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Analysis: Five Years Out of Bankruptcy, Can Detroit Avoid Another One?

ABI Bankruptcy Brief

December 12, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Analysis: Five Years Out of Bankruptcy, Can Detroit Avoid Another One?

Tuesday marked the five-year anniversary of Detroit's exit from the largest city bankruptcy in the nation's history, the Detroit Free Press reported. Now billions lighter in debt and running $100 million-plus annual surpluses, Detroit is in phenomenally better financial shape than when it entered the bankruptcy, which lasted 17 months. But the process did not eliminate all future obstacles, and whether the city can keep its budget act together — and avoid a do-over bankruptcy — is a question that may find an answer over the next five to seven years. The first big challenge comes in mid-2023, when Detroit's "pension holiday" ends and it must start making full yearly contributions — about $163 million a year and every year — toward two city retirees' pension funds. The city was given a vacation from pension payments as part of its post-bankruptcy restructuring plan.


 

America’s Dairy Farmers Are Hurting, but a Giant Merger Could Make Things Worse

America’s dairy farmers have been battered over the past decade by a nationwide drop in milk consumption, the rise of dairy-free and plant-based alternatives and the trade war with China. But New York dairy farmer John Lamport says that there is another factor pushing down milk prices and harming farmers: the business practices of Dairy Farmers of America, a farmer-owned cooperative. The biggest dairy co-op in the U.S., with more than 14,000 members from New York to California, D.F.A. was established in 1998 to help farmers like Lamport market their raw milk to dairy processing companies, which prepare the milk for distribution to retailers. Over the years, however, the co-op has also invested heavily in milk-processing operations, meaning that it buys some of the milk its own marketing arm sells. Those investments have created a conflict of interest, farmers and the lawyers who represent them say, since milk processors benefit from lower prices, while farmers benefit from higher ones. Now, the co-op is in talks to acquire Dean Foods, a century-old milk-processing company that sought bankruptcy protection in November. No agreement has been reached, but the prospect of D.F.A.’s taking control of Dean Foods, the co-op’s biggest customer, has raised new antitrust concerns..

Betsy DeVos Testifies at House Hearing over Denying Student Borrower Relief

U.S. Secretary of Education Betsy DeVos endured a withering barrage of questions today at a House Education and Labor Committee hearing about her handling of a program meant to provide debt relief to federal student loan borrowers who say they were defrauded by for-profit colleges, NPR.org reported. DeVos testified one day after NPR published internal memos showing the Secretary overruled her own department's findings that borrowers deserved full relief from their loans, because their college credits are essentially worthless. Hundreds of thousands of borrowers are in limbo, and several members referred to the memos in their questioning. In answering questions from the panel, DeVos acknowledged some of the problems. "Yes, there is a backlog of borrower defense claims at Federal Student Aid," she said. "To say that I am frustrated by that is an understatement." While she stated her intention to enforce current regulations in "good faith," DeVos also repeated her position that taxpayers' interests need to be protected when deciding who should get their money back, and how much. More than 300,000 borrowers have pending claims, DeVos said on Wednesday. Some have been waiting, in many cases for years, for the Education Department to decide their financial fate. Federal agencies found, starting in 2015, that some for-profit colleges, including the now-defunct Corinthian Colleges and ITT Technical Institute, lied to these students about their job prospects and the value of their credits. Read more.

To read the prepared testimony from the hearing, please click here.
 

Corporate Pensions Head for Extinction as Nature of Retirement Plans Changes

The practice of companies sending monthly retirement checks to their former workers is headed for extinction, and remaining pension funds are in tough financial shape, USA Today reported. Nearly two-thirds of pension funds are considering dropping guaranteed benefits to new workers within the next five years, according to a human resources consulting firm that studied the matter. Despite gains in the stock market this year, U.S. pension plans are near their worst financial state in two years, according to the new report by Mercer, which casts a spotlight on the escalating cost of past promises to employees. Most U.S. companies no longer offer defined-benefit pension plans, which typically provided guaranteed monthly payments to workers when they retired. But pension funds that still operate must gain in value to ensure they have enough to meet their obligations. By late 2019, the average pension fund had 85 percent of the funds necessary to meet its obligations over time due largely to low interest rates, according to Mercer's 2020 Defined Benefit Outlook. The firm also reported that 63 percent of companies with defined-benefit pensions "are considering termination" of the plan within half a decade. That would mean the pensions would be closed off to future participants.


 

Law Firms 'Poised to Grow' as They Report More Success in Lateral Hiring

Law firms are planning to add equity partners while at the same time increasing leverage by hiring more junior and temporary lawyers, according to a recently released client advisory by Citi Private Bank’s law firm group and Hildebrandt Consulting, the ABA Journal reported. “Across most revenue segments, firms are poised to grow and are placing even greater emphasis on innovation, efficiency and practice profitability,” the advisory says. “Firms are also expected to expand their equity partnerships, aided by lateral growth strategies that are becoming more successful than we have ever seen before.” By the end of the year, revenue growth for law firms is expected in the range of 5.5 percent to 6.5 percent, according to the client advisory. Next year, revenue growth is expected to continue, reaching a range of 5 percent to 6 percent. The primary driver of growth has been an increase in billing rates, which grew by an average of 4.7 percent the first nine months of the year. Growth in demand for legal services was lower at just 0.9 percent, although Am Law 51–100 firms outpaced the overall numbers with a 1.8 percent rise in demand. Sixty-one percent of law firm leaders responding to a 2019 Citi survey said they expect to grow their equity partnerships in the next two years. Law firms are expected to increase their equity partner ranks through a mix of promotions and lateral hires.

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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: Chicago Exercising Control over Debtor Vehicles: To the U.S. Supreme Court?

A dispute is raging over the City of Chicago’s refusing to surrender possession of impounded vehicles upon their owners’ bankruptcy filing, according to a recent blog post. The bankruptcy proceeding is City of Chicago, Illinois v. Fulton, with a petition for certiorari pending before the U.S. Supreme Court (Case No. 19-357).

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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