Detroit Bankruptcy: Into the Unknown

July 19, 2013
By
Detroit Emergency Manager Kevyn Orr

Detroit Emergency Manager Kevyn Orr

History was made Thursday when Detroit became the largest U.S. city ever to seek Chapter 9 bankruptcy protections.

What does that mean for the city?

The short answer is: No one can say with  certainty. Judging from a wide variety of media reports, the overwhelming consensus among experts is that Detroit is entering uncharted territory.

“The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country, the New York Times reported. “Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.”

Nothing before, though, has ever come close to equaling the amount of debt at stake here. Emergency Manager Kevyn Orr has said that Detroit’s liabilities top $18 billion and could reach as high as $20 billion.”

The previous record was held by Jefferson County, Ala., which filed for bankruptcy in 2011 with about $4 billion in debt

“The case will … set a legal precedent that will be watched closely by other major cities across the country struggling under the weight of years of accumulated debt and underfunded pensions covering millions of public sector retirees,” the Washington Post reported.

“Orr must now convince a bankruptcy judge to invalidate the city’s pension contracts, freeing him to reduce payments to retirees,” reports John W. Schoen of CNBC. “The unions’ lawyers will argue that pension and health benefits are protected by Michigan’s constitution, one of seven states that specifically ban cuts in retiree pension and benefit payments.

“That’s why the case will be closely watched by states like Illinois and California, which also have badly underfunded their pensions. If Detroit is allowed to cut payments to its retirees, city and state workers in those states and others could see their future benefits pared back.”

First though, for the case to move forward, a federal bankruptcy judge will have to determine that Detroit is truly insolvent and that it has been bargaining in good faith with creditors. The contention that Detroit lacks the assets to meet is obligations is likely to be challenged by at least some creditors, setting the stage for opening-round disputes in a legal battle that some experts predict could take years to resolve.

Despite the uncertainty, fears and potentially massive legal costs associated with bankruptcy, there’s also hope that the city, if it able to get out from under the crippling effect created by liabilities totaling at least $18 billion, that real recovery will be possible.

“Once the city gets through this, it will be well on its way to substantial revitalization,” former Mayor Dennis Archer told one news outlet.  “The stigma of bankruptcy has not prevented corporations from going on to be successful. Witness Chrysler and General Motors. The same could be said of the city of Detroit. If this works, other distressed cities will be knocking on our door and asking, ‘How did you do that?’ ” — Curt Guyette