefits will result, Aquilina said.

“We can’t speculate what the bankruptcy court might order,” said assistant Attorney General Brian Devlin, representing the governor and other state defendants.


“It’s a certainty, sir,” Aquilina replied. “That’s why you filed for bankruptcy.”

as to your second point...agreed. the order is probably toothless theater.

[ElbertHanks]

http://www.freep.com/article/2013071...must-withdrawn

She might want to look up the definition of automatic stay. But then again I'd hazard a wild guess that the publicity from issuing meaningless orders is worth a few votes during her next election campaign.

[Gannon]

Well, she issued the TRO because she believes bankruptcy WILL harm pensioners and it is a certainty it will happen...hence the injunction.

as to your second point...agreed. Order is probably toothless theater.

But the mathematics are in place for a neat Constitutional Crisis...this is nearly the "perfect storm" combination that can un-do it all.

There has to be some check for fraudulent bankruptcy filing, to insure that it wasn't done to elude a lawsuit...certainly there is case law already done, just not at this level...with government using another level of government to protect itself from civilian creditors.

Geez, this has so many dimensions of approach...it could be an entire economic system crisis. The President is going to HAVE to bail out Detroit, with as cozy a terms as the bankers got.

[Gannon]

Wasn't it deTocqueville who said Democracy would be destroyed when the populace figured it could vote themselves a comfortable living out of the public largesse? That was the final stage of four in the evolution, if I remember correctly.

This might be what happens just afterward...maybe amplified a bit by some generational corruption in the political machine.