Legal Challenges

  • Detroit Police claim “Cynical Treatment” by city in Chapter 9 case

    Detroit’s police officer and fire fighter unions have not reached contract agreements with the city during the bankruptcy proceedings, and based on a court filing Friday, it’s not sounding like the police will any time soon.

    The Detroit Police Officers Association filed an Objection to the city’s Plan of Adjustment, and it’s highly critical of the city’s actions. The officers’ group claims Detroit and the state have used PA 436, the law providing for emergency managers and the bankruptcy’s prohibition on lawsuits against the city to avoid arbitration with employees.

    The Detroit Free Press writes:

    The union argues that the city is punishing the DPOA for not coming to an agreement, and that the federal bankruptcy code can’t be used to either impose lesser terms on the union compared to city unions that have agreed to settlements, or to strip them of rights to bargain employment conditions. The union also notes that other financial creditors are arguing that the city’s proposed pension cuts — now reduced to 0% for the PFRS and 4.5% for the General Retirement System — are unfair since other creditors are taking deeper hits.

    Indeed, the city and several of its employee groups — the court-mandated Official Committee on Retirees and a coalition of employee unions including the American Federal of State, County an Municipal Employees local council — have agreed on terms of deals related to contracts and other employee provisions.

    But the DPOA’s objection doesn’t make it sound like they’re even close to a deal. The court filing reads:

    The City’s cynical treatment of the men and women who provide “core” and “essential” police protection is the punishment the members of the DPOA stand to receive because they have reached what would otherwise be a readily resolvable impasse with the City as to economic terms of a collective bargaining agreement.

    Judge Steven Rhodes will ultimately decide on the feasibility and reasonableness of the city’s post-bankruptcy plan at a hearing scheduled to begin July 24.

    Here is the text of the full Objection:

    5.16.14 DPOA Objection to PoA

  • Bankruptcy: Bad News for Bond Insurers

    With demands to sell the Detroit Institute of Arts collection, hundreds of pages of legal arguments and a few successes at the negotiating table, The Detroit News reports five financial firms are “fighting for their survival” in the Detroit bankruptcy case.

    The reason is simple: These insurers will be left holding the bag for nearly every dollar cut from payments on the city bonds, a tab that could run to more than $2 billion. And after taking massive losses during the great recession, a big hit in Detroit’s bankruptcy could push at least one bond insurer to close its doors, notes Matt Fabian, managing director of bond analysts Municipal Market Advisors.

    One of those firms is Syncora Guarantee, a branch of the Bermuda-based Syncora Holdings Ltd., which insured the pension “interest rate swaps,” a deal settled for $200 million under its value.

    Syncora also is the creditor who subpoenaed massive amount of information from the Detroit Institute of Arts, Christie’s and the Michigan Attorney General as part of the Detroit bankruptcy case. Last week, the AG’s office provided documents, revealing officials there and at the DIA had been communicating about the issue of the artwork as collateral for creditors weeks before the bankruptcy was filed.

    Another of the bond insurers profiled in The News today is Financial Guaranty also known as FGIC. The company insured $1.1 billion of the certificates of participation in the 2005 and 2006 pension funding arrangement. Emergency Manager Kevyn Orr  has authorized a lawsuit seeking to void that deal. The News writes:

    FGIC filed a 1,027-page lawsuit disputing the city’s lawsuit that attempts to repudiate the COPs deal. FGIC accuses the city of turning “a crooked eye to history, revising the facts of the pension funding transactions and claiming that the city was the innocent victim of fraud perpetrated on a grand scale.”

    FGIC has filed court papers, urging the court to do “due diligence” in assessing the value of the DIA collection.

    Two other bond insurers, National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp., are negotiating a deal over the city’s water and sewer bonds. The News reports “Assured covers $1.6 trillion in those bonds, while National insures $1.8 billion, plus another $621 million with Berkshire Hathaway.”

    A fifth insurer, Ambac, “remains on the hook for the city’s limited-tax general obligation bonds, and was ordered to mediation on April 22.”

    In the last bankruptcy proposal, the city planned to settle at 10 percent to 13 percent of the $164 million in bonds, which would hand Ambac a loss of $82 million to $85 million. Ambac has strenuously objected.

    Ambac, along with Assured and National Public Finance Guarantee Corp., earlier reached a deal with the city reducing the trio’s $388 million claim to $287.5 million on general obligation bonds.

  • Is an EM legal? Lawsuit seeks answer in federal court

    UPDATE: Here is the Michigan Citizen’s article about the hearing. The Michigan Citizen is part of New Michigan Media, which is one of the members of the Detroit Journalism Cooperative.

    After hearing more than two hours of arguments in a jam-packed courtroom, U.S. District Judge George Caram Steeh said he would rule “as soon as” he can on the state’s request to dismiss a lawsuit that challenges Michigan’s emergency manager law.

    He could agree with the state, and make the legal challenge go away. If he does allow the lawsuit to proceed, it will likely not be wrapped up before Detroit’s bankruptcy case has its confirmation hearings, based on the current schedule.

    The city’s Chapter 9 case is on track to be finalized by late summer under the leadership of the city’s emergency manager, Kevyn Orr. It’s not exactly clear how this lawsuit, challenging Orr’s authority, could ultimately affect the bankruptcy.

    No one can predict what Judge Steeh will decide, but his questions and comments to attorneys during the hearing may have signaled some concerns about the emergency manager law. He pointed out its disproportionate effect on minority-majority communities in Michigan. (More than half of the state’s African-American population lives in a municipality with an emergency manager.)

    Judge Steeh also noted how atypical the statute is as compared to what other states have in place to deal with financial challenges of their municipalities. “We’re dealing with a law that is quite unique in the United States. We’re seeing to apply a number of constitutional principles to a law that is quite unusual,” the judge said during the early part of the hearing.

    Michigan’s emergency manager law, formerly known as Public Act 436, was passed by the Legislature and signed by Gov. Rick Snyder late in 2012. That November, citizens voted to overturn a previously enacted law, and it took immediate effect. Snyder appointed Orr in March 2013.

    First filed last year, the lawsuit debated on Wednesday challenges the constitutionality of the current law on the grounds that it violates rights related to due process, voting and representative government under the U.S. Constitution. Defendants in the case are Snyder and former state Treasurer Andy Dillon.

    The suit itself reads:

    “Public Act 436 unconstitutionally strips local voters of their right to a republican form of government by transferring governance, including but not limited to legislative powers, from local elected officials to one unelected emergency manager. … In each of these communities, citizens will have effectively lost their right to vote for elected officials or had that right diluted so as to render it an exercise in form without substance.”

    Indeed, PA 436 grants broad power to emergency managers, who are appointed by the governor. Attorneys for the plaintiffs argue that:

    • Because the previous emergency manager law was “overwhelmingly rejected by the electorate,” the current law does not represent citizens’ wishes, says Julie Hurwitz, a Detroit-based attorney representing the plaintiffs and the National Lawyers Guild.
    • Hurwitz also says the case is about the “U.S. Constitution and the sovereign power of the state versus the abuse of the sovereign power of the Michigan.” This statement refers to the issue of which law has precedence, federal or state. Since states have the power to create local governments, including cities and school districts (both able to have emergency managers, under PA 436), defenders of the emergency manager law have argued that that power reinforces the legality of emergency managers. But Hurwitz and other attorneys for the plaintiffs argue that state law cannot conflict with federal law, and she believes the current emergency manager law does. “This law, Public Act 436, infringes on the right to a representative form of government. It denies the right to vote,” she said during the hearing. “The law is blatantly unconstitutional.”
    • In arguing against the law, Hurwitz objected to the “sole discretion, power more broadly granted than ever, powers extending beyond those of elected officials” that PA 436 grants to emergency managers. Unlike representatives, senators, city council members, township board members and other local or state lawmakers, emergency managers are not directly elected, and Hurwitz says that is an issue. “They have the power to repeal, amend and enact laws. If that is not a legislative function, I don’t know what is.”
    • John Philo, director of the Sugar Law Center, extended Hurwitz’s argument, explaining that the appointment of an emergency manager replaces an elected official. “We believe this affects a fundamental right to vote,” he said during the hearing.
    • Although states by law create local governmental units, Philo said there are limits to the state power affecting them. “Once the vote is granted – whether it’s for dog catcher or president – it can’t be taken away,” Philo said.
    • Philo also made the argument, in support of the lawsuit being allowed to proceed, that the appointment of an emergency manager means that a vote in a city with such an appointee actually means “less” than a vote in a city without one. For example, in Detroit, “When they vote for governor, they’re not getting a say in the mayor of Birmingham, but when they vote in Birmingham, they’re getting a say in Detroit’s emergency manager,” Philo said.
    • He also questioned why some financially distressed communities in Michigan had received emergency managers and some have not. “We have shown that citizens in emergency manager municipalities have had three times the rates of poverty,” he said. “We believe that there is a causal link and we should be factually permitted to explore that causal link.”
    • Herb Sanders, a Detroit-based attorney representing the plaintiffs, also argued about the effect of the limits of voting that he says the emergency manager law creates. He says the appointment of an emergency manager will decrease voter turnout in future elections in those communities. “When you tell an individual that their vote doesn’t count, it has a certain psychological effect, and they are deterred and less likely to partake in the voting process at all,” he said.

    But Michael Murphy, the attorney from the Michigan Attorney General’s office, representing Snyder and Dillon, discounted the plaintiffs’ arguments, starting with the claims that emergency manager laws discriminate against poor or African-American citizens.

    “The analysis (of whether to appoint an emergency manager) is based upon money, not the color of the community. The only color we’re dealing with in these criteria is green,” Murphy said. “It’s cash and the ability of the community to manage that money.”

    Several times during his time at the podium, Murphy emphasized that the purpose of the law is to help local governments and school districts deal with their challenging finances. “The statute is economic in nature. It was passed for the benefit of the state, of the citizens to protect their health, safety and welfare,” Murphy said.

    With the Great Recession, falling property values and population drops in several of the communities with emergency managers, including Detroit, the law was needed, he explained. “It’s not only a unique solution for the times, it’s unique times that force unique solutions,” Murphy said.

    For people who don’t like the law, he urged that they “bring their grievances to their state legislator as they see fit” and head to the polls to vote out lawmakers who support the law.

    “The remedy isn’t here. It’s at the ballot box. If they didn’t like it, they vote for a new Legislature to repeal it,” Murphy said. “We’re not in the business of squashing local governments. We’re not governing by referendum. … We don’t pass laws by voting. We live by elected representatives who pass laws for us.”

    -By WDET’s Sandra Svoboda

    @WDETSandra and nextchapter@wdet.org

  • The Monday Medley: A few new things about the city’s bankruptcy case

    Aggressive Opposition

    Calling Syncora “an obscure but combative insurance company,” the Detroit Free Press today takes a look at one of the bankruptcy’s biggest opponents, the Bermuda-based firm that insures hundreds of millions of dollars in bonds. Syncora has issued sweeping subpoenas seeking seeking centuries of records from the Detroit Institute of Arts and has caused city attorneys to describe the company’s legal tactics as employing a “scorched earth strategy.” Nathan Bomey writes:

    Syncora advisers say the company is being unfairly treated by Detroit and contends the city is moving hastily at the expense of creditors and residents. “What we’re doing is advocating for the highest and best reorganization and rehabilitation of the City of Detroit,” said Todd Snyder, a Rothschild financial adviser for Syncora, in an interview.

    Payment Plans?

    The city’s latest Disclosure Statement, filed Friday night, includes the $350 million Gov. Snyder proposed earlier this year to shore up pensions funds and protect Detroit Institute of Arts holdings from sale. The governor’s original proposal was for $17.5 million annual payments for 20 years, but that plan could be changing, The Detroit News reports today.

    Detroit’s latest debt-cutting plan spells out for the first time a mathematical method for the state to make a lump sum discounted payment of the present value of $350 million over 20 years, which three sources tell The News would be about $190 million — a 45 percent savings. The sources spoke on condition anonymity because of ongoing confidential negotiations.

    With tentative deals reached on pension payments, some pension fund financing debt and other creditor obligations in the city’s case, when will we see some official action in Lansing? After all, the pension deals require the $350 million from the state or bigger cuts befall the retirees, according to the city’s filings.

    Setting the (Handle)Bar High

    “With ever-increasing width and whimsy,” writes Neil Rubin in The Detroit News, Bill Nowling’s handlebar mustache is growing, both in appearance and reputation. Nowling, of course, is the spokesman for  Detroit Emergency Manager Kevyn Orr. By email, text or actual conversation, Nowling is the  answer guy for media with questions about what’s happening in the EM’s office.

    His mustache has been in development since late last year, and now it’s achieved its own 21st century-style fame: two Twitter accounts.

    Orr likes it, Nowling says, while Detroit Mayor Mike Duggan has stayed largely neutral. Others ask if he’s a Civil War re-enactor, and someone called him “Rollie Fingers.” He’d rather be known as the first than the last. Fingers was a Hall of Fame pitcher a generation ago who was best known for his spectacular handlebar mustache. Beyond that, he’s best known for going bankrupt.

     

  • Pensioners’ deal terms prevent lawsuits over EM law, constitutional pension protections

    Unions and retirees groups would agree to halt their existing — and not pursue future — litigation related to Michigan laws regarding emergency managers and public pensions protections under a deal reached this week in the Detroit bankruptcy case.

    The boards of both city retiree groups – the Detroit Police and Fire Retirement System and the General Retirement System – voted in favor of the negotiated deal. The agreement preserves pension payments to retirees far in excess of what Emergency Manager Kevyn Orr had been publicly proposing. It will go to a full vote by the roughly 32,000 pensioners as part of the bankruptcy proceedings, and their favorable vote is needed for the so-called “Grand Bargain.”

    The bargain provides for $366 million of foundation contributions, $100 million from the Detroit Institute of Arts and $350 million in state funds – as yet only a proposal with no vehicle for allocation — to go toward pension funding in order to protect the museum’s artwork from sale, among other terms.

    It’s the conditions tied to those “other terms” that were articulated for the first time in the city’s latest Plan of Adjustment, filed late Wednesday. Among them is a requirement for unions and retirement systems to halt all lawsuits challenging Public Act 436, the state’s law providing for emergency managers.

    Also in the new pensioner-city deal conditions tied to the state funds is an agreement to not sue the state over Article IX, Section 24 of the Michigan Constitution. That’s the provision that provides the state guarantee for public pensions. It is superseded by federal bankruptcy law in the city’s Chapter 9 case, the bankruptcy judge has said.

    “A critical part of any settlement is the elimination of potential lawsuits against Michigan taxpayers,” Ari Adler, spokesman for House Speaker Jase Bolger, said in a statement today after NextChapterDetroit.com first reported the terms. “The House of Representatives cannot contribute to any settlement until and unless there is an actual settlement to which to contribute.”

    The provision halting and preventing lawsuits has immediate implications but only for cases in which the unions or retirement systems are involved as parties. In February, the 6th Circuit Court of Appeals agreed to hear a challenge from the two retirement systems questioning whether Detroit was even eligible to file for bankruptcy. It includes references to both the emergency law and the pension provision in the state constitution.

    Also in February, a federal judge cleared the way for a challenge to Michigan’s emergency manager law made by 22 plaintiffs, including union leaders, ministers, Detroit school board members and city council members from Flint, Pontiac and Benton Harbor but not the unions themselves. The current law replaced a previous measure providing for the unelected managers that had been overturned by voters in November 2012. The next month the Legislature approved PA 436, which Gov. Rick Snyder signed.

    Opponents complain it unlawfully emasculates representative government and gives too much power to unelected appointees who report only to the governor.

    Ryan Plecha, an attorney who represents the Retired Police and Fire Fighters Association, says the litigation limits represent a balance between interests. “No pensions cuts and retaining 45 percent of COLA (cost-of-living allowances) was a pretty big incentive to do it,” he says. “This is not the final plan.

    Attorneys for the city of Detroit have said they will file a fourth version of the Plan of Adjustment and Disclosure Statement probably by April 25. Plecha says ongoing negotiations could revisit and amend the provisions limiting litigation.

    “That’s one of the things being discussed,” he says.

    Here is the text of the proposed agreement, as found in the latest Plan of Adjustment:

    The State’s payment of the State Contribution is conditioned upon, among other things, the following: … (e) active support of the Plan by, a release of and covenant not to sue the State from, and an agreement not to support in any way the litigation described in subsection (f) of this Section by, the City, the Retiree Committee, the Retirement Systems and certain unions and retiree associations, or equivalent assurances of litigation finality; (f) cessation of all litigation, including the cessation of funding of any litigation initiated by any other party, (i) challenging PA 436 or any actions taken pursuant to PA 436 as it relates to the City or (ii) to enforce Article IX, Section 24 of the Michigan Constitution, or equivalent assurances of finality of such litigation; …

    -By WDET’s Sandra Svoboda

    @WDETSandra and nextchapter@wdet.org

     

     

  • New DWSD Talks About Regional Authority: Meet the mediators

    U.S. District Judge David Lawson

    U.S. District Judge David Lawson

    The chief mediator in the Detroit bankruptcy case named two federal judges as mediators for continuing discussions toward a regional water authority. U.S. District Judges Sean Cox and David Lawson will facilitate discussions between the city and Macomb, Oakland and Wayne counties as they return to negotiating under the direction of Bankruptcy Judge Steven Rhodes. This morning,  Rhodes ordered the parties back to the table to renew talks about an authority with shared governance between the city and the counties.

    “The creation of a regional water authority is not only in the best interest of the city but also in the best interest of all the customers of the city’s water department,” Judge Rhodes said. “The customers of the water department, since we’re talking about a governmental function here, ought to have the opportunity to participate in the governance of that water authority and the governance of the delivery of water services, and that can only be done through a regional authority.”

    U.S. District Judge Sean Cox

    U.S. District Judge Sean Cox

    The city has issued a “Request for Information” seeking proposals from private companies to manage the system after talks about the regional authority broke down. Suburban county leaders said the city’s proposals called for the non-Detroit municipalities to put too much money into the department and objected to their contributions potentially being moved to the city’s general fund.

    With Judge Rhodes’s order today, the parties will resume talks.

    4.17.14 Mediator's Statement on DWSD Progress

  • More Pensioner Pacts: News of 2nd Detroit retiree agreement

    Just hours after U.S. Bankruptcy Court mediators announced an historic agreement between the city and pensioners from the police and fire departments, news reports emerged about a second deal for  general retirees.

    Both agreements are potential bombshells in this already landmark case, in part, because they are significantly better for retirees than anything Emergency Manager Kevyn Orr has publicly discussed or included in court filings. General services pensioners, according to the most recent city court filings, would have been facing a 34 percent cut if they didn’t approve the city’s eventual bankruptcy exit plan and 26 percent if they did.

    But according to last evening’s news reports, the deal now includes (just) a 4.5 percent reduction in the monthly pension payments, significantly lower than the previous proposals for the roughly 25,000 general service retirees. Meanwhile, retired police and firefighters aren’t facing any reductions of their current pension payments, according to a statement released early Tuesday afternoon.

    Don’t think everyone will find this a perfect deal. Plenty of public statements from retirees and their supporters have called for zero cuts to pensions. Those folks won’t be happy about the two deals’ provisions under which both employee groups face the elimination of some contractual cost-of-living adjustment (COLA) increases. General employees lose it altogether, while police and fire have some reductions in the near future with the option of gaining the COLA payments back.

    The two agreements require the roughly 32,000 retired, former or current employees involved to vote in favor of the city’s bankruptcy exit plan as a class. The so-called “grand bargain” money is also tied to a favorable vote. That’s the $866 million that comes from foundations ($366 million), the Detroit Institute of Arts ($100 million) and the state ($350 million). Those funds would be put toward pension funds in exchange, in part, for the museum’s collection remaining intact and not being sold to pay other city creditors.

    But the state money so far hasn’t materialized in any form except for Gov. Snyder’s proposal for it. With these employee agreements in place, the pressure is on the Legislature now to find some funding to complete the terms the other parties have set forth.

    This next chapter in Detroit’s bankruptcy has happened. The next (next) chapter will be the pension fund leadership lobbying members to vote in favor of the plan and how Orr, who has given the city’s current and former employees far more than he publicly offered, will treat banks and other financial institutions in the next round of court filings outlining the city’s exit plan.

    -By WDET’s Sandra Svoboda

    @WDETSandra and nextchapter@wdet.org

  • On The Craig Fahle Show: DWSD regional deal falling through

    A court filing in the bankruptcy case in Detroit shows a deal regarding the city’s water system between the city and suburban counties appears to have fallen through. Sandra Svoboda, from NextChapterDetroit.com, and Nathan Bomey, from the Detroit Free Press, discuss the situation and its implications with Craig.

  • Breaking Down the Deal: What today’s pension settlement is and means

    Today’s big news in the bankruptcy – at least as of 1:30 p.m., which is early in the day in the Detroit Chapter 9 world – is that the city reached a deal with the Retired Detroit Police and Fire Fighters Association (RDPFFA) leadership about pensions.

    The big points:

    • No cuts to current amounts in pensioners’ monthly checks. (In the last formal document from the city, they had been as high as 14 percent.)
    • Previously proposed cuts to cost-of-living increases are halved. (That’s from about 45 percent to 18 percent.)
    • The RDPFFA agrees to support a Voluntary Employee Beneficiary Association (VEBA) to manage retire health care. (This still means cuts are likely coming.)
    • The RDPFFA gets a voting representative on a new board of governance for pension assets and management.
    • The RDPFFA leadership will support the city’s formal restructuring proposal (translation: there will be a communication campaign to its members urging approval) when it’s voted on during May and June. But that support is dependent on the legislature enacting Gov. Rick Snyder’s proposal that the state provide $17.5 million annually for 20 years toward pension funding. (That, of course, is the “Grand Bargain” that also includes $366 million from foundations and $100 million from the Detroit Institute of Arts. It funds the pensions and protects the sale of artwork at the museum.)
    • The city agreed to use a 6.75 percent annual return on pension investments as a way to calculate future funding levels. The previous assumption had been lower, making less cash available in the forecasting used to inform the city-association talks.

    Now, remember, we in the media are working off a statement from the bankruptcy court mediators and a few interviews with attorneys as source material for these reports. We haven’t yet seen the formal deal, but that doesn’t lessen its impact. This represents the first agreement between the city of Detroit and a group of its retired workers.

    It’s also the biggest deal involving pensioners in a municipal bankruptcy. No other municipality has had such complicated pension issues in debt restructuring. The deal avoids a court-imposed “cramdown” in which pensioners could be forced to accept the city’s offer, whatever it would be.

    So that’s basically good news for retirees covered by this.

    What we don’t yet know are whether other provisions are part of the agreement that will make significant changes. For example, will modifications be made to retirement eligibility like raising the age for it? Will the fire department assume any additional duties like emergency medical services? What is the final structure of the board that will govern the pension funds? What will health care benefits for retirees be?

    Also, importantly, this deal is limited to the 6,500 members of the police and fire association, not general retirees, assuming the members follow their leadership’s example and vote in favor of the plan. The general retirees are facing a bigger cut under the city’s last public plan: up to 34 percent.

    Under the terms of the “grand bargain” both employee groups must vote in favor of whatever plan the city ends up with or that $816 million goes away.

    Negotiations are continuing, we do know that.

    -By WDET’s Sandra Svoboda

    @WDETSandra and nextchapter@wdet.org

  • Hear Judge Rhodes rule from the bench

    [sc_embed_player fileurl="http://www.nextchapterdetroit.com/wp-content/uploads/2014/04/4.11..14-Judge-Rhodes-Ruling-on-Swaps-Agreement.mp3"] Here is the audio of Bankruptcy Judge Steven Rhodes issuing his ruling in favor of the city’s agreement with two global banks on the interest rate swaps debt in the city’s Chapter 9 case.