25 July 2013

Detroit Seeks to Shield Snyder From Suits Over Bankruptcy

Story Originally Appeared in Bloomberg News

Detroit’s first court hearing after filing the biggest U.S. municipal bankruptcy may determine whether Michigan Governor Rick Snyder can be insulated from lawsuits related to the case.

Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities, typically prevents creditors from taking actions against the debtor that might interfere with reorganization. Kevyn Orr, the Detroit emergency manager, is scheduled to ask U.S. Bankruptcy Judge Steven Rhodes today to extend that immunity to Snyder.

Public workers and retirees claim the bankruptcy threatens their pension benefits with illegal cuts, and a union opposing immunity said in a court filing that protecting the Republican governor, who appointed Orr and authorized the July 18 bankruptcy, would be an “improper, unprecedented” move.

Immunity would allow Snyder “to engage in conduct which is unconstitutional under the Michigan Constitution, unauthorized or, at a minimum, outside the scope of Chapter 9,” the AFL-CIO, the union for thousands of current and former city workers, said in court papers.

The $18 billion bankruptcy filing came amid negotiations between Orr and creditors including bondholders, public workers and retirees. Orr said that six decades of economic decline had left Detroit unable to both pay creditors in full and provide residents necessary services.

Today’s hearing in Detroit is to confirm immunity for the city, as well as extend it to state entities, employees, and agents and representatives of the debtor, including the 54-year-old governor.

Retirement Plans

The General Retirement System and the Police and Fire Retirement System of the City of Detroit sued Snyder and Orr on July 17, contending that the state constitution bars any government in the state from reducing pension benefits. The suit was filed on behalf of the retirement plans and more than 32,000 active and retired Detroit employees.

Two similar cases were filed earlier in the month against Snyder and Michigan Treasurer Andy Dillon. Just minutes before a state-court hearing that may have halted the city’s plans, Detroit filed its bankruptcy petition.

Larry Dubin, a professor at the University of Detroit Mercy School of Law, said Snyder’s role is probably less important than it was before the Chapter 9 filing.

‘Very Important’

“Governor Snyder was very important in setting the groundwork necessary for this bankruptcy,” he said. Now Orr and his advisers will handle the day-to-day management of the case. Snyder “will not be the driving force,” Dubin said.

Extending the so-called automatic stay to the governor would prevent creditors, including the pension plans, from filing disruptive lawsuits, Orr said in court papers.

Creditors want to sue Snyder “for the sole and inappropriate purpose of attempting to improve their bargaining positions with respect to their claims and otherwise denying the city the protections of the Chapter 9 stay,” he said.

Before the bankruptcy, Orr proposed canceling about $2 billion in bond debt and reducing $3.5 billion in unfunded pension liabilities. Those debts would be replaced with about $2 billion in new notes, forcing bondholders and the pension systems to accept less than what they are owed.

Worker Concessions

City workers, other than police and firefighters, argue that their pensions and benefits are being unfairly targeted for cuts after they have already made concessions. Those employees saw pension benefit cuts of 40 percent last year, the AFL-CIO said in its court filing.

The average pension for employees other than police and firefighters was set at slightly less than $18,000 a year, according to a June 30, 2012, valuation report cited in the AFL-CIO filing. The average annual pay for such employees is $41,385, the union said.

The three lawsuits are pending in state court in Ingham County, Michigan. Circuit Judge Rosemarie Aquilina in Lansing ruled on the first two, finding Detroit’s Chapter 9 filing violated the state’s constitution, which says public pension benefits are a contractual obligation that can’t be diminished or impaired.

In asking Rhodes to delay hearings in the bankruptcy, pension officials cited a July 19 ruling by Aquilina criticizing Snyder for “overreaching” when he authorized Orr to rush the city into bankruptcy.

Request Denied

Rhodes on July 22 rejected the request to delay the bankruptcy case, and Aquilina’s ruling was put on hold yesterday pending consideration by Michigan’s court of appeals.

Attorney Dale Ginter, who represented retired city workers in the 2008 bankruptcy of Vallejo, California, said the immunity motion may stumble at first on technical grounds -- the city may need to re-file its request in the form of a lawsuit -- before finally being granted.

“They may well lose that motion, but ultimately I think the city will be able to protect the governor,” Ginter said.

The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

22 July 2013

Legal battle brews over Detroit bankruptcy

Story Originally Appeared in USA TODAY

DETROIT -- While Detroit emergency manager Kevyn Orr on Friday was offering short-term reassurances to thousands of city pensioners whose benefits are in jeopardy, his lawyers were waging a whirlwind legal battle over the constitutionality of the bankruptcy filing that could land both sides before a federal judge early next week.

On Friday, Michigan Attorney General Bill Schuette said he will appeal an Ingham County judge's ruling that Detroit's bankruptcy filing must be withdrawn because it violates the Michigan Constitution and state law.

However, the order from Ingham County Circuit Judge Rosemarie Aquilina ultimately could have little effect because the bankruptcy case already was filed in federal court, and federal law generally trumps state law. The city filed a motion requesting to include the state as a party in the bankruptcy code's provisions that put on hold all lawsuits against the city, a clear attempt to fight the Ingham County ruling by preventing the state from being sued in similar fashion. The city is asking U.S. District Judge Steven Rhodes to hold a hearing on Tuesday, or earlier, to decide this and other matters.

Friday's legal wrangling marks the beginning of what is expected to be a lengthy bankruptcy process that will involve more than 100,000 creditors, which include the Police and Fire Retirement System and the General Retirement System and its 20,000 retirees.

Orr provided retirees some temporary relief Friday, telling the Detroit Free Press that pension and health care benefits are safe for at least the next six months.

"We have made a decision that for the balance of this year, the next six months, we're not touching pension or health care," Orr said in an interview with Free Press editors and reporters. "So all pensioners, all employees you should understand: It's status quo for the next six months."

The announcement was welcome news to Thomas Berry of Livonia, who retired from the Detroit Police Department six years ago after more than 34 years on the job.

"I think that's huge," Berry said. "You've given me five months to evaluate. We're going to sock away more and maybe spend a lot less."

Orr has not yet specified the cuts to pensions he will seek through the bankruptcy process. He has proposed freezing pensions and moving workers to a 401(k)-style plan to help alleviate the pension systems' unfunded liabilities of $3.5 billion. He also wants to move retirees to Medicare or health care exchanges being set up through the Affordable Care Act.

Orr, alongside Michigan Gov. Rick Snyder, spent Friday in a series of public appearances and meetings explaining why it was necessary for Detroit to file for bankruptcy protection and how the lengthy process is likely to affect the city's residents, workers and retirees. The duo stressed bankruptcy was long overdue, and is the best path to resolve the city's liabilities of about $18.5 billion. They said services to residents will improve.

Orr said the lawsuits from pension boards and others didn't spur the filing. He said he was simply running out of time.

"We're dealing with 60 years of deferred maintenance in 18 months," Orr said during a news conference at Wayne State University, referring to the length of time in which he'll oversee the city.

Still, Orr singled out retirees and pension fund lawsuits filed in recent days to try to stop the state-approved bankruptcy filing, based on the argument that the state's constitution prevents the city or state from cutting protected pension benefits for retirees. Orr deflected criticism from union leaders and pension officials that he wasn't bargaining in good faith in recent weeks, citing lawsuits opponents filed.

"That's the very thing I had pleaded for not to happen," said Orr, standing next to Snyder. "Anyone who thinks I wasn't negotiating in good faith, when they're suing me, look at that context."

In a spate of orders out of Ingham County Circuit Court arising from three separate lawsuits, Aquilina said Snyder and Orr must take no further actions that threaten to diminish the pension benefits of city of Detroit retirees.

"I have some very serious concerns because there was this rush to bankruptcy court that didn't have to occur and shouldn't have occurred," Aquilina said.

Lawyers representing pensioners and two city pension funds got an emergency hearing with Aquilina on Thursday at which she said she planned to issue an order to block the bankruptcy filing. But lawyers and the judge learned Orr filed the bankruptcy petition in Detroit five minutes before the hearing began.

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."

Devlin said Snyder has to follow both the Michigan Constitution and the U.S. Constitution.

Schuette's office issued a statement saying an appeal has been filed on behalf of the governor in all three cases before Aquilina.

Aquilina issued a declaratory judgment that says the bankruptcy filing violated the Michigan Constitution. She also ordered that a copy of her declaratory judgment be sent to President Barack Obama, saying he "bailed out Detroit" and may want to look into the pension issue.

In the Schuette appeal, state attorneys say Aquilina abused her discretion and the question of a Detroit bankruptcy filing is now moot.

"The governor has authorized the bankruptcy proceeding and the petition has been filed," the appeal said.
University of Michigan law professor John Pottow said the issue could travel up the court system, all the way to the Michigan Supreme Court. Or it could be answered decisively and quickly in bankruptcy court, he said.

"There's nothing that precludes a federal judge from adjudicating the constitutionality of the Michigan statute," Pottow said. "The bankruptcy judge can interpret Michigan law."

Snyder said the decision to file for bankruptcy was based on the unmistakable conclusion there was no other option for a city that had reached the end of the line. Detroit, he said, was done in by decades of residential and business flight to the suburbs, loss of its manufacturing base, chronic overspending and mismanagement and corrupt leadership, all reaching a climax as the economic meltdown and the national housing crisis hit.

"Let's get to the point of saying enough is enough," Snyder said. "This is 60 years of bad outcomes. Let's do something about it, finally."

Meanwhile, Aquilina is scheduled to hold a hearing at 9 a.m. Monday to decide whether Snyder has the authority to approve a bankruptcy filing that would affect accrued pension benefits.

Contributing: Nathan Bomey of the Free Press

Okemos businessman smoked by federal pot law

Story Originally Appeared in The Detroit News

Dennis Forsberg thought he was doing everything right. He had filed all the necessary paperwork and cleared his business plan with attorneys, local government officials and law enforcement. He created new companies and got a federal tax ID number. He wasn’t trying to hide anything. Yet in the end, he still got burned.

On Tuesday, the 59-year-old Okemos businessman is headed to federal prison in North Carolina for three years because he found himself in the dangerous intersection between state and federal marijuana laws. His son, Lance, has already started serving a three-year sentence in West Virginia.

“We worked so hard to be transparent,” Forsberg says. “But it worked against us.”

Forsberg’s error was leasing some of the buildings owned by the family real estate company to licensed growers, or caregivers, under Michigan’s medical marijuana law. Now instead of enjoying retirement and spoiling grandchildren, the father of four will spend years away from his family and life — even though everything he did was legal under state law. He’s outraged.

“The crime and punishment don’t make sense,” Forsberg says. “I had a great track record, and they do this to good people who think they are under the law.”

Forsberg’s wife, JoAnn, faces a lonely three years without her husband of nearly 40 years and her son. Plus, the couple still have two children in college, and finances will be tight with Forsberg behind bars. “We got caught in a trap between state and federal law,” she says.

The case highlights the tension between state and federal drug law. Michigan is one of 18 states, in addition to Washington, D.C., that have passed medical marijuana laws. And recently, Colorado and Washington state legalized the recreational use of marijuana. No matter what states do, however, marijuana is still illegal under federal law. The drug is classified as a Schedule I substance, which places marijuana on par with heroin and ecstasy.

Forsberg justifiably feels betrayed by the state — and country — he loves, and he wants to get the word out to others who may think about getting involved in medical marijuana. He says the state didn’t communicate the huge risks involved. “We just want to help other families,” he says.

The Obama administration has said it doesn’t want the Justice Department to go after people who are abiding by state medical marijuana laws. That leaves Forsberg scratching his head. Because when federal agents stormed his property, it definitely seemed like he was a target. Matthew Abel, an attorney for Cannabis Counsel in Detroit and executive director of Michigan’s chapter of the National Organization for the Reform of Marijuana Laws, says both state and federal marijuana laws need adjusting. Efforts under way in both the state Legislature and Congress could help, and they deserve lawmakers’ support.

“It’s very unfair that some are prosecuted and some are not,” Abel says.

The Forsberg family feels that unfairness acutely. The economic downtown of 2008 had hit the business hard. Real estate tanked, so when Forsberg started getting calls in early 2010 about leasing some space for growing medical marijuana, he decided he might as well. It was legal after all in Michigan. But by November of that year, the Drug Enforcement Administration raided his buildings and Forsberg had 13 federal indictments against him.

“It was scary, terrifying,” he says. “I was just devastated.”

Court records from May show that U.S. District Judge Janet Neff, with the Western District of Michigan, felt some sympathy. “This was certainly an atypical drug case,” she said. Neff also noted the attempts to comply with state law and acknowledged the situation was a “perfect storm for all of you.”

That’s not much consolation for Forsberg, who sees his days as a free man dwindling.

Forsberg, soft-spoken and fatherly, says he’s never had any previous run-ins with the law, so this sentence came as harsh wake-up call. He was treated like a drug kingpin, rather than the law-abiding citizen he tried to be. Forsberg and his wife describe themselves as proud Americans, Christians, volunteers and hard-working business owners. Felon isn’t something they wanted to add to that list.

“Our family has been devastated,” Forsberg says. “As a father, it’s like tearing some of my heart out.”

Business leaders: Bankruptcy won't impact major Detroit downtown projects

Story Originally Appeared in The Detroit News 

Detroit Business leaders say the city’s bankruptcy filing won’t have an impact on downtown development projects like the new home of the Detroit Red Wings, but it has already caused concern among the city’s convention clients.

Officials from the Detroit Economic Growth Corporation, Michigan Regional Chamber and others gathered for a Friday press conference to discuss bankruptcy, calling it the first step toward creating a place that’s attractive to outside investment and business.

"It's a new day for the city of Detroit," said Larry Alexander, president and CEO of the Detroit Metro Convention and Visitors Bureau.

Others aren’t as optimistic.

Alexander admitted the bureau has received "quite a few phone calls" from conventions expressing concerns over Detroit's financial troubles, but, for now, no one has backed out of bringing events to the city.

Pat O’Keefe, a financial turnaround expert with Bloomfield Hills-based O’Keefe, said the conventions’ leaders concerns are very real.

“When you’re hosting a convention for thousands you have to wonder how the city’s going to operate,” he said. “These are people who don’t really have their hand on the pulse of the city. They’re asking intelligent questions.”

Officials from some conventions slated for Cobo Center promised Friday their shows will go on.

Rod Alberts, executive director of the North American International Auto Show, said Detroit’s bankruptcy has no impact on the city’s signature car show, and called it a “good decision.”

“The 2014 NAIAS will be as sensational as ever, and we look forward to boosting the region with $350 million of annual economic impact once again,” he said in a statement.

Dearborn-based Society of Manufacturing Engineers — the largest event-producing manufacturing organization in the country — will host a manufacturing event June 9-12 in 2014 that’s expected to draw 7,000 people from around the nation despite the bankruptcy filing, said Debbie Holton, director of events.

“We feel business is going to continue in the downtown corridor,” Holton said. “We understand bankruptcy is a part of business restructuring and we hope it’s a positive sign.”

Brian Holdwick, executive vice president of business development at the DEGC, said other big projects shouldn’t be impacted by the bankruptcy filing.

But the Red Wings arena project may come before the bankruptcy judge because some of the development is slated to be built on city-owned land. In theory, the judge may have to approve the land so it can be used for the project.

The Downtown Development Authority, a regional entity that uses taxes to fund major projects, is listed as one of Detroit’s major creditors and is owed about $34 million, which Holdwick said came from old debts related to the People Mover and Cobo.

Chamber President and CEO Sandy Baruah called bankruptcy a tool to moving forward.

"We are now solving the problem,” he said.

Obama Takes Romney’s Advice on Detroit

Story Originally Appeared on Fox News

“We refused to throw in the towel and do nothing. We refused to let Detroit go bankrupt. We bet on American workers and American ingenuity, and three years later, that bet is paying off in a big way.” -- President Obama in his weekly address, Oct. 13, 2012.

Just before Detroit became the largest municipality to ever file bankruptcy, the failed city’s emergency manager, Kevin Orr, pleaded with top White House officials, including senior adviser Valerie Jarrett, for help.

But no help was coming.

That detail in the Wall Street Journal’s coverage of how the once-great city, now $11 billion in debt, finally succumbed may be the most telling of any in the slew of obituaries for Detroit.

For all of the invective launched by President Obama and his campaign against challenger Mitt Romney last year for having argued for structured bankruptcy for the city’s Big Three automakers, in the end, the most liberal, most pro-union president since LBJ opted to take Romney’s advice when it came to the city itself.

Detroit has been teetering on the brink for years. Its huge debt is mostly from unfunded employee benefit programs, constituting some $9 billion of the total. Those pensions and bennies were negotiated in fatter days for government worker unions there, but the contracts stayed in place long after the collapse of the Big Three’s superpower status made such self-dealing for government workers and the Democrats they patronized unsustainable.

Having seen the flight of taxpayers accelerate as the economy worsened and city services and safety declined, there’s no reason to believe that Detroit will ever be able to pay anything but pennies on the dollar to those who have bought its bonds and only slightly more to those unionized retirees.

A place where nearly half of the streetlights don’t work anymore, the violent crime rate is higher than any other major city and the average police response time is one hour doesn’t attract new residents. It either loses them more quickly or more slowly, a critical mass of despicability having been achieved. In the 21st Century, the pace of the exodus has been blinding: the city has lost 26 percent of its population since 2000.

The only thing that the producers of RoboCop seem to have missed was that there wouldn’t be enough money to buy murderous, law-enforcement robots. Much of Detroit is simply falling apart and being reclaimed by the natural world. The Motor City is becoming the domain of raccoons and coyotes, not an evil international mega corporation.

David Byrne may have said it best: “This used to be real estate. Now it's only fields and trees.”

So it hardly would have made sense for Obama to have put together a loan package for the city. Delaying the inevitable for a place that keeps finding new kinds of rock bottom would have not only been illogical but also politically impractical for a president who is already under fire for his stance in federal fiscal fights: borrow more now to expand government outlays as an investment in the future.

In Detroit, 40 years of such investments have brought sorrow as their only return. Certainly Obama, who is promising a smarter, more efficient federal government, would not like to be seen standing with a city that has become synonymous with the excesses of government worker unions, Democratic machine politics and corruption.

Obama would no more deliver a loan package to Detroit than he would announce a new green energy stimulus program at the remains of the Solyndra world headquarters. Bad optics.

But, it’s still an instructive moment for organized labor in America.

Union members are happy to see that not only have Republicans in the Senate agreed to confirm two union labor lawyers to the National Labor Relations Board and a crusading liberal in Thomas Perez as Labor secretary.

Obama’s dismissing of Detroit’s last-minute pleas, though, shows where Big Labor really stands in Obama’s remade Democratic coalition. While the president is engaging young singles in the cities with promises of free contraceptives, liberal social policies and global warming curbs, the old unions who made the Democratic Party great are left to crumble like Detroit’s streets and sidewalks.

We saw in a letter to Democratic leaders this week evidence of the broadening realization among unions that Obama’s 2010 health law is a disaster for them: Fewer members, less money and less clout in addition to difficult regulations for their own existing health plans.

In an interview with the Washington Post, Thea Lee, an economist and deputy chief of staff for the AFL-CIO, described the president’s economic policies as “schizophrenic.” She bashed Republicans for “glorying” in the perennially weak economy as evidence of Obama’s failures, but also lamented the president’s doublespeak on fiscal issues.

They wanted the 2008 version of Obama who would crusade for domestic spending, not the guy trying to sound like a fiscal moderate in face of Republican attacks on his deficit spending and mounting debts.

"It's a pathetic recovery," Lee told the Post. "It really is extraordinary that four years ago we declared the recession over, but we're not even within spitting distance of full employment."

One doubts that the Obama of 2008 would have brushed off Detroit’s bailout pleas, certainly not when he was looking for union endorsements. Nor would their worries about his health law have gone unanswered. But when the elections are all over, Obama’s not looking for the union label anymore.

Unions are facing the same fate as the city they made and the president can’t do much about it. What is galling for them, though, is that he doesn’t even seem willing to fight for them in public.

United Auto Workers plants were key backdrops for Obama’s re-election campaign, with the president endlessly touting his industry bailout and support for union workers. But when the chips were down for their city, their calls went unanswered.

While Vice President Joe Biden’s slogan, “Usama bin Laden is dead and General Motors is alive,” remains true, the second part of that seems to be doing a lot more for Shanghai, where GM broke ground on another new plant last month, than it is for a bankrupt Detroit.

And Now, A Word From Charles

“The United States, which dominated the world economically, created all of these programs – entitlements: Social Security, Medicare, and now added on Obamacare – living on the glories of the past when we were the most dominant without any rivals of the world, and now having to adapt to a reduced economy, are we going to be able to have commensurate cuts.  And when you see all of the resistance to anything of that sort by especially Democrats and liberals, it doesn't give one a lot of hope.  In the end, you can have a bankruptcy for a city, but not for a country.”

-- Charles Krauthammer on “Special Report with Bret Baier.”

19 July 2013

Creditors to fight Detroit insolvency claim

Story Originally Appeared in The Detroit News

Detroit — -- The city of Detroit filed the largest municipal bankruptcy case in U.S. history Thursday, culminating a decades-long slide that transformed the nation's iconic industrial town into a model of urban decline crippled by population loss, a dwindling tax base and financial problems.

Gov. Rick Snyder justified approving the historic filing by reciting a litany of the city's ills, including more than $18 billion in debt, maxed-out tax rates, the highest murder rate in 40 years, 78,000 abandoned buildings and a half-century of residential flight. He said the city failed to provide basic services to residents or pay creditors.

The filing, which has broad implications for the nation's municipal bond market and sanctity of public pension funds, was met with outrage, disappointment and a vow to fight. Some creditors adopted a war stance, threatening a prolonged battle. Others accused Emergency Manager Kevyn Orr of failing to negotiate in good faith -- an essential requirement for approval of a bankruptcy petition -- during his month-long push to secure concessions from creditors, including deep cuts to pensions.

"It's war," said George Orzech, chairman of the city's Police and Fire pension fund.

The 16-page bankruptcy petition was shrouded in secrecy and filed amid drama. Snyder planned to file the bankruptcy petition today in U.S. District Court but reversed course after learning the city's pension funds planned to ask a judge to block a filing, according to a source. The petition was filed at 4:06 p.m. Thursday and cost the bankrupt city $1,213.

Eighteen minutes later -- too late to make a difference -- Ingham County Circuit Judge Rosemarie Aquilina signed a restraining order.

Snyder authorized Orr to file bankruptcy under a controversial law the Legislature passed in December that replaced the previous emergency manager law voters repealed last November.

"There were no other viable alternatives," Snyder told reporters Thursday. "We have a great city but a city that has been going downhill for 60 years."

Orr said he will continue trying to secure deals with additional creditors that could ease the city's path through bankruptcy court. He said he hoped the city could restructure and emerge from bankruptcy court next year, by late summer or early fall.

During a month of negotiations, Orr has reached a settlement with only two creditors: Bank of America Corp. and UBS AG. They have agreed to accept 75 cents on the dollar for approximately $340 million in swaps liabilities, according to a source familiar with the deal.

Orr had harsh words for those who tried to block the city's restructuring efforts.

"We don't have time for more delaying tactics," Orr said.

Orr insisted he "bent over backwards" and negotiated in good faith during more than 100 meetings with creditors. In court filings late Thursday, he said it was impossible to reach an accord with "many tens of thousands of creditors" and accused unions of refusing to negotiate on behalf of the city's 20,000 retirees.

The filings also indicated that Orr may be open to offers on the Detroit Institute of Arts' collection, which is worth billions. Orr said he will continue to "engage all interested parties in dialogue regarding the City-owned art collection" and "reach a resolution with respect to such assets that will maximize the long term benefits to the City and the prospects for a successful restructuring."

Orr also will continue to evaluate how much money the city could collect by selling other assets, including Belle Isle, the Detroit-Windsor Tunnel, real estate and municipal parking operations.

Mayor Dave Bing, whose powers were usurped when the governor appointed Orr in March, spoke of Thursday's moves with a mix of resignation and optimism.

"As tough as this is, I didn't want to go in this direction," Bing said. "Now that we are here, we have to make the best of it. If it is going to make citizens better off, this is a new start for us."

But not until creditors feel varying degrees of pain, experts said.

Unsecured creditors could take the biggest hit in bankruptcy court. Orr wants them to share a $2 billion payout on approximately $11.5 billion worth of debt, which includes an estimated $9.2 billion in health and pension benefits and $530 million in general-obligation bonds.

"Pain is going to be handed out to a number of creditors simply because Detroit has no other option," said Dan Heckman, senior fixed income strategist with U.S. Bank Wealth Management in Minneapolis.

Orr chronicled the city's economic collapse in a detailed plan presented to creditors June 14 -- a proposal that drew criticism from some who said the cuts were too deep and did not include the sale of city assets, including Belle Isle and a Detroit Institute of Arts collection. He proposed paying most of the money owed to secured creditors while pension funds, unions and unsecured bondholders would receive, in some cases, as little as 10 cents on the dollar.

Instead of paying creditors in full, Orr said he would use $1.25 billion over the next decade to buy police cars and fire trucks, replace broken street lights, tear down burned-out homes, fight blight and improve city services.

Orr said he wants to stabilize the city, woo new residents, provide essential city services, lower property taxes and transfer costly departments, including the water and sewerage, to an outside group.

The bankruptcy filing gives Orr unusual power to break promises made by past city officials that left Detroit on a path to spending almost 65 percent of every tax dollar on retiree pensions and health care.

The Chapter 9 filing could take years, experts said, despite hopes by Snyder and Orr thatit can be wrapped up in a year. A bankruptcy judge could trump the state constitution by slashing retiree pensions, ripping up contracts and paying creditors roughly a dime on the dollar for unsecured claims worth $11.45 billion.

"Detroit cannot afford any further attacks on working families, who have already sacrificed so much without a say in the process," Metro Detroit AFL-CIO president Chris Michalakis and Michigan State AFL-CIO president Karla Swift said in a statement. "City workers have already made severe concession to keep the city afloat. It is time to put the needs of Detroit residents above the interests of out-of-town creditors."

The filing is expected to trigger a costly, long and precedent-setting battle by creditors -- the city has more than 100,000. Detroit's bankruptcy case could become a template for the treatment of pensions in future municipal bankruptcies.

"The negotiations from here are likely to be long and complex, offering no resolution or clarity perhaps for years," said Peter Hayes, who heads BlackRock's Municipal Bonds Group. "Ultimately, it's important for market participants to understand that Detroit is the exception and not the rule. This is first and foremost a Michigan issue, not a systemic municipal market issue."

The bankruptcy case will be assigned by Alice Batchelder, chief judge of the 6th U.S. Circuit Court of Appeals, which spans Michigan, Ohio, Kentucky and Tennessee. Any judge in the four-state region could be assigned the case, though Batchelder will weigh potential political concerns and decide who has the time and capability to handle a complex, large case in Detroit.

Once the nation's fourth largest city, Detroit was hailed as an industrial hub with nearly 2 million people.

Today, there are about 700,000 residents after a half-century of residential flight, high unemployment, a significant reduction in state funding, plummeting income and property taxes, corruption and chronic mismanagement.

The filing serves as a grim reminder of the bankruptcies in the auto industry four years ago. Unlike the cases of General Motors and Chrysler in 2009, the White House offered no financial help.

Steven Rattner, the Obama administration's auto czar who steered the General Motors and Chrysler bailouts, said the state will have to help fund Detroit's exit from bankruptcy.

"It's really ugly," Rattner said Thursday.

20 largest


Here are the city's 20 largest unsecured creditors and type of claim:

  • General Retirement System: (A) $2 billion

  • Police and Fire Retirement System (A) $1.4 billion

  • U.S. Bank (B) $801 million

  • U.S. Bank (B) $516 million

  • U.S. Bank (B) $153 million

  • U.S. Bank (C) $79 million

  • U.S. Bank (C) $61 million

  • U.S. Bank (C) $59 million

  • U.S. Bank (C) $45 million

  • U.S. Bank (C) $40 million

  • U.S. Bank (C/E) $38 million

  • U.S. Bank (C) $38 million

  • U.S. Bank (C) $35 million

  • Downtown Development Authority (D) $34 million

  • U.S. Bank (C) $30 million

  • U.S. Bank (E) $25 million

  • U.S. Bank (C) $19 million

  • U.S. Bank (C) $19 million

  • U.S. Bank (C) $13million

  • U.S. Bank (C/E) $11 million

(A) pension funds; (B) certificate of participation; (C) general obligation bond; (D) loan payable; and (E) capital improvement bond. Source: City of Detroit


(313) 222-2028

News Staff Writers Darren A. Nichols and Christine Ferretti contributed

18 July 2013

Detroit pension funds sue to block potential bankruptcy

Originally Appeared in The Detroit News

Detroit — -- The city's two pension funds sued Gov. Rick Snyder on Wednesday to block him from authorizing what would be the biggest municipal bankruptcy in U.S. history.

The Ingham County Circuit Court lawsuit says authorizing a Detroit Chapter 9 bankruptcy would violate retirees' constitutional right to a pension.

The General Retirement System and Police & Fire pension fund lawsuit could be combined with a similar complaint filed by retirees earlier this month that also seeks to block a bankruptcy filing.

An attorney for three retirees and two city workers vested in the Detroit retirement system who are plaintiffs in the earlier case welcomed the pension funds' joining the legal battle.

"The more the merrier," said Bingham Farms attorney Bill Wertheimer, who is being paid by the United Auto Workers.

The new lawsuit is the latest step in an escalating fight between the pension funds and Emergency Manager Kevyn Orr, who wants to cut pensions and benefits while restructuring as much as $20 billion in city debt.

The pension funds aren't alone in eying the lawsuit as an option to block a Detroit bankruptcy filing. Several labor unions are interested in joining the lawsuit, said Wertheimer.

That lawsuit claims the emergency manager's power to alter or wipe out vested pensioners in a bankruptcy violates Michigan's constitutional protection of accrued pension benefits.

Under the new emergency manager law, if Orr concludes there's "no reasonable alternative to rectifying" Detroit's financial emergency, he must get Snyder's approval to seek Chapter 9 bankruptcy protection.

The law, which took effect in March, contains no timetables or waiting periods.

The pension funds were prepared to fight Orr as the city's finances continued to erode.

They set aside $5 million to fund a legal fight and any attempts by Orr to takeover a system with $5 billion worth of assets.

As part of Orr's restructuring plan, he is proposing to slash pensions and health benefits.

The Michigan Constitution protects benefits for the city's 30,000 current and former city workers, but it's unclear whether a bankruptcy judge would rule otherwise.

Under state law, Orr can replace pension board members if a review determines the funds are underfunded. There is wide disagreement about the funds' financial soundness.

Orr contends that the city's retirement system is underfunded by an estimated $3.5 billion. Pension officials dispute the figures.

An Orr-commissioned review of both funds will be completed soon, said Bill Nowling, the emergency manager's spokesman. If the pension systems are less than 80 percent funded, Orr can try to remove the boards and have state Treasurer Andy Dillon appoint a sole trustee.

Orr also recently launched an investigation of the pension funds amid concerns over mismanagement, investments and spending.

The general pension fund is likely less than 80 percent funded, said Michael VanOverbeke, the fund's interim general counsel. A preliminary report on the police and fire fund pegged its funding level at 96.1 percent, though Orr has said both funds are below 80 percent.

16 July 2013

Scripps heir gets 9 years for swindling mom, uncle

Originally Appeared in USA TODAY

 A media company heir raised in what his lawyer called a wealthy but dysfunctional family must serve nine years in prison for stealing $3.6 million from his mother and disabled uncle.

Federal prosecutors in Philadelphia said Michael Scripps spent the money on cars, jewelry and women, including strippers and porn stars.

A defense lawyer argued Monday that Scripps, 36, has since married and built a productive life and credited the turnaround to his estrangement from his family in 2006. However, U.S. District Judge Legrome Davis did not quite see it that way.

"He got caught stealing their money, so they didn't want to have anything else to do with him," Davis said.

Scripps lived in suburban Detroit, as did his mother and uncle. He has been in custody since an April trial conviction on wire fraud charges.

Melissa Scripps had agreed to let her son's college friend in suburban Philadelphia manage $9 million belonging to her and her brother, David. But Scripps and the Merill Lynch broker, Richard "Duke" Gleeson of Bryn Mawr, then colluded to misuse the funds, prosecutors said.

Melissa Scripps is an heir to the fortune of James E. Scripps, the founder of The Detroit News. She testified that she had inherited $11 million. But defense lawyer Michael Dezsi argued that her fortune was closer to $100 million. She was giving her adult son about $3,900 a month, along with a $250,000 trust fund and college tuition.

Dezsi said she had run a chaotic house when her son was growing up and was long addicted to drugs.

"My client was raised in a very chaotic, somewhat dysfunctional household," Dezsi said. "He was raised in a house where his mother asked him to buy drugs for her."

"The spending in the Scripps family was just unimaginable," the lawyer said.

Assistant U.S. Attorney Terri Marinari disputed any effort to paint Scripps as a victim.

"This is real money that he put in his pocket, knowing that these two other people had no other source of income," she argued.

And the judge challenged the notion that his mother's wealth or her drug use fueled Scripps' crimes.

"There's something deeper here than a desire for money, or family circumstances," Davis said.

Scripps has been in custody since his conviction. He did not testify at trial and declined to speak to the judge Monday.

However, Dezsi said his client had the authority to use the money, and plans to appeal the conviction and sentence.

Gleeson, 38 and a married father of four, was sentenced Monday to a year in prison. A self-described gambling addict, he netted about $300,000 and pleaded guilty before trial.

The two men were also ordered to joint restitution of $3.6 million.

09 July 2013

Originally Appeared in The New York Times

DETROIT — A question unimaginable in most major American cities is utterly commonplace in this one: If you suddenly found yourself gravely ill, injured or even shot, would you call 911?

 Many people here say the answer is no. Some laugh at the odds of an ambulance appearing promptly, if ever. In Detroit, people map out alternative plans instead, enlisting a relative or a friend.

As officials negotiate urgently with creditors and unions in a last-ditch effort to spare Detroit from plunging into the largest municipal bankruptcy in the nation’s history, residents say the city has worse problems than its estimated $18 billion debt.

“The city is past being a city now; it’s gone,” said Kendrick Benguche, whose family lives on a block with a single streetlight, just down from a vacant firehouse that sits beside a burned-out home. The Detroit police’s average response time to calls for the highest-priority crimes this year was 58 minutes, officials now overseeing the city say. The department’s recent rate of solving cases was 8.7 percent, far lower, the officials acknowledge, than clearance rates in cities like Pittsburgh, Milwaukee and St. Louis.

“I guess I’ll be glad if someone else takes over and other people run this thing,” Mr. Benguche said. “The way I look at it, the city is already bankrupt.”

Kevyn D. Orr, the state-appointed emergency financial manager for Detroit, has said that the chances of filing for bankruptcy, a possibility that could be decided as early as this month, stand at 50-50. On Wednesday, Mr. Orr is expected to lead 40 representatives of Detroit’s creditors on a bus tour of the city and its blight to let the bleak images of empty lots and shuttered firehouses make the argument that creditors should accept pennies on the dollars owed.

The prospect of a bankruptcy filing — a move that is extremely rare for cities and one that has never happened to an American city as populous as Detroit, with about 700,000 people — worries some residents. They say they fear that bankruptcy would add more stigma to a city that has contracted alarmingly in the decades since it was the nation’s fourth largest, starting in the 1920s, and that it might worsen already bare-bones services.

The notion that assets like Coleman A. Young International Airport, Belle Isle Park and the collections of the Detroit Institute of Arts might be sold — either in a formal bankruptcy proceeding or in a huge city reorganization outside of the court system — has fueled outrage.

“Bankruptcy scares me,” said LaTanya Boyce, a nurse practitioner. She urges her patients to treat health concerns before they become acute because, she said, “if they find themselves calling 911, it’s probably too late.”

But as with many here who have wrestled with the practical realities of living in this city, Ms. Boyce said she would not mind if some entity other than the city took over the management of Belle Isle, a park whose plan was conceived in the early 1880s by Frederick Law Olmsted. Ms. Boyce goes to the park for exercise, wearing a fanny pack that at times contains a gun — “Do you see any city police here?” — and bemoaning several locked restrooms that have portable toilets planted in front of them.

“I would love to see it leased to the state,” she said of the park. “They’d take better care.”

Recent developments among Detroit’s elected leaders have only added to the sense that significant changes in the city are perhaps even preferable. Two of the nine City Council members have resigned. (One said he was leaving to work for the emergency manager’s office.) Then, Charles Pugh, the Council president, had his salary stopped and power stripped by Mr. Orr after the councilman abruptly stopped showing up for meetings and disappeared from public view.

“Where Is Charles Pugh?” a headline at the top of the front page of The Detroit Free Press asked.
“For a lot of people, I think city government has become a nonentity here,” said Kurt Metzger, the director of Data Driven Detroit, which tracks demographic, economic and housing trends in the region. “People almost feel like the city goes on in spite of city government — that city government in this case certainly doesn’t define the city — and that affects how they’re feeling about what comes next.”

Recently, Mr. Orr indicated that Detroit was getting out of the business of electricity distribution. An independent authority is already planning to take control of the city’s streetlights, 40 percent of which, Mr. Orr’s office said, were not working in recent months. Similar handoffs are being weighed for the water and sewer services, and possibly more.

While many who have been through municipal bankruptcies say such moves often mean more budget cuts to city services, Mr. Orr has called for spending about $1.25 billion over the next 10 years on improving city infrastructure and services, including the police. Last week, James Craig, Mr. Orr’s choice for police chief, arrived to face a city that had seen five chiefs in as many years and had the highest rate of violent crime in 2012 of any city with more than 200,000 residents, according to a report by Mr. Orr.

“Whatever the solution is — a negotiated plan or a bankruptcy proceeding — the end result is going to be better services,” Bill Nowling, Mr. Orr’s spokesman, said. “This is all about getting Detroit strong, viable and solvent.”

Frank Ponder, 45, who works at a hospital here, said major changes in the city, even bankruptcy, now seem all but certain. “Everybody had all these ideas about saving Detroit, and nobody’s ideas actually worked,” he said. “At a certain point, you have to stop fooling yourself.”

The East Side house in which Mr. Ponder lives, once owned by his grandmother, is the only one on his block that appears to be occupied. He has been saving money for years in hopes of moving this fall to a suburb, Warren — and he expects to just walk away.

“What can you do?” he said. “Sell it? On that block?”

While corporations announced this year that they would donate money to the city in part to lease new emergency vehicles, there have been times in 2013, the authorities acknowledge, when only 10 to 14 of Detroit’s 36 ambulances have actually been in service. Some of the city’s emergency medical service vehicles have as many as 300,000 miles on them, so they tend to break down.

All this helps explain why Mr. Ponder said he, as so many here, would try to get himself to a hospital before seeking help from Detroit.

“If you have a heart attack, you’re dead,” he said. “There is no such thing around here as ‘in case of emergency.’ ”