Friday, October 28, 2016

NCBJ Report 2016: From Detroit to San Juan--Perspectives on Municipal and Territorial Restructurings

The Commercial Law League of America held its annual luncheon at NCBJ featuring the Lawrence King Award and a keynote speech by Andy Dillon.

Bankruptcy Judge Dennis Montali received this year's King Award, joining such luminaries as Elizabeth Warren, Steven Rhodes and Gene Wedoff.   Among his accomplishments, Judge Montali sailed from San Francisco to Hawaii when he was only seventeen.    He served in the Navy.   As a practitioner, he helped to craft the emergency rule which allowed the courts to function after the Marathon decision.  He was appointed to the bench in 1993 and presided over the Pacific Gas & Electric case.   He gave a heartfelt acceptance speech in which he emphasized his commitment to treating each case as if it was his most important.

Andy Dillon was the keynote speaker.  Mr. Dillon was speaker of the Michigan House of Representatives before becoming Michigan's State Treasurer.   As Treasurer, his responsibilities included placing failing cities, including Detroit, into receivership.    More recently, he has advised Puerto Rico on its financial issues through his association with Conway McKenzie.    

Mr. Dillon talked about the difficulties facing Detroit and Highland Heights, a small enclave within the City.   There was so much deferred maintenance in Detroit that one fire station relied on a fax machine connected to a jar full of coins as its alarm system.   When the fax machine rang, the jar of coins would fall over alerting the firemen.   Because governmental accounting standards required long term debt to be booked as income, the city's constant borrowing masked its deteriorating financial condition.    

However, anyone attempting to address these problems was hobbled by the fact that 75% of the city's budget consisted of payroll obligations subject to a four foot high stack of union contracts.    Under Michigan law and the Constitution those contracts could be suspended temporarily but could not be permanently modified.   Another major problem was underfunded pension liabilities.   This was a major issue that was compounded by the fact that the pensions have so little liquidity that they must keep most of their assets in short term instruments.   This means that they earn a subpar rate of return which puts them deeper in the hole.    Highland Heights, the enclave that once held the headquarters of Chrysler, had sunk to the point where less than 50% of the population was paying their taxes or water bills.   The problem was worse than it looked on the financials because a resident of the city had won the lottery and paid the city a 1% income tax.   

Mr.  Dillon's talk emphasized the difficulties in restructuring governmental debt while meeting basaic needs of health and safety.

The solution was first to get authorization from the legislature to use an emergency manager.   Prior to actually being appointed, the emergency manager Kevin Orr, spent a year meeting with African American business leaders, politicians and pastors.   Dillon said that if the manager had been imposed initially, the population would likely have revolted.   However, by the time Orr was appointed, the community was ready for him.   The State Treasurer loaned employees to the City to get good books and records put together and to develop forecasts that went more than one year.    At that point, the City was ready for Chapter 9.  Ultimately the State of Michigan authorized funds to Detroit as part of the grand bargain in its plan.   

He said that his one regret was not hiring lawyers with more experience with government finance.   He explained that failure to use the right terminology or to say the right thing in public could lead to problems with both internal constituencies and the public.

He described Puerto Rico as a much larger problem.    First, its debts were an order of magnitude higher than Detroit's.   The island has lost about 10% of its population and doesn't have some of the advantages that helped Detroit.   Detroit was able to use Chapter 9 which is not available to Puerto Rico.     Detroit was surrounded by healthy economies in surrounding Michigan and across the border in Canada while Puerto Rico is one thousand miles away from the mainland.   Puerto Rico also did not have a state sponsor such as Michigan to provide financial assistance.   

No comments: