News & Commentary

When the ACLU of Michigan Flint Branch held a panel discussion on emergency management last week, activist Claire McClinton pointed out that the event was being held at a site where autoworkers staged a landmark sit-down strike in the 1930s. That action – with workers asserting their rights and making sure their voices were heard – proved to be a pivotal moment in the history of organized labor. In fact, it can be argued that what those union members did went even further than that, helping to strengthen American democracy by increasing the collective clout of the working class and providing a much-needed balance to corporate power. So there’s no small amount of irony in the fact that Flint is now part of what can be called an experiment in anti-democracy. Read the whole blog over at Democracy Watch.

A Pontiac lawsuit that could have far-reaching implications throughout Michigan was heard by the U.S. Court of Appeals for the Sixth Circuit in Cincinnati.

In a recent blog I, like a number of other reporters, wrote about Detroit Emergency Manager Kevyn Orr’s proposed pension cuts, which were outlined in the plan of adjustment he submitted to the bankruptcy court last month. And, like others, I made mention of the fact that cost of living allowances, or COLAs, would be eliminated if the plan gets approved.

Anyone at all familiar with Michigan’s emergency manager law knows that the people handed control of municipalities and school districts facing financial crises have extraordinary power.In fact, the law goes even further than many realize, creating the possibility that residents of cities under emergency management may emerge from state control with a completely revamped form of local government imposed on them by the governor.

What can be said with absolute certainty about the so-called plan of adjustment Detroit Emergency Manager Kevyn Orr released last week?Almost nothing.It is a plan built on a mountain of ifs.According to a summary of the plan, “police and fire retirees would likely receive in excess of 90 percent of their earned pensions after elimination of cost of living allowances,” and “general retirees would likely receive in excess of 70 percent of their pensions after elimination of cost of living allowances.”But that’s only if they agree to give up without a fight and promise no lawsuits in the future. Otherwise the deal gets more stingy, and will be heaped on top of crushing cuts to medical benefits.Either way, the offer hinges on a promise by Gov. Rick Snyder to deliver $350 million in state money. But that’s a pledge Snyder can’t fill on his own. To actually deliver all those millions, he must convince a legislature that’s controlled by conservatives often hostile to Detroit to actually appropriate the money.On the other hand, it could be that the pensioners won’t have to take any cut at all. Obscured by all the coverage of Orr’s proposed “adjustments” was news that the U.S. 6th Circuit of Appeals had agreed to consider a case, brought by the city’s two pension systems and others, which challenges the legitimacy of the bankruptcy itself.A key component of that case is the contention that the Michigan Constitution guarantees the payment of pensions promised to public employees, and that U.S. Bankruptcy Judge Steven Rhodes grievously erred when he allowed those pensions to be placed on the chopping block along with other unsecured creditors.And just who, really, is an unsecured creditor – meaning one that is subject to the kind of buzz cuts the bankruptcy court will be administering?As the New York Times reported, it seems unlikely that Wall Street is going to willfully roll over and accept pennies on the dollar for debt it is owed. “While we understand that favoring pensioners and discriminating against bondholders and other creditors may be politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city’s emergence from bankruptcy,” Steve Spencer, a financial advisor to one of the companies that insures several types of Detroit’s debt, told the paper.And then there’s a lawsuit Detroit filed claiming that a disastrous deal involving certificates of participation was actually illegal. If the city prevails in that case, it would free itself of $1.4 billion in outstanding debt.How can any final settlement with anyone be calculated with that big if still hanging out there?Aside from the virtual certainty that Kevyn Orr and company are going to burn through the $95 million that’s been extracted from departments throughout the city to pay for restructuring costs during the current fiscal year – with much of that money going into the very deep pockets at Orr’s former law firm, Jones Day – what else is considered to be a safe bet in this mess of a bankruptcy?Well, for one thing, there are the grassroots efforts by a coalition of activists who gathered at the Historic King Solomon Baptist Church on Detroit’s west side. Despite a dearth of media attention, they can be counted on to keep plugging away with their message, which is gradually finding a broader audience. The group held a press conference on Monday to announce a plan of their own, one intended to counteract what Detroit attorney Julie Hurwitz called a “full-scale assault on our constitutional rights and protections.”The reason they are doing so is laid out in the preamble to the group's People’s Plan for Restructuring Toward a Sustainable Detroit itself, which begins:“The restructuring and rebirth of Detroit will not be delivered by a state-imposed emergency manager, nor through Chapter 9 bankruptcy proceedings, foundation contributions, closed door deals, or other devious and misleading corporate schemes. Detroit’s rebirth will be the result of the people’s unrelenting demand for democratic self-governance, equal access to and management of the natural and economic resources of the city.”Anyone interested in learning more about that plan can visit the web site of the group Detroiters Resisting Emergency Management. That plan will be the focal point of a town hall meeting being held on Sunday, March 2 at 3 p.m. at Central United Methodist Church (the corner of Woodward and Grand Circus Park in downtown Detroit).By Curt Guyette, Investigative Reporter

What can be said with absolute certainty about the so-called plan of adjustment Detroit Emergency Manager Kevyn Orr released last week?Almost nothing.It is a plan built on a mountain of ifs.According to a summary of the plan, “police and fire retirees would likely receive in excess of 90 percent of their earned pensions after elimination of cost of living allowances,” and “general retirees would likely receive in excess of 70 percent of their pensions after elimination of cost of living allowances.”

 

In 2005, the city of Detroit faced a monumental dilemma: It desperately needed to borrow more than $1.4 billion to help shore up its two pension systems, but doing so would far exceed the legal limit on the amount of debt it could amass.The solution arrived at by the administration of then-Mayor Kwame Kilpatrick was to sidestep the law by turning to something called certificates of participation, or COPs, which are similar to municipal bonds. But instead of borrowing the money directly, Kilpatrick and his crew – following the advice of investment bankers who would reap massive profits from the deal – set up two nonprofit “service corporations,” which in turn created trusts that would sell the COPs to investors. Technically, it was these two nonprofits that were obligated to ensure repayment of the debt. The city then entered into a contract with the nonprofits – both of which were controlled entirely by city officials -- agreeing to pay them for services rendered.In other words, they were mere shells.“At the time, it was seen as a clever legal circumvention of the debt limit,” says Laura Bartell, a Wayne State University Law School professor who specializes in bankruptcy.Last Friday, lawyers representing the city filed a federal lawsuit claiming that the deal was illegal from the start, and because of that Detroit should not be required to continue paying off the debt. The case is now in the hands of U.S. Bankruptcy Judge Stephen Rhodes.The lawsuit came as a complete surprise to most people, even those who have been following the bankruptcy proceedings closely. Until this point, attention in this aspect of the bankruptcy proceedings has been focused instead on interest rate swaps, a controversial side deal to the COPs transactions.A type of hedge, these swaps were essentially a very high-stakes gamble. In effect, the city bet that interest rates were going to rise over time. If they did, the banks would be on the hook for the increased costs. Instead, the economy crashed in 2008, and interest rates fell to almost nothing. As a result, the cost to the city has been about $300 million in payments to what are known as the swap counterparties – Bank of America/Merrill Lynch and UBS, an investment bank based in Switzerland.For the better part of a year, the city has been trying to end the swaps. The banks claim that the cost of doing so should be about $300 million, and that the city is in a bad negotiating position because, even in bankruptcy, the swap payments are secured by casino tax revenues (as a result of another deal, struck in 2009).This is where the weeds thicken.

In 2005, the city of Detroit faced a monumental dilemma: It desperately needed to borrow more than $1.4 billion to help shore up its two pension systems, but doing so would far exceed the legal limit on the amount of debt it could amass.The solution arrived at by the administration of then-Mayor Kwame Kilpatrick was to sidestep the law by turning to something called certificates of participation, or COPs, which are similar to municipal bonds.But instead of borrowing the money directly, Kilpatrick and his crew – following the advice of investment bankers who would reap massive profits from the deal – set up two nonprofit “service corporations,” which in turn created trusts that would sell the COPs to investors. Technically, it was these two nonprofits that were obligated to ensure repayment of the debt. The city then entered into a contract with the nonprofits – both of which were controlled entirely by city officials -- agreeing to pay them for services rendered.In other words, they were mere shells.