As a backdrop to the news today about an analysis showing the Detroit Institute of Arts collection is valued at up to $4.6 billion, a figure that could fall to $1.1 billion in actual sales if the art was put on the market, NextChapterDetroit.com brings you a bit of history about why and how the museum’s collection has been part of the bankruptcy case this year.
1-The artwork at the Detroit Institute of Arts is the city’s top asset, according to Detroit’s Disclosure Statement, the document designed to provide information to creditors so they can evaluate the city’s restructuring plans. The artwork, while not precisely valued in the May 5 document, was worth more than city-owned land, Belle Isle and the Detroit-Windsor Tunnel.
2-Prior to Emergency Manager Kevyn Orr filing for bankruptcy, Michigan Attorney General Bill Schuette issued an opinion that the artwork was protected from sale and “is held by the City of Detroit in charitable trust for the people of Michigan, and no piece in the collection may thus be sold, conveyed, or transferred to satisfy City debts or obligations.” His opinion has no force of law in federal bankruptcy court.
3-Bond insurer Syncora, who stands to lose nearly $300 million in the case, is one of the creditors that has been advocating for selling art to cover debts. Here’s what Syncora attorney Stephen Hackney said at an April hearing:
“The art has been a sort of noteworthy, highly publicized part of the case, and from our standpoint, a very important part of the case … The city is proposing to address the issues surrounding the art collection in a way, from our standpoint, that yields far less value.”
4-Bankruptcy Judge Steven Rhodes on April 28 granted Syncora’s request to view communication between Schuette and the DIA that preceded his opinion that the art was protected from sale to pay debt. In issuing his ruling from the bench, Rhodes said:
Plainly, the extent to which the art held by the Detroit Institute of Arts should be taken into account in evaluating whether the city’s plan meets the best-interest test of the bankruptcy code is a substantial issue in the case, one that has not been prejudged or determined by the court at all, and, of course, this ruling should not be construed to suggest one way or another how the court will or may rule on that substantive issue of confirmation.
5-In preparation for trial, the city and the DIA hired Artvest Partners, an art investment firm, to “assess the viability and practicality of selling art or otherwise monetizing the collection,” according to Bill Nowling, spokesperson for Detroit emergency manager Kevyn Orr.
6-The Artvest report disputes some of the findings in another report that was commissioned by some of the city’s creditors.
7-Issued today, the Artvest report cost $112,500. (Its author, Michael Plummer, co-founder of the Artvest firm and a former employee at both Christie’s and Sotheby’s, is scheduled to appear as an expert witness during the city’s bankruptcy trial in August.)
8-The report was issued just days after pensioners and other creditors needed to mail their ballots to meet the Friday deadline of the votes being received. Would this information have changed their minds? We’ll never know. As a related noted: The DIA has pledged to raise $100 million toward pension funding as part of the “grand bargain,” the agreement that also has, among other terms, the state paying $195 million and foundations contributing $366 million toward the pension funds.
Among the Artvest report’s findings:
About two-thirds of the DIA’s collection is in four areas that have “fallen out of favor with collectors and that are underperforming their market peak in 2007”. The are: American Art pre-1950, Old Maser and 19th Century European Paintings, and Impressionist and Modern Art.
If the DIA collection were for sale, “few sales would be to other museums, both because other museums are likely to boycott such sales, as well as because funding constraints limit their participation in the marketplace at today’s price levels.”
If the DIA wanted its art auctioned, Sotheby’s and Christie’s might not participate. Sotheby’s parent company was based in Detroit from 1983 to 2006, and had a number of connections to the DIA. Christie’s “received unusually strong negative feedback from both the museum community and the art industry by merely conducting an appraisal.”
If the city sold art through an auction house outside of Christie’s or Sotheby’s, it could expect to lose 20-40 percent of potential selling prices.
Another issue raised in the report is the authenticity of some of the pieces. The DIA has works that are thought to be Modiglianis but have not been validated by the art worlds’ most trusted sources. And also, according to the report, the authenticity of some of the Old Masters paintings could be challenged during a review of them before a sale.
The iconic Diego Rivera murals would have little value if moved. According to the Artvest report, cutting them off the walls would seriously damage them.
A sale of the art, especially if ordered through a court decision related to settling debt, could result in “formidable legal obstacles and prolonged litigation.” Some of those obstacles, according to the report, are: items would need free and clear title to be sold, and the threat of future litigation could prevent that; it’s likely the Michigan Attorney General would take legal steps to prevent the sale, based on his opinion from last year; the heirs of DIA donors would be likely to “pursue every legal option necessary to stop or delay the sale of any of the art, potentially leading to years of litigation.”
The potential impact of selling the most valuable works would “deprive the museum of its core attraction, drastically reduce attendance and related revenues, drive away potential donors of future gifts and endowments, and in all likelihood, ultimately for the closure of the DIA due to a loss of economic sustainability, resulting in a full liquidation.”
-By WDET’s Sandra Svoboda
@WDETSandra and email@example.com
A New York art investment firm estimates the Detroit Institute of Arts collection is worth billions of dollars. But, the firm says, if the art was sold to pay creditors in the bankruptcy, it would likely only bring in half that amount.
The company, Artvest Partners produced a 112-page report for Detroit Emergency Manager Kevyn Orr analyzing the financial value of the D-I-A’s collection as well as issues and dynamics involved in selling it. The city and the museum hired the firm.
NextChapterDetroit.com has a longer analysis of some of the history and findings of the report.
Several creditors and some pensioners have argued the city should monetize the collection to pay part of its $18 billion dollars in debt. They likely won’t be happy this report came out just days after they needed to return their ballots voting on the city’s Plan of Adjustment, the blueprint for restructuring debt, which does not include selling anything from the DIA. The Plan does include the “grand bargain” funding: that’s the state’s $195 million and the private foundation contributions of $366 million to fund pensions. The agreement also comes with a $100 million commitment from the DIA toward pension funding.
The Artvest report estimates total worth of the museum’s 60,000 pieces is between $2.8 billion and $4.6 billion dollars with the individual pieces ranging in value from tens of millions to a few thousand dollars.
The Artvest analysis also finds selling the collection would produce between $1.1 billion and $1.8 billion in revenues. The report identifies several challenges in today’s market. For example, a majority of the DIA’s collection is comprised of styles that have fallen out of favor with collectors and investors.
“This is the first comprehensive valuation of the entire DIA collection. The report makes it abundantly clear that selling art to settle debt will not generate the kind of revenue the City’s creditors claim it will,” says Bill Nowling, Orr’s spokesman.
Still, creditors likely won’t give up the fight to have the city sell art to pay debt.
The report was authored by Michael Plummer, co-founder of the Artvest firm and a former employee at both Christie’s and Sotheby’s. He is scheduled to appear as an expert witness during the city’s bankruptcy trial in August.
-By WDET’s Sandra Svoboda
@WDETSandra and firstname.lastname@example.org
Featured art above by Carl Oxley III.
The city and the Detroit Police Officers Association, the union representing patrol officers, say they have reached an agreement on some terms of what could become a five-year contract, the federal court bankruptcy mediators announced tonight. The deal includes wages, health care benefits and pensions, and union leaders now say they support the city’s Plan of Adjustment and urge a “yes” vote.
Of course ballots from the DPOA’s roughly 1,900 members are due in California by Friday, so unless there is a mass expedited mailing, leadership’s promotion of a favorable vote may not matter much to the election results.
Under the current terms of the Plan of Adjustment, the city’s “blueprint” of how it will restructure debt and services post-bankruptcy, retired police have no cuts to their pensions, take a reduced cost-of-living increase and assume more of their health care costs. But those provisions only happen with a favorable vote on the plan from the two classes of pensioners: the non-uniform (or general service) employees and police and fire fighters.
Without favorable votes, cuts to pensions and other benefits are much steeper.
The DPOA was one of the few employee groups that had not reached an agreement through mediation with the city. Its attorneys had been highly critical of the city in court filings, and DPOA is one of the parties appealing Judge Steven Rhodes ruling that the city was eligible to file for bankruptcy. Last week, the Sixth Circuit Court of Appeals in Cincinnati scheduled arguments on that appeal for July 30.
If pensioners vote in favor of the plan, they agree to drop the litigation.
The city’s bankruptcy trial is set to begin Aug. 14.
Craig speaks with Next Chapter Detroit’s Sandra Svoboda about the latest news on Detroit’s bankruptcy. That includes NCD’s most recent columns about the Sixth Circuit Court of Appeals. First an appellate panel said there will be a hearing on the challenges to the bankruptcy’s eligibility. Also, the Sixth Circuit ordered a lower court judge to not delay any longer and decide within days an issue bond insurer Syncora raised before the city filed for bankruptcy nearly a year ago: whether the $15 million of monthly casino revenue can be divvied up to creditors.
As part of the bankruptcy case, city attorneys last week issued a subpoena to the Bond Buyer, seeking documents related to an award the trade publication gave former Detroit Mayor Kwame Kilpatrick for the deal to fund pensions that is now one of the most contentious issues in the bankruptcy case.
WDET Bankruptcy Reporter and NextChapterDetrot.com Blogger Sandra Svoboda spoke with Herschel Fink, legal counsel for the Detroit Free Press about the subpoena, protections that exist for publications, and what options Bankruptcy Judge Steven Rhodes has now that it’s filed.
Here’s the transcription of the full interview:
Sandra Svoboda: When subpoenas are issued to media organizations for their records, what are lawyers normally looking for?
Herschel Fink: Normally lawyers are trying to do two things. They either want to appropriate the status of the news organization to help them and more likely, of course, they are looking for relevant information that somehow helps their case.
SS: So in this case we have the city issuing the subpoena to the trade publication the BB, they’re looking for records related to an award that the Bond Buyer publication gave to Kwame Kilpatrick related to the deal that they did to fund the pension funds, to fund pension debt in what we call the Certificates of Participation> this of course has become highly controversial in the bankruptcy case. Can you speculate at all what they might be looking for?
HF: Frankly, from what I understand about the case, I don’t have a clue because it would seem so far off point to try to introduce information about why a publication, which is not a party to the bankruptcy case, not involved in the controversy, to try to get information about why that publication gave an honor to the city of Detroit or the Kilpatrick administration, just seems totally irrelevant to the dispute. I can’t imagine what they are trying to find or what point they are trying to make. It certainly isn’t apparent.
SS: In other cases, you’ve been involved with or are familiar with, what legal strategy are lawyers using when they go after the records of media organizations?
HF: Often they want information, they want a reporter or someone who a fact finder, a judge, a jury will find credible and who they think they may be able to make the point that an independent third party thinks such and such. So sometimes they’re just trying to borrow the credibility of the publication but the real purpose of the subpoena is to gather relevant information about a key matter in the dispute at hand and there doesn’t appear to be any in this case at all that the award by, the decision to make an award by a publication just would totally seem to be irrelevant, very atypical. I can’t see what they’re trying to do and I would expect the judge to probably dismiss it out of hand but that’s my thought.
SS: Here in the Eastern District of Michigan, what precedent is there in federal courts for what we do call of course, the shield law that protects journalists from having to give up their sources or information. What would the judge be relying on in making his decision here?
HF: The majority of states have either statutes of cases that have recognizes that reporters and news organizations have a privilege against having to disclose unpublished information or confidential information. But that isn’t true in the federal courts. The federal courts don’t have a statute, a shield law as we call it, that guides them. But many federal courts have fashioned a privilege without there being a statute. In Michigan in the courts of what we call the Sixth Circuit, which Michigan is part of, the federal Sixth Circuit, the Michigan trial courts have gone different, in different directions on this issues Some judges have recognized that there is such a privilege in civil cases and the one or two federal judges, district judges that said no there’s no privilege under the First Amendment even in a civil case. So if the issue is presented to Judge Rhodes, I think his first inquiry is just simply relevance. If the matter is not relevant to the central dispute before the judge, he should quash or dismiss the subpoenas without even getting to a First Amendment issues. If somehow they can convince him and I really doubt it that the information is relevant and important, ten he’s going to have to decide which of the federal district judges’ opinions on this issue he’s going to follow. But I don’t even see how he would get to that issue because it just appears totally off base, totally irrelevant. Why a publication gives someone an honor doesn’t have anything to do with the bankruptcy dispute or anything I can see.
SS: So finally what should we be looking for as the next step in this particular legal issue in the bankruptcy?
HF: I would expect the attorneys for the Bond Buyer, if they’re experienced in media law, I assume they would find a lawyer who defends news organizations on issues like this.
SS: There should be some in New York where they’re based.
HF: There are many fine federal, many fine media lawyers in New York, but you’ve just introduced another issue here. Because the subpoena, if they’re based in New York, it may actually be a New York judge, a federal judge in NY, who will have to decide whether to force the Bond Buyer to testify. There’s a federal law, excuse me, rule, that deals with that and it’s usually a judge in the federal district court in the place where the news organization or any witness is located. Now in New York that’s what we call the Second Federal Appellate Circuit and in fact judges of the Second Circuit have recognized that news organizations have a privilege so even that judge if it doesn’t go to Judge Rhodes, even the judge, certainly the judge in New York, it would have to be a federal judge in New York would probably apply the privilege that judges or the Second Circuit U.S. Court of Appeals have laid down which is there is a privilege against disclosure but again, all of those cases deal first off with relevance, and again I think that’s going to be the deciding issue. The judge, whether it’s Judge Rhodes or a judge in New York, is going to say this information is simply irrelevant and the news organization is not going to have to produce anything.
Bond insurer Syncora hasn’t had many courtroom victories in Detroit’s bankruptcy case as its attorneys fight for the hundreds of millions of dollars the Bermuda-based company stands to lose. But last week the Sixth Circuit Court of Appeals ordered a lower court to not delay any longer and decide within days an issue Syncora raised before the city filed for bankruptcy nearly a year ago.
Syncora argues the city should use casino tax revenue to pay creditors instead of being allowed to keep it for operations, as has been ruled in earlier decisions in the Chapter 9 case. The roughly $170 million collected annually from three casinos is the third largest source of revenue for Detroit, behind income and property taxes, so it’s a significant part of the city’s balance sheet.
Whether the Appellate Court order turns into a type of “win” for Syncora or not, the 13-page ruling, issued at Syncora’s request, contains several noteworthy admonishments from the appellate court to the lower courts in Detroit. For example,
“Without a final decision on that question, the city will not know what amount its coffers will contribute to the bankruptcy estate, the creditors cannot know the size of the pie they are being asked to share, and the bankruptcy court cannot be confident that it is considering a legally and financially viable plan. An orderly bankruptcy process depends on a concomitantly efficient appeals process, and the district court’s stay of Syncora’s appeal improperly thwarts both processes.”
“Insofar as a debtor’s plan of adjustment incorporates final decision reached by the bankruptcy court, any appeals from those decisions should generally be reviewed before the bankruptcy court confirms the plan,” the panel wrote. “The question presented in Syncora’s appeal — whether a substantial revenue stream is rightly considered property of the bankruptcy estate — is precisely the type of issue that should be reviewed before the bankruptcy court confirms the plan of adjustment.”
Court observers have noticed some other interesting phrases and perhaps innuendos in the ruling that relate to the case’s ambitious timetable, which has been supported and promoted by local and state political leaders. One interpretation is that perhaps this order serves as an indication the Cincinnati-based Sixth Circuit is willing to flex its power in reviewing — and possibly overturning — what’s happening in the Detroit courts.
While that may prove to be a stretch, the appellate panel clearly took issue with how the Detroit courts have handled this particular issue involving the casino tax revenue. Until the Sixth Circuit’s ruling last week, it could have remained undecided at the city’s bankruptcy trial where Judge Steven Rhodes will rule on the city’s Plan of Adjustment and how it restructures debt and future revenues for operations and services for residents.
The appellate panel found such a potential delay in deciding the question about the casino tax funds “presents the specter that Syncora may be forced to abandon its appeal and instead to seek appellate review of the bankruptcy court’s decision in the form of an emergency motion for a stay on the confirmation plan. In a bankruptcy case of such scope and complexity, that is not the proper way to adjudicate appeals that implicate legal questions of fundamental importance to the bankruptcy proceedings.”
The issue in Syncora’s appeal dates back to 2005, when Detroit borrowed $1.4 billion to fund pensions. In doing so, two nonprofit service corporations were set up as pass throughs for the money because the deal pushed the city’s debt above the state-allowed limit. The debt was issued through what’s called “Certificates of Participation,” (COPs) which the service corporations sold. The proceeds went to the city and then to the two pension funds: one for police and fire, another for general service workers. The city periodically gave the service corporations money to cover the debt payments for the COPs. Some of the debt was at a fixed interest rate, some had a floating rate.
The city eventually sought to convert the floating interest rate to fixed in the deal that’s known as the “interest rate swaps.” The appellate court wrote, “Because of the city’s dire finances, however, investors were unwilling to buy the certificates and banks were unwilling to execute the interest-rate swaps unless an insurer guaranteed the city’s obligations. Syncora, a monoline insurer, enhanced the city’s creditworthiness by insuring some of the city’s obligations under both the certificates and the swaps.”
Then in 2009, a credit downgrade and rising interest rates meant the city owed $300 million under the terms of the deal. To avoid the payment or termination of the agreement, the city and the swap counterparties, including Syncora, made an arrangement involving casino tax revenue, which is the issue involved in the appeal: The city and the swap counterparties bypassed the service corporations by creating two accounts at U.S. Bank.
The casino taxes would be paid directly into one of the accounts (about $15 million a month), and the city would make payments to the second account under the terms of the interest rate swaps deal (about $4 million a month). U.S. Bank would release the funds from the second account on a quarterly basis to the swap counterparties and from the first account to the city if all obligations were met.
In June 2013, Syncora, as one of the counterparties with obligations of about $276 million in the deal, notified U.S. Bank there was “an event of default” and asked the bank not to release casino tax revenue to the city. The city sued in Wayne County Circuit Court to force the release of the funds, but Syncora moved the case to U.S. District Court. The issue became part of the bankruptcy case in July 2013, and the funds were frozen while the Chapter 9 case proceeded.
In August 2013, Judge Rhodes ruled that the casino tax revenue were city property and therefore protected by the bankruptcy filing from payment at that time. Syncora appealed Judge Rhodes’s decision in U.S. District Court, and the case was assigned to Judge Friedman. He received briefs from both parties in the case, but as the appellate court wrote, “…the district court never adjudicated the appeal, and it has languished in that court for seven months.”
In December, Judge Rhodes ruled the city was eligible for bankruptcy, a decision that was appealed by several parties including Syncora. In February the Sixth Circuit said it would consider the eligibility appeals, and last week scheduled arguments for July 30. Meanwhile, the city reached an agreement to pay $85 million of the $285 million owed on the swaps deal and keep the casino tax revenue instead of paying it to banks. (The city, under Emergency Manager’s Kevyn Orr’ direction, is suing the service corporations, challenging the legality of their existence.)
In April the district court stayed Syncora’s appeal of the bankruptcy eligibility determination, and a month later Syncora filed the writ of mandamus asking the appellate court to order Judge Friedman to decide on the issue of whether the casino tax should be part of the city’s assets in the bankruptcy case and counted among available funds to pay creditors.
The Appellate Decision
The Sixth Circuit Court of Appeals last week ordered Judge Friedman to decide by July 14 on Syncora’s request for release of the funds. A three-judge panel (including Raymond Kethledge, a University of Michigan Law School grad) granted Syncora’s writ of mandamus – that’s a party’s request to a higher court to force a lower court to make a decision, in case you don’t remember that lesson from the landmark Marbury v. Madison case in civics class.
Such a ruling isn’t common. Of the 10 cases found in the Sixth Circuit online database since the beginning of 2013, just two were granted.
The appellate panel justified its ruling for two reasons. One was “to protect this court’s future appellate jurisdiction and to ensure that the district court’s stay order does not deprive Syncora of a meaningful opportunity to obtain timely review of the bankruptcy court’s decision.” The other was because the “deprivation of meaningful and timely appellate review itself constitute substantial and irreparable prejudice … and we undertake no inquiry at this point as to whether or not the bankruptcy court correctly decided the underlying dispute.”
The Sixth Circuit panel went on to say that one of Judge Friedman’s reasons for staying Syncora’s appeal — that if a Sixth Circuit decision related to eligibility “rendered moot” any decision of the bankruptcy court — was “no reason to say other appeals that present independent questions of law.” In other words: deciding whether the casino tax revenue is part of the city’s assets for the bankruptcy case should not be postponed until a separate appeal on the bankruptcy’s eligibility is adjudicated.
In the simplest of terms: Do your job when it should be done.
In its ruling on Syncora’s writ of mandamus, the Sixth Circuit did recognize the prospect that it might ultimately uphold all the lower and bankruptcy court decisions. Still, the panel wrote, “Whether a substantial revenue stream is rightly considered property of the bankruptcy estate, is precisely the type of issue that should be reviewed before the bankruptcy court confirms the plan of adjustment,” the appellate court said. “The problem posed by the district court’s stay is that it fails to account for all of the potential implications of that court’s inaction.”
With the trial scheduled to begin Aug. 14, that timetable is getting tight.
-By WDET’s Sandra Svoboda
@WDETSandra on Twitter and email@example.com
A federal appeals court plans to hear arguments later this month on the eligibility of Detroit’s bankruptcy filing, according to court documents. The hearing in front of the Sixth Circuit Court of Appeals in Cincinnati will be held just two weeks before the confirmation hearing on the Plan of Adjustment is scheduled to begin in bankruptcy court in Detroit.
Here’s the story:
After Bankruptcy Judge Steven Rhodes ruled last year that Detroit’s bankruptcy case could go forward, several groups representing employees and retirees appealed his decision to the Sixth Circuit. In February, that court ruled the appeal could proceed but refused to expedite it as the attorneys had asked. Now the court says it will hold arguments on the issue July 30.
Each side will have one hour to argue before a three-judge panel, the court wrote.
The city has asked the arguments on the appeal be postponed if pensioners vote in favor of the city’s Plan of Adjustment. Votes are due July 11, and the city plans to report votes to the bankruptcy court by Monday, July 21, city spokesman Bill Nowling said earlier this week. City lawyers repeated that plan in their request for the postponement of eligibility arguments.
According to terms reached in negotiations and in the “Grand Bargain,” if the two classes of pensioners — police/fire and non-uniform — vote in favor of the plan, they agree not to pursue pending litigation, such as the appeal of the bankruptcy eligibility. Several employee groups who are parties to the appeal have reached agreements with the city as part of the bankruptcy negotiation and have agreed to support the Plan of Adjustment. These include the Police and Fire Retirement System; the General Retirement System; the Official Committee of Retirees; American Federation of State, County and Municipal Employees Council 25; Retired Detroit Police and Fire Fighters Association, the Detroit Retired City Employees Association, the Detroit Police Command Officers Association and the International Union, UAW.
But the Retired Police Member Association, the Detroit Fire Fighters Association and the Detroit Police Officers Association — have not reached agreements with the city in the bankruptcy and are also parties to the eligibility appeal.
-By WDET’s Sandra Svoboda
@WDETSandra and firstname.lastname@example.org
Steve Wojtowicz was waiting for this.
In an agreement announced this morning, Detroit pensioners like Wojtowicz will be able to make a lump-sum payment to return money from their annuity savings funds if they also vote, as a class, in favor of the city’s Plan of Adjustment. “Definitely it swayed my vote to a ‘yes,’ and I’ll be dropping it in the mail tomorrow morning,” said Wojtowicz, a 30-year employee of the Detroit Water and Sewerage Department. At least a few of his friends and former colleagues have told him the option is a deciding factor in their votes as well.
At issue is the Annuity Savings Fund that was available to non-uniform city employees.When employees retired, they had the option of a full pay out or receiving it monthly, according to court filings. Workers who paid into the annuity plan contributed up to 7 percent of their salaries with guaranteed rates of return of 7.9 percent. The pension fund covered the difference between the promised 7.9 percent and the lower, actual return rate, a policy the city contends drew down the pension fund and contributed to its underfunding by millions of dollars.
As part of the bankruptcy restructuring negotiations, attorneys for employees and retirees had agreed to a 20 percent “clawback” of the annuity funds. But because several retirees like Wojtowicz had asked, Detroit’s General Retirement System (GRS) filed a motion seeking to allow retirees make one-time repayments instead of spreading them out over their lifetimes with 6.75 percent interest tacked on. Judge Steven Rhodes scheduled a June 27 hearing about the request, but attorneys said they had “agreed to a resolution in concept.”
That agreement was announced today.
Wojtowicz’s payback totals about $89,000. But he is 55 years old. By his calculation, his payback with interest, if he lives until he is 80, would be around $200,000. He plans to use a home equity loan to make a lump sum payback if the city’s plan is approved in court.
But he acknowledges not all retirees have that option.
“I’ve talked to other people, they can’t afford to do it,” he says. “Some people aren’t in the situation to come up with, say, $60,000.”
-By WDET’s Sandra Svoboda
@WDETSandra and email@example.com
The city’s lawsuit over what’s been termed a “disastrous deal” in how it funded pensions in 2005 and 2006 — a description levied with the benefit of 20-20 hindsight — is the subject of a court-ordered mediation session today.
Chief U.S. District Judge Gerald Rosen, also the head mediator in the city’s bankruptcy case, issued an order to the city, several insurers and the banks that financed the “Certificates of Participation” (COPs) for the city’s two pension funds. Attorneys are to appear at noon today to discuss the deal, which provided about $1.8 billion for Detroit’s two pension funds under terms that later became unaffordable for the city.
The city, in a lawsuit filed in January by Emergency Manager Kevyn Orr, calls the COPs deal illegal.
As part of the city’s bankruptcy case, an agreement was reached earlier this year with UBS and Bank of American Merrill Lynch, the banks that funded an interest-rate restructuring related to the COPs. Bankruptcy Judge Steven Rhodes twice rejected settlements of $230 million and $165 million before approving the $85 million in March for the city to settle the debt, known as the interest-rate “swaps” deal. Detroit incurred the debt in 2009 when it pledged casino taxes as collateral to avoid defaulting on pension debt payments. The city ended up locking itself into high interest rates on bonds, and the deal became too costly when interest rates plunged.
Judge Rosen is considered the chief architect of the “grand bargain,” the “swaps settlement” and has led talks between the city and employee groups in reaching settlements in the bankruptcy case. Judge Rhodes has repeatedly encouraged attorneys for the city and its creditors to keep discussing settlements in advance of the Aug. 14 bankruptcy trial.
Here’s Reuters’ story on the mediation session today.
Next Chapter Detroit brings you a few of the bankruptcy-related stories from the previous week in the local and national media:
The Million-Dollar Housing Market?
The city’s auctioning of abandoned homes has generated more than $1 million in commitments, city officials reported this week.
“The success of these auctions is another reminder of just how much demand there is for good homes in Detroit’s neighborhoods,” Mayor Mike Duggan said statement on June 26. “Within a matter of months, these vacant houses will become homes that will be adding to the strength of our neighborhoods.”
As The Detroit News reports: Since May 5, the city has been selling homes on the www.buildingdetroit.org. The first auction generated 88 bids with a high of $34,100. For the past month, the land bank has been selling two homes per day.
Speaking of Moving In…and Out of the City
The New York Times and the Wall Street Journal published stories this week about whether Detroit’s population continues to move out or grow with new residents. The WSJ’s Marketwatch blog takes a somewhat analytical approach, comparing cities across the country on the basis of home affordability, tax rates and unemployment. Of course, the piece is also peppered with colorful anecdotes about Detroit’s reality with a hopeful tone.
The Times, though, includes “up high” some of the facts that seem to fascinate much of the country: Detroit’s foreclosure rate (one in 10 properties this year) and the occasional starting auction price of $500 for a house. The Times also notes Detroit’s unusually high tax foreclosure rate, linking it to the city’s financial woes:
“In some cases, homeowners have abandoned properties and simply quit paying taxes, and foreclosure may be the only way to get a house back into the hands of people who actually want to live there and pay their share. In other cases, those who lose or abandon their houses sometimes end up buying other houses at auction – sometimes for as little as $500 – and begin the cycle again, although new rules are aimed at taking back properties sooner if taxes are again not paid. Either way, the city fails to get all the tax revenue it is owed.”
Lighting Up Detroit
The June 25 sale of $185 million worth of revenue bonds for Detroit’s public lighting authority “had no problem finding buyers,” Reuters reports.
“The bond issue, which was sold through the Michigan Finance Authority, was 2.5 times oversubscribed, receiving 35 institutional orders and several dozen more from retail accounts, according to a statement from Michigan officials.”
In December, Citibank financed about $60 million in floating-rate bonds for the lighting system. The June 25 sale was the first public offering of Detroit debt for lighting since then, Reuters reports.
What the Detroit bankruptcy “teaches” the rest of the world continues to be a common theme in media coverage and conversations about history’s largest Chapter 9 filing. This week, the Wall Street Journal’s Bankruptcy Beat blog covers some.
Perhaps predictably, the WSJ did not address communicating with citizens or ensuring the process is explained as fully as possible for residents or retirees. But the “takeaways” author identifies are worth “putting on the record” as lawyers and journalists say. They are:
Negotiate and make every attempt to avoid Chapter 9, but do not forego its potential rehabilitative benefits.
Seek to organize creditor groups as soon as practicable and engage in meaningful negotiations.
Understand the nature, full extent and potential value of the assets of the troubled municipality.
Prior to any formal proceedings, develop a projected restructuring and business plan that would be feasible and would comply with the applicable principles and rules that govern Chapter 9.
Establish, as early as practicable, the involvement of the state government as a party in interest.