To the unintended consequences of Detroit's epic bankruptcy, two words can now be added: false expectations.

Not for the impact of the financial restructuring on the city's books. Or for the way Mayor Mike Duggan's administration and the City Council will use the opportunity to change — or not — the way the city operates.

But for the message Chapter 9 inadvertently sent to Michigan's body politic: namely, that bankruptcy apparently proved contracts can be unilaterally restructured. That's how a reader chastised my contention this week that the state is obliged to honor tax-credit deals with Detroit's automakers and others totaling liabilities of an estimated $9.4 billion.

He's mistaken, as are the state lawmakers suggesting as much. Drawing the conclusion that such contracts can be diminished unilaterally distorts (if not willfully misunderstands) what bankruptcy is, what it does and where it cannot be used.

So does suggesting that because Detroit's pension obligations could be diminished in bankruptcy, the state's obligations to honor its tax credits can be diminished because they are, well, politically inconvenient and financially expensive.

Under federal law, municipalities can restructure their debts and contracts in Chapter 9. Sovereign states cannot because states cannot go bankrupt, legally speaking. Accordingly, the contractual obligations surrounding the costly tax credits can only be modified through mutual agreement.

Second, Chapter 9 may not always be the preferred remedy, even where it legally can be applied to restructure contracts and other obligations. The basket case of Detroit Public Schools, under their fourth emergency manager, are hurtling toward some kind of state-imposed remedy.

It could be as part of a "portfolio" of different types of schools in the city. It could be as part of the reconfigured reform office Gov. Rick Snyder now controls. It could be under some kind of hybrid model likely to be recommended by the Coalition for the Future of Detroit Schoolchildren.

What DPS is not likely to be is the state's next candidate for Chapter 9. A blunt-force legal instrument, bankruptcy could use the power of a federal judge to restructure labor contracts — but not the district's $420 million in bond and pension debt because it is backed by the state of Michigan.

That's why the governor appears to be using the power of executive orders — witness Thursday's move to place the reform office under supervision of his office — to prepare a sweeping solution for public education in Detroit.

However much the Chapter 9 cheering section may hunger to see DPS and its unions endure the harsh discipline of the bankruptcy process (and, believe me, such a section is not insignificant), the collateral damage and less-than-perfect application make it an unlikely option.

Snyder is demonstrating a willingness to use gubernatorial powers to forge a schools framework for Detroit, whatever the political push-back. But the governor and his team are not anxious to order another pillar of Detroit's public sector into bankruptcy, especially if it can be avoided.

Third, experts who've studied the matter — including former Detroit Emergency Manager Kevyn Orr — are persuaded that neither Public Act 436 nor Chapter 9 bankruptcy are well-suited to resolving the deep financial woes weighing on Wayne County.

Yes, its structural deficit is $50 million, cash-flow essentially is zero and the accumulated deficit is expected to reach $230 million next year. The county's pension fund is only 44 percent funded and would require cash infusions of $40 million annually over the next 10 years to reach a barely acceptable level of 70 percent.

Yes, County Executive Warren Evans has assembled a smart restructuring team; worked closely with the governor's office and key members of the state Treasury Department; ordered a spending freeze; and signaled that he likely will seek concessions from county employees, including potential changes to future pension accruals.

But the presence of five constitutionally elected officers — including Evans, the sheriff, the prosecutor and their separate budgets — creates a diffuse structure that cannot be easily subordinated to an emergency manager or the next logical step: Chapter 9 bankruptcy.

Not likely. Detroit's historic bankruptcy may prove to have been the right path to a true second chance for the city, but its levers of change are not so easily adaptable to southeast Michigan's most obvious trouble spots.

Understanding that reality is part of the reckoning still under way here — and so is the fact that the hard work ahead may not get the assist from Chapter 9 that Detroit did.


(313) 222-2106

Daniel Howes' column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.

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