Detroit's Casino Tax Dollars Become Issue in City's Bankruptcy
Provided by HG.org
Detroit was one of the most heavily hit cities during the recent economic downturn. Although it has started to rebound, based in large part upon federal subsidies provided by the Obama Administration which many credit with saving the American auto industry, the city continues to deal with financial woes as it struggles through the larges Chapter 9 municipal bankruptcy in US history.
Last summer, it looked as though Detroit might avoid some of its problems when several banks indicated that they were willing to let it out of some expensive financial contracts without paying the full early-termination fees on those agreements. However, a coalition of creditors, spearheaded by Syncora Guarantee, seeks to block the deal contending that Detroit’s good deal was struck at their expense.
Syncora says the city already pledged the money to it as collateral on a complex borrowing package that Syncora insured, and it wants the judge in the case to block Detroit’s settlement with the other participants in the swap transaction. Syncora’s objections received support from some of Detroit’s other bond insurers and investors that bought the securities that Syncora insured.
The court battle illustrates the difficult position cities find themselves in as a result of the economic downturn and the complex municipal borrowing deals that came into vogue about a decade ago, involving both securities, like bonds, and derivatives, like interest-rate swaps.
However, strangest of all for a city more often associated with the auto industry than casinos, the cash that the city and Syncora are fighting over comes from gambling. Like many states and cities looking for additional cash in recent years, Detroit approved casino operations in its downtown area, and levied a tax on the newly minted establishments. As the city’s population plunged and its tax base declined, the casino-tax dollars became one of its most reliable revenue sources, paying almost $180 million annually since its inception.
The fight over the casino tax money raises a fundamental question of whether and how a bankrupt American city can continue to borrow to finance its day-to-day operations even as it seeks relief from creditors in the bankruptcy. Bankrupt companies do this routinely under Chapter 11, using a tool called debtor-in-possession financing, whereby they offer to pledge business assets as collateral to lenders, showing that the loans will be repaid in full even if their restructurings fail.
On the other hand, cites rarely declare bankruptcy and are usually quite reluctant to pledge away their prized parks or public buildings as collateral. The few cities and counties that have declared Chapter 9 bankruptcy have generally used other methods to continue operations, and experts say they have not yet seen debtor-in-possession financing used in a municipal bankruptcy.
Syncora has said in court documents that Detroit should not be permitted to pledge the casino taxes to anyone else because the city already promised these funds to it. Detroit says it has legal authority to terminate the swaps and pledge the casino money to its debtor-in-possession lenders because Syncora was not part of a 2009 restructuring of the city's debts. Syncora says that without the swaps, it has a greater exposure on the related debt, which is already in default, and that it has a rightful claim to the casino money.
If you are in need of assistance with a bankruptcy matter, whether as a creditor or a debtor, you should contact a local bankruptcy attorney. The process of bankruptcy can be complicated and confusing, and only by hiring a qualified, licensed attorney can you ensure that your interests will be protected.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Syncora says the city already pledged the money to it as collateral on a complex borrowing package that Syncora insured, and it wants the judge in the case to block Detroit’s settlement with the other participants in the swap transaction. Syncora’s objections received support from some of Detroit’s other bond insurers and investors that bought the securities that Syncora insured.
The court battle illustrates the difficult position cities find themselves in as a result of the economic downturn and the complex municipal borrowing deals that came into vogue about a decade ago, involving both securities, like bonds, and derivatives, like interest-rate swaps.
However, strangest of all for a city more often associated with the auto industry than casinos, the cash that the city and Syncora are fighting over comes from gambling. Like many states and cities looking for additional cash in recent years, Detroit approved casino operations in its downtown area, and levied a tax on the newly minted establishments. As the city’s population plunged and its tax base declined, the casino-tax dollars became one of its most reliable revenue sources, paying almost $180 million annually since its inception.
The fight over the casino tax money raises a fundamental question of whether and how a bankrupt American city can continue to borrow to finance its day-to-day operations even as it seeks relief from creditors in the bankruptcy. Bankrupt companies do this routinely under Chapter 11, using a tool called debtor-in-possession financing, whereby they offer to pledge business assets as collateral to lenders, showing that the loans will be repaid in full even if their restructurings fail.
On the other hand, cites rarely declare bankruptcy and are usually quite reluctant to pledge away their prized parks or public buildings as collateral. The few cities and counties that have declared Chapter 9 bankruptcy have generally used other methods to continue operations, and experts say they have not yet seen debtor-in-possession financing used in a municipal bankruptcy.
Syncora has said in court documents that Detroit should not be permitted to pledge the casino taxes to anyone else because the city already promised these funds to it. Detroit says it has legal authority to terminate the swaps and pledge the casino money to its debtor-in-possession lenders because Syncora was not part of a 2009 restructuring of the city's debts. Syncora says that without the swaps, it has a greater exposure on the related debt, which is already in default, and that it has a rightful claim to the casino money.
If you are in need of assistance with a bankruptcy matter, whether as a creditor or a debtor, you should contact a local bankruptcy attorney. The process of bankruptcy can be complicated and confusing, and only by hiring a qualified, licensed attorney can you ensure that your interests will be protected.
Copyright HG.org - Google+
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
