Seven months after fleeing to bankruptcy court for protection from its creditors, the city of Detroit will detail how it intends to shed billions in debts through a reorganization plan expected to be made public today.
The city intends to file with the U.S. Bankruptcy Court its plan of adjustment, a legal term for the Motor City’s proposed prescription for reducing its debts, canceling or rewriting contracts and ending years of chronic budget deficits.
“There’s going to be a lot of screaming and yelling tomorrow, there’s no doubt about it,” Anthony Michael Sabino, a bankruptcy law professor at St. John’s University, predicted Thursday. “This will be intensely painful for all involved.”
The plan is likely to draw battle lines among creditors as more than 23,000 retirees, hundreds of vendors, bondholders, banks and labor unions begin to wrestle for their piece of Detroit’s limited resources.
Detroit’s offer to creditors, observers say, could have precedent-setting ramifications for other American cities considering bankruptcy as an avenue for shedding debt, and alter Wall Street’s perception of Michigan municipal debt if the city is allowed to deliver deep cuts to bondholders.
“We haven’t really scratched the surface on the real awesome issue that exists here in the priority of debts and obligations for the city,” said David Tawil, a New York hedge fund manager and former bankruptcy attorney following the case closely. “The ramifications of that stretch far beyond Detroit.”
Bill Nowling, spokesman for Emergency Manager Kevyn Orr, said the complex legal document will contain a disclosure statement to creditors that explains how it proposes that large classes of creditors will fare in Detroit’s historic reorganization.
Detroit is expected to disclose long-term revenue projections from taxes and assets in the plan to show the cuts and how the city intends to pay off creditors over a time period that could take decades.
The reorganization plan is expected to lay out a path for the city to get out of bankruptcy quicker by offering solutions to the two thorniest issues in the case: retiree pensions once thought to be sacrosanct from reductions and a city-owned art collection eyed by unsecured creditors owed more than $11 billion.
To get the approval of U.S. Bankruptcy Judge Steven Rhodes, the federal code requires the plan be in the “best interest” of creditors. Rhodes has ruled pensions are akin to a contract that can be reduced in bankruptcy, but the judge warned in December that he “will not lightly or casually exercise federal bankruptcy law to impair pensions.”
During a court hearing Wednesday, one of Detroit’s lead bankruptcy attorneys suggested the city may portray the plan as Detroit’s best hope for fixing city services and stemming a decades-long population and business exodus.
“The best interest of creditors test is going to be satisfied easily in this case, because ... the recoveries in the absence of this bankruptcy case for creditors are going to be small enough that you’re going to need a magnifying glass to find them,” said Bruce Bennett, a city bankruptcy attorney with the Jones Day law firm.
The document also is expected to provide more details about the highly publicized $820 million fund pledged by 10 private foundations, donors of the Detroit Institute of Arts and Gov. Rick Snyder to bolster the city’s pension funds and shield the DIA from a sale of its multimillion-dollar masterpieces to satisfy creditors.
Snyder still needs to get approval from the Legislature for his $350 million pledge toward the fund, which he repeatedly has said is not a bailout.
When asked Wednesday at an event in Detroit whether the $350 million is his best and final offer, the Republican governor replied: “That’s how I would interpret it.”
The plan also is expected to detail how the city proposes converting the Detroit Water and Sewerage Department into a cash-generating asset by leasing its facilities to a new authority that would feature a board that could be controlled by suburban leaders.
At the outset of the bankruptcy case in July, Detroit’s legal team had planned to file the plan of adjustment by Dec. 31, but that self-imposed deadline was delayed to allow for more negotiations.
Rhodes, who imposed a March 1 deadline for the city to file its reorganization plan, also has taken action that delayed the city’s speedy timeline. He has twice rejected the city’s early settlement deals with two big banks over a troubled pension-related debt as too generous.
On Wednesday, another city attorney told Rhodes during a hearing that Detroit has secured a third settlement with UBS AG and Bank of America. The terms were not disclosed.
One legal observer — George South, who has worked on municipal bankruptcy cases in Jefferson County, Ala., and Harrisburg, Pa. — said once the plan is filed, the next 60-90 days likely will feature debate over the city’s disclosure statement and confirmation of the debt-cutting plan.
Creditors will have roughly 30 days to object to the disclosure statement. Once the statement is approved, the city will solicit votes from creditors on the plan.
If approved by the majority of impaired creditors, Rhodes then will hold a confirmation hearing after creditors have an opportunity to file objections, South said.
Sabino, a New York bankruptcy attorney, said confirmation hearings on Orr’s plan of adjustment will likely be a “15-round heavyweight bout.”
“Anybody and everybody who has skin in this game is going to come to court and scream bloody murder and say this plan is no good,” Sabino said.