Will federal court approve Detroit's bankruptcy?

[renf]

http://www.nytimes.com/2013/08/19/us...lity.html?_r=0
This is an interesting essay from the morning paper about whether the federal court will allow approve bankruptcy for Detroit. Kevyn Orr will need to show that
*what is being done is consistent with Michigan laws
*a good faith effort has been made to negotiate settlements without recourse to bankruptcy
*the city has sold all or almost all assets
It will be interesting to see what side the state's attorney general takes in this matter.
If the federal court rejects bankruptcy for Detroit, will the governor and the legislature have to find a way to pay Detroit's creditors and fund their pension liabilities? Will they have to do this for the many other cities and school districts in the state whose financial problems resemble those of Detroit?

[professorscott]

http://www.nytimes.com/2013/08/19/us...lity.html?_r=0
This is an interesting essay from the morning paper about whether the federal court will allow approve bankruptcy for Detroit. Kevyn Orr will need to show that
*what is being done is consistent with Michigan laws
*a good faith effort has been made to negotiate settlements without recourse to bankruptcy
*the city has sold all or almost all assets
It will be interesting to see what side the state's attorney general takes in this matter.
If the federal court rejects bankruptcy for Detroit, will the governor and the legislature have to find a way to pay Detroit's creditors and fund their pension liabilities? Will they have to do this for the many other cities and school districts in the state whose financial problems resemble those of Detroit?

Where do you get the notion that the City has to sell any assets? That's not in the story you cited and my understanding of Chapter 9 bankruptcy is specifically that asset sales are not required as they would be in a Chapter 7 bankruptcy. Hopefully BankruptcyGuy will chime in.

My favorite quote in the article from an attorney representing some [[unnamed) creditors: “I think that a lot of people are beginning to realize, and I mean all creditors, with the exception of this constitutional issue, that fighting over eligibility in Detroit is the effectual equivalent of fiddling while Rome burns.”

[313WX]

Without questeion.

Judge Rhodes has already taken actions that would otherwise be taken after Detroit's eligibility was determined.

[Locke09]

I think Detroit will be deemed eligible because the judge has already indicated his preference to see Detroit have access to the bankruptcy court. I think he will find a way to give Detroit the benefit of the doubt. I would be surprised if he doesn't. The test for insolvency and whether you bargained in good faith is heavily skewed towards the municipality in Chapter 9.

As far as the constitutionality issue, I think the judge will rule that the time for that argument is when Detroit presents its plan. Although Orr has indicated a desire to give the pension funds 10 cents on the dollar, he hasn't formally submitted that in a plan. If he does, then the retirees can argue that Chapter 9 bankruptcy prevents you from submitting a plan that requires you to violate a law.

[Cincinnati_Kid]

It's a foregone conclusion that Federal Court will approve the bankruptcy. The $64,000 question is who gets screwed?

[compn]

it would surprise me to see the judge reject detroit.

anyone have statistics on cities that failed to file bankruptcy ? detroit isnt the first...

[professorscott]

...Orr has indicated a desire to give the pension funds 10 cents on the dollar...

We need to be precise when discussing this. The pension funds have assets, money. The assets of the pension funds are not included in the bankruptcy and will not be touched.

The concern is that the pension funds do not have enough - how much depends on whom you believe - to pay future obligations. That discrepancy is going to be the amount the pension funds have to fight for.

If you believe the claims of some that the pensions are fully funded, then you have to wonder what they're fighting about, since if they are fully funded they don't need any money out of the bankruptcy. But in any case, the actual money in the funds is not in any way up for grabs.

[Danny]

The judge will approve the Detroit's bankruptcy filings with negotiations of certain city owned properties. However the judge will say no the selling of art from DIA! We have to see what's next.

[BankruptcyGuy]

http://www.nytimes.com/2013/08/19/us...lity.html?_r=0
This is an interesting essay from the morning paper about whether the federal court will allow approve bankruptcy for Detroit. Kevyn Orr will need to show that
*what is being done is consistent with Michigan laws
*a good faith effort has been made to negotiate settlements without recourse to bankruptcy
*the city has sold all or almost all assets
It will be interesting to see what side the state's attorney general takes in this matter.
If the federal court rejects bankruptcy for Detroit, will the governor and the legislature have to find a way to pay Detroit's creditors and fund their pension liabilities? Will they have to do this for the many other cities and school districts in the state whose financial problems resemble those of Detroit?

The conditions include only that the filing is authorized by the state [[in Harrisburg, it was not), that the city is insolvent [[duh) and that a good faith effort was made to negotiate with creditors [[that's a really low hurdle). The city does not have to show that assets have been sold, or do have some predetermined limitations on the plan of adjustment. As I've said, I'm not even sure those would be enforceable.

There is a really low probability that Detroit is not eligible for bankruptcy, as I've said. There are, however, many hurdles to getting an approved plan.

[BankruptcyGuy]

As far as the constitutionality issue, I think the judge will rule that the time for that argument is when Detroit presents its plan. Although Orr has indicated a desire to give the pension funds 10 cents on the dollar, he hasn't formally submitted that in a plan. If he does, then the retirees can argue that Chapter 9 bankruptcy prevents you from submitting a plan that requires you to violate a law.

Actually, the issue will not be before the court until a plan is submitted. So there will be no ruling on that question when the eligibility is decided.

And I think there is a substantial possibility that the pensioners reach a negotiated settlement. They would risk having the accrued but unfunded liability being treated the same as bondholders.

[BankruptcyGuy]

We need to be precise when discussing this. The pension funds have assets, money. The assets of the pension funds are not included in the bankruptcy and will not be touched.

The concern is that the pension funds do not have enough - how much depends on whom you believe - to pay future obligations. That discrepancy is going to be the amount the pension funds have to fight for.

If you believe the claims of some that the pensions are fully funded, then you have to wonder what they're fighting about, since if they are fully funded they don't need any money out of the bankruptcy. But in any case, the actual money in the funds is not in any way up for grabs.

Actually, best to divide it into three parts:

1. Accrued liability for which there are assets in the pension funds. These are not even the subject of the bankruptcy by the most aggressive creditor's wildest imagination.

2. Accrued liability for which there are not assets in the pensions. In the Millender and other reports, these were called "UAL" -- unfunded accrued liability. This is where Section 24 of the Michigan Constitution and federal bankruptcy law may conflict. I think you could break this category into two sections, one for retirees and one for active employees, but there may not be a distinction there, depending on the terms of the funds.

3. Unaccrued liability--for current employees who are not vested. This is likely to go away. Based on what I've read, I would imagine the pension funds would be frozen.

Yes, more precise language is always helpful.

[Novine]

"If you believe the claims of some that the pensions are fully funded, then you have to wonder what they're fighting about, since if they are fully funded they don't need any money out of the bankruptcy."

"Fully funded" is based on the city continuing to contribute on an ongoing basis. If the city is able to escape its obligations, the pension funds would be placed in the situation of having to cover current obligations and future obligations solely on the earnings coming from investments. Over time, that would become harder and harder to do. That's why closing pension funds is expensive for municipalities. They have to cover not just the current obligation but future obligations too. But Orr wants to escape that obligation and leave the pensioners to fend for themselves.

[Locke09]

Yes, more precise language is always helpful.

I already understood it to be the way you have broken it down. In fact, it has been broken down this way and similar ways multiple times on multiple threads, so I assumed those who have been reading these threads understood that, and that most if not all of us understood we are only talking about what the City "owes" the funds - the unfunded liability.

I still take the position that if you are only offering me 10 cents on the dollar of what you owe me, I might as well go to court. More so since we are only talking about the unfunded liability, because even if I lose completely and get 0 cents on the dollar, which is unlikely, I still have what is already funded.

On the other hand I find it interesting that Orr does not include the funds from the Pension Obligation Bonds [[POBs) in his calculation of the pension assets, to determine the unfunded liability, even though that money is deposited in the pension funds already. He backs that money out, and a law passed by the Michigan Legislation recently says that POB dollars cannot be included in a determination of the health of the funds. This is a law that seemed to have been written specifically for Detroit and makes me wonder about them attempting to get that specific money back from the funds. I know the funds are an "asset held in trust" for the pensioners, but we have seen that any contract can be broken and laws can be written specifically to accomplish whatever the powers that be want to accomplish.

Of course perhaps that law was only written to facilitate making the funds appear less healthy so they can appoint a sole trustee.

[BankruptcyGuy]

Locke09, what if you, representing the pensioners, were offered:

1. 100% of #1,
2. Say, 50% of #2, and
3. 0% of #3

Certainly, the unions will object. They want to keep pensions for current workers, including those with benefits that are not yet vested.

Pensioners may object, thinking that they are entitled to 100% of #2. But at what point do you take that risk--75%? 50%? 25%? Remember, it is not clear, despite the Attorney General's position, that the City cannot get out of #2. Maybe there is a subsequent suit by pensioners against the State. But at some point, the risk of getting 0% is not worth taking, wouldn't you agree?

[[For the POBs, I would imagine that assets pledged to secure a debt would be deducted from the calculation of assets that could be used to pay pensioners. At least that's how I'd do it.)

[Locke09]

Locke09, what if you, representing the pensioners, were offered:

1. 100% of #1,
2. Say, 50% of #2, and
3. 0% of #3

Certainly, the unions will object. They want to keep pensions for current workers, including those with benefits that are not yet vested.

Pensioners may object, thinking that they are entitled to 100% of #2. But at what point do you take that risk--75%? 50%? 25%? Remember, it is not clear, despite the Attorney General's position, that the City cannot get out of #2. Maybe there is a subsequent suit by pensioners against the State. But at some point, the risk of getting 0% is not worth taking, wouldn't you agree?

[[For the POBs, I would imagine that assets pledged to secure a debt would be deducted from the calculation of assets that could be used to pay pensioners. At least that's how I'd do it.)

Very good questions.

If I were Police/Fire pensioner or vested employee I would gladly accept 50% of what Orr says is the unfunded liability, because that would leave them more than 100% funded by their own reports. I wouldn't accept any amount less than what PFRS says is the unfunded liability because I'm close enough to 100% funded that I might as well go for the whole thing on the constitutional question.

If I am civilian pensioner or vested employee, I can accept 50% of what Orr says is the unfunded liability, because I believe he is estimating it at about twice what the fund is estimating it to be. Once again, by GRS estimates I am being made whole. So, I'd be willing to take 50% of his ultraconservative estimate of unfunded liabilities.

I'm pretty sure pension assets have not been pledged to secure the POB debt. The casino revenue was pledged to secure that debt, which is the other big battle that is taking place. That's why the legislation does not make any sense to me and appears to be contrived to get control of the pension funds.

P.S. Then if the City is closing the pension and not guaranteeing future payments after making it whole, I would want all of my money so I could invest it myself - so long as it does not cause me any tax penalty problems. I don't know how that works.

[Novine]

"I'm pretty sure pension assets have not been pledged to secure the POB debt. The casino revenue was pledged to secure that debt, which is the other big battle that is taking place. That's why the legislation does not make any sense to me and appears to be contrived to get control of the pension funds."

This sounds right. There's no reason to treat the funds raised by the COPs any differently than any of the other funds in the pension fund. But if you can play with the math to gain control of the pension funds, well, we've seen that Lansing is more than willing to do what it takes to accomplish that.

[Wesley Mouch]

"I'm pretty sure pension assets have not been pledged to secure the POB debt. The casino revenue was pledged to secure that debt, which is the other big battle that is taking place. That's why the legislation does not make any sense to me and appears to be contrived to get control of the pension funds."

This sounds right. There's no reason to treat the funds raised by the COPs any differently than any of the other funds in the pension fund. But if you can play with the math to gain control of the pension funds, well, we've seen that Lansing is more than willing to do what it takes to accomplish that.

Novine, why does anyone want to 'gain control' of the pension funds? Seems like a lot of political risk to gain control of the helm of the Titanic.

[Locke09]

Novine, why does anyone want to 'gain control' of the pension funds? Seems like a lot of political risk to gain control of the helm of the Titanic.

Can I take a shot at answering.

$5 billion is a lot of money.

If you are artificially lowering the value of the assets then it's not really the titanic you have been making it out to be. And you've got to admit it's a little odd that someone would pass a law saying that funds that have been deposited in the pensions for several years cannot be counted as an asset.

If you have another pension fund that is even more underfunded, then that fund would greatly benefit from the influx of assets from the Detroit fund. That fund would look healthier and I assume could benefit more from the enhanced volume of investments. Even though the funds for Detroit could not be used for other municipalities, there is a benefit to having a larger amount of money overall to invest.

Give the EM sole control over the fund and he can use whatever actuarial assumptions he wants to use [[the law even says he can).

That's all I can think of for now.

[Wesley Mouch]

Can I take a shot at answering.

$5 billion is a lot of money.

If you are artificially lowering the value of the assets then it's not really the titanic you have been making it out to be. And you've got to admit it's a little odd that someone would pass a law saying that funds that have been deposited in the pensions for several years cannot be counted as an asset.

If you have another pension fund that is even more underfunded, then that fund would greatly benefit from the influx of assets from the Detroit fund. That fund would look healthier and I assume could benefit more from the enhanced volume of investments. Even though the funds for Detroit could not be used for other municipalities, there is a benefit to having a larger amount of money overall to invest.

Give the EM sole control over the fund and he can use whatever actuarial assumptions he wants to use [[the law even says he can).

That's all I can think of for now.

Hard to believe that all this effort is really just about plundering Detroit for its pension money. And all this time I thought we were helping pensioners.

[Novine]

Since the Republicans took control in Lansing in 2011, there's been a steady stream of "Daddy knows best" legislation aimed at allowing the state to impose their view of the world on local governments. Why should this be any different?

[Wesley Mouch]

Since the Republicans took control in Lansing in 2011, there's been a steady stream of "Daddy knows best" legislation aimed at allowing the state to impose their view of the world on local governments. Why should this be any different?

Since it was obvious that the children were misbehaving? Or do you really think things would have been OK but for state intervention? I don't mean to be argumentative. I really am trying to understand the anti-State position. I don't get it.

[professorscott]

Since it was obvious that the children were misbehaving? Or do you really think things would have been OK but for state intervention? I don't mean to be argumentative. I really am trying to understand the anti-State position. I don't get it.

You have an excellent point. Whenever a problem arises, there are three level of responses, from three kinds of people. In order, from most helpful to least helpful:

1. Doers. These are the people who take the reins and attempt to solve a problem. Note I said "attempt to solve", not "solve". Doers don't always accomplish what they set out to, but they try.

2. Idea rats. [[I got the phrase from Scott Adams.) They have ideas how to solve a problem, but aren't willing to implement them. Still, the ideas can sometimes be beneficial.

3. Movie critics. They have no idea how to solve a problem, and aren't interested in solutions, but they sure as hell can cast aspersions on the ideas of the other two groups.

Oddly, this list also, purely by chance, is ordered from the rarest type of person to the most common.

[Novine]

You and the good Professor must be blissfully unaware of the stream of legislation coming out of Lansing. From everything from fireworks to pension funds to the personal property taxes, Republicans in Lansing have been using their lock on state government to impose their one-size-fits-all view of the world on local communities. Want to make these decisions locally? Too bad. Republicans have decided they know better than you.

[professorscott]

You and the good Professor must be blissfully unaware of the stream of legislation coming out of Lansing. From everything from fireworks to pension funds to the personal property taxes, Republicans in Lansing have been using their lock on state government to impose their one-size-fits-all view of the world on local communities. Want to make these decisions locally? Too bad. Republicans have decided they know better than you.

You're missing my point. Fine, let's assume for the sake of argument that your cynicism is completely well founded and Gov. Snyder [[etc.) are just on a huge power grab.

Detroit, were that not happening, remains flat effing broke. I have heard neither from you nor from anyone else any plausible proposal to fix Detroit's financial clusterbleep, just complaining about the allegedly undemocratic process [[approved by the elected state legislature and signed by the elected governor) that is the only effort being made to try to right the ship.

Remember the consent agreement that the democratically elected City Council agreed to? Go back and reread what happened to that.

[corktownyuppie]

You're missing my point. Fine, let's assume for the sake of argument that your cynicism is completely well founded and Gov. Snyder [[etc.) are just on a huge power grab.

Detroit, were that not happening, remains flat effing broke. I have heard neither from you nor from anyone else any plausible proposal to fix Detroit's financial clusterbleep, just complaining about the allegedly undemocratic process [[approved by the elected state legislature and signed by the elected governor) that is the only effort being made to try to right the ship.

Remember the consent agreement that the democratically elected City Council agreed to? Go back and reread what happened to that.

"...fix Detroit's financial clusterbleep?"


I'd settle simply for a plan to continue paying operating expenses without access to credit. At the end of the day, math beats law.