Category: Municipalities


Jefferson County, Alabama has pushed back mediations scheduled with creditors in April until the end of May. On November 9, 2011, Jefferson County, Alabama filed a voluntary petition for relief under Chapter 9 of the United States Bankruptcy Code.  The county’s goal, after nearly 18 months in bankruptcy related to $4 billion in debt, is to present an exit strategy to the court by June 1.  The county has been working outside of court to resolve outstanding issues with “school warrant, general obligation and sewer creditors.”  Such out-of-court negotiations will either need to result in settlement or an agreement to the county’s proposed exit strategy by at least one creditor class.  The May mediations are scheduled to be conducted by a federal mediator in Atlanta.

Sources:

Quotation from: Honora Gathings, “Jeffco bankruptcy mediation delayed,” http://www.wset.com/story/22058140/jeffco-bankruptcy-mediation-delayed, Apr. 23, 2013.

In re Jefferson County, Alabama, Case No. 11-05736 (TBB), U.S. Bankruptcy Court, N.D. Ala., KCC, http://www.kccllc.net/jeffersoncounty.

 

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On March 14, 2013, Michigan Governor Rick Snyder, through the State of Michigan’s Local Emergency Financial Assistance Loan Board, named Kevyn Orr, a partner in Jones Day’s Business Restructuring & Reorganization Practice, to serve as Emergency Financial Manager for the City of Detroit.  Orr has since issued a statement indicating that he is resigning from his practice at Jones Day, to avoid conflict of interest issues, given Mayor Dave Bing’s announcement earlier this week that “Jones Day [will serve] as the restructuring counsel for the city — if Detroit City Council approves the contract.”  Reportedly Orr stated,  “And people always ask me why would I do that, because I think this is the type of representation and restructuring that requires the highest degree of ethical conduct and remove any appearance of impropriety or my involvement with my firm’s representation of the city.”

Sources:

Jones Day, http://www.jonesday.com/en-US/jones-day-partner-kevyn-orr-named-as-emergency-financial-manager-for-city-of-detroit-03-14-2013/

Quotations from Gus Burns, Michigan Live, Kevyn Orr named Detroit EFM three days after former employer wins contract with city; no conflict, Snyder’s office says, http://www.mlive.com/news/detroit/index.ssf/2013/03/detroit_efm_kevyn_orr_quits_la.html (Mar. 15, 2013).

In recent days, it has been reported that the City of Detroit may be next in line for a Chapter 9.  The city’s top options are for Michigan Governor Rick R. Snyder to appoint a financial manager, file bankruptcy, or submit to neutral evaluation or mediation.  Last week, a review team assembled by state Treasurer Andy Dillon said that all signs point to a Motor City financial emergency.  As reported by The Huffington Post on Thursday:

With 700,000 residents, Detroit could become the largest city in American history ever to enter Chapter 9 municipal bankruptcy. But Snyder has stated that he’s reluctant to go down that path.

While the governor has several options under Michigan law for dealing with the city’s financial emergency, a major tug-of-war has revolved around Michigan’s emergency manager law, Public Act 4.  The so-called PA4 replaced its predecessor Public Law 72 in 2011 under Snyder’s watch.  PA4 was repealed by voters in November 2012.  More recently, however, “Republican lawmakers . . . passed a new emergency manager law, known as Public Act 436, which goes into effect March 28 . . . . Much like PA4, the new law vests emergency managers with considerable powers over the municipalities they are appointed to run.”

PA436, however, provides for a neutral evaluation or mediation option.  Although mediation has not been a top consideration thus far, it is available to leaders as an alternative to the appointment of a financial manager or Chapter 9.  Governor Snyder has said he supports giving interested parties, including the local government, bondholders, unions, and pension funds, and the city’s creditors an opportunity to compromise.

The review team noted the severity of the city’s financial crisis:

Detroit’s unfunded pension liabilities and long-term debt total almost $15 billion, and without new budget cuts or an infusion of cash, the city’s short-term debt for the fiscal year ending in June will top $100 million. As soon as this summer, Detroit may not be able to pay city workers, staff fire engine rigs or mow the grass at the city’s under-maintained parks.

These projections apparently only underscore the city’s fiscal situation, as “auditing errors, operational dysfunction and systemic challenges [also] hamper reform.”  Additionally, protestors, including mostly African-American activists, have “opposed state intervention . . . call[ing] the [emergency manager] law undemocratic . . . .  [joining] hands [in the governor’s office building] pray[ing] for local control. ”

“Mayor Dave Bing . . . has insisted his administration is capable of solving the city’s financial problems without a state takeover.”  The city’s other politicians and citizens, however, have voiced differing opinions regarding the financial manager and bankruptcy options.  See
Letters: An emergency manager or bankruptcy for Detroit?, The Detroit Free Press, http://www.freep.com/article/20130301/OPINION04/303010036/Letters-An-emergency-manager-or-bankruptcy-for-Detroit-?odyssey=mod_sectionstories, Mar. 1, 2013.

Source:

Quotations from Ashley Woods, Detroit Financial Emergency: Is Mediation An Option For Michigan Gov. Rick Snyder?, The Huffington Post, http://www.huffingtonpost.com/2013/02/28/detroit-financial-emergency-neutral-evaluation_n_2741938.html, Feb. 28, 2013.

With the recent waves of ailing municipalities moving toward Chapter 9 bankruptcy protection, mediation has become a key initial approach to addressing budget shortfalls and city operations issues.  Chapter 9 of the United States Bankruptcy Code provides for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts).  Mediators have been called upon before a municipality’s filing to assist with debt negotiations and other looming issues.

Since 2008, many cities have been plagued by foreclosures, lost income from property taxes, strained city benefits and costly city investments.  Indeed, California has enacted a law requiring mediation prior to a city’s bankruptcy filing.  After the City of Vallejo, California filed bankruptcy in 2008, state lawmakers passed AB 506, a bill requiring cities to hire a neutral evaluator to negotiate with creditors for up to 90 days before filing bankruptcy.  The alternative to the appointment of a “neutral evaluator” is for the municipality to declare a fiscal emergency.  The City of Vallejo, a smaller municipality, emerged from bankruptcy in 2011.

The first to enter into the state-mandated mediation, the City of Stockton, California and its 18 creditors failed to meet a midnight deal deadline, in June 2012, after 90 days of mediation.  In early 2012, the “city defaulted on several debt payments, and as a result Wells Fargo repossessed a downtown building bought in 2007 for $40 million.”  After the failed deal, the Stockton City Council approved a budget for the city’s operations while in bankruptcy and to amend a $26 Million budget shortfall.  “The new budget will suspend debt payments, cut employee pay and reduce retiree benefits, allowing this city of about 292,000 residents to continue providing essential services through the bankruptcy process.”  Stockton is the largest municipal bankruptcy filing in U.S. history.

Although Chapter 9 bankruptcies are rare, including the cities of Stockton and Vallejo, mediation has been utilized in both small and large municipalities in an effort to avoid a Chapter 9 bankruptcy.  Other municipalities that have either declared a fiscal emergency, explored or filed for Chapter 9 protection since 2008, include:

  • Jefferson County, Alabama;
  • Prichard, Alabama;
  • Atwater, California;
  • Compton, California;
  • Mammoth Lakes, California;
  • San Bernardino, California;
  • Boise County, Idaho;
  • Moffett, Oklahoma;
  • Harrisburg, Pennsylvania;
  • Westfall, Pennsylvania; and
  • Central Falls, Rhode Island.

While mediation cannot always cure the woes of parties, whether they are willing or unwilling participants in the process, it at least brings them to the table.  After all, some steps toward communication, no matter how small, are necessary to cure or address whatever ails you.

Sources:

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