May 28, 2014 at 1:00 am

Daniel Howes

Detroit far from sealing Chapter 9 deal

As Michigan’s powerbrokers converge today for their annual confab on Mackinac Island, the long-sought fresh start for a struggling Detroit appears closer than any time in recent memory.

The city’s historic Chapter 9 bankruptcy, the largest of its kind in American history, is on track for confirmation later this year. The “grand bargain” to make it possible — funded by foundations, state taxpayers and donors to the Detroit Institute of Arts — last week passed the state House and is headed for the Senate.

And the readiness to finally address deeply entrenched problems grounded in entitlement and a belief in a Detroit that no longer exists is poised to change the national debate about what Michigan, its largest city and what leaders of all political persuasions can do to correct problems and revive growth.

But it’s not a done deal — not even close.

For as much as attendees this week to the Detroit Regional Chamber’s Mackinac Policy Conference may sense a Detroit on the precipice of radical change, establishing the legal framework to exit bankruptcy by October and complete the municipal restructuring is fraught with uncertainties political leaders and the city’s bankruptcy lawyers cannot control.

Yes, the Republican-controlled House voted by a surprisingly wide margin to approve the $195 million 11-bill Detroit rescue package. And yes, the effort stands a decent chance of emerging from the Republican-controlled Senate and heading for Gov. Rick Snyder’s desk.

Legislative approval and the governor’s signature are necessary for the grand bargain to move forward as the linchpin of Detroit’s bankruptcy case, but they are not sufficient. A majority of two classes of Detroit retirees — general employees and police and fire retirees — must approve the offers based on the grand bargain for the case to move forward.

That’s not at all certain, as recent meetings of retirees suggest. Despite efforts to simplify complex calculations, make them understandable and tailor the offers to individual retirees as essentially required by U.S. Bankruptcy Judge Steven Rhodes, the offers are being met with confusion, resistance and anger.

Presuming a majority of voters in each class of retirees would approve a deal many of them deeply (and understandably) resent represents a triumph of hope over experience. Besides, the ability of state officials to muster cash late in the bankruptcy negotiation process feeds, unintentionally, the suspicion that the city and the state have more resources than they’re saying to soften a hard landing for retirees.

Second, Rhodes gets high marks for quickly moving the massive case with the help of a federal mediation team headed by Chief U.S. District Judge Gerald Rosen. But Rhodes also is signaling clearly that he’s not likely to fast-track the case and risk challenges on appeal to meet Snyder’s political calendar or the end of Emergency Manager Kevyn Orr’s 18-month term.

The election cycle and what it implies for Snyder and Republican control of the Legislature will run its course even as Rhodes runs his courtroom. Attempting to synchronize the two in engineering the nation’s largest municipal bankruptcy may have been a risk worth taking, but it’s a risk whose costs are rising as the calendar rolls forward.

Third, Mayor Mike Duggan and a presumed 6-3 majority of City Council are unequivocal in their desire to see Orr and his colleagues at Jones Day, the city’s lead bankruptcy counsel, gone by the end of Orr’s term. Bouncing both, as Duggan and council are able to do under the emergency manager act, could throw the complex case into chaos.

What that would portend for the grand bargain, assuming a majority of retirees vote to accept it, is unclear. But the willingness of foundations and other donors to create their unprecedented fund depends in part on the plan engineered by Orr, Jones Day and the governor’s team — not a plan managed by the mayor and his allies on council.

Fourth, even if the governor could persuade Duggan, an experienced deal-maker and chief executive, to agree to extend Orr’s tenure to complete the case, it’s likely a majority of council still would push to remove the EM and isolate the mayor in the process.

Duggan’s public opposition to Orr and Jones Day continuing with the case exerts additional pressure on a timeline that cannot be compressed at the expense of Detroit’s creditors and their rights under bankruptcy law. Rhodes has said as much from the bench, and many of the principals in the case — from Orr and his bankruptcy counsel to Duggan and Snyder — know it, too, because they’re all lawyers.

Fifth, efforts to create a regional water authority with Oakland, Macomb and Wayne counties are being stymied by battles over information, mistrust and the aggressive timetable Orr and his lawyers are pushing because they don’t have much choice. Even with federal mediation, there’s a decent chance a water deal could not be done, potentially impacting the city’s restructuring assumptions.

“There may be a series of things that the limited tenure of Kevyn Orr simply won’t permit us to reach,” Kresge Foundation CEO Rip Rapson told The Detroit News, referring to the water talks. “It may be too complex and there may not be enough time … to figure out the operating code here and crack it.”

No, Detroit’s bankruptcy restructuring is not a done deal.

A year ago, 1,500 or so of the state’s most influential business, civic and political leaders descended on the Grand Hotel amid signals the governor and Orr were angling toward a Chapter 9 filing that came less than two months later.

With the help of an energized business community, innovative foundations, a new mayor and a council elected by districts for the first time since 1918, the bankruptcy promised change, a sustainable municipal balance sheet, rationalized and improved city services.

It still does. Private meetings on the island may improve its prospects, but Detroit’s bankruptcy odyssey is far from over.

daniel.howes@detroitnews.com
(313) 222-2106
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.