Bankruptcy cleared way for change

Daniel Howes
The Detroit News

The road blocks are disappearing.

In the space of one long work day, the city and its bankruptcy lawyers reached two key agreements that should speed the conclusion of the largest municipal bankruptcy in American history and share the costs of running Detroit once it emerges from Chapter 9.

The moves, coming in the second week of the city's bankruptcy trial, demonstrate that Chapter 9 is the effective bludgeon its advocates long-maintained. The case is forcing the kind of historic, common-sense change that the city, its political and union leadership, even its suburbs resisted for too long.

It's about time. As much as critics insist Detroit's bankruptcy is no more than an epic, anti-democratic mistake, the deals over deeply contentious issues — the Detroit water department and the Detroit Institute of Arts, union contracts and city pension funds, Belle Isle and funding for basic services, Wall Street funding for sketchy bond deals — suggest Chapter 9 is just what the cash-strapped city needed.

"What bankruptcy ended up doing is force the city to open its eyes ... instead of wishing the problems would go away," Douglas Bernstein, managing partner of Plunkett Cooney's banking, bankruptcy and creditors' rights practice group, said in an interview Wednesday. "Who was going to take this on rather than complain that we lack the tools to do the job?"

Outsiders, mostly, people emotionally and financially unattached to the chronic dysfunctions that came to be accepted practice despite the city's downward financial spiral. Testimony in the bankruptcy trial, expected to continue when court reconvenes Monday, depicts a city bureaucracy woefully managed, public safety departments dangerously under-equipped and IT systems a relic of another era.

The chief outsider is Kevyn Orr, the Washington bankruptcy lawyer Gov. Rick Snyder appointed nearly 18 months ago to be the city's emergency manager. Within four months of his arrival, the city filed Chapter 9, the precursor to a series of agreements that will reshape both the city's obligations and its occasionally fraught relationship with the suburbs.

The preliminary deal with the three suburban counties to create the Great Lakes Water Authority and to allow the city to continue owning the underlying assets of the Detroit Water and Sewerage Department addresses longstanding concerns of the city, Oakland, Macomb and Wayne counties even as it funnels scarce capital into overdue upgrades — not the city's general fund.

"Everyone in this region is paying for the water and everyone in this region should have a voice," Mayor Mike Duggan said in a news conference outlining details of the regional water authority that will pay the city $50 million a year over 40 years to be used exclusively for capital improvements to the aging system. "There's fairness in that. We've structured this in a way that is fair and everyone gets a chance to participate."

Ask yourself: But for the very real threat that U.S. Bankruptcy Judge Steven Rhodes possesses the power to impose a settlement on the city's water department and its suburban customers, would that remarkable announcement have occurred anytime soon?

But for the team of federal mediators led by Chief U.S. District Judge Gerald Rosen, would the town that manufactures confrontation and entitlement in almost equal measure be witnessing mediated agreements that have eluded politicians and business leaders for decades, in part because no one in the room sported a black robe of the federal judiciary?

Not a chance, as Oakland County Executive L. Brooks Patterson, a fierce critic of earlier versions of a water deal, made clear Tuesday: "We didn't have any options," he said, likening Rhodes' implied powers to the proverbial "sword of Damocles" looming over the counties and their taxpayers.

That's the beauty of the bankruptcy process, however protracted and ridiculously expensive it is to the city. It can expose BS, drain the political swamp, impose generally accepted accounting and management principles on government systems that have defied both for decades, and identify solutions that can turn unproductive liabilities into assets.

The city's tentative agreement with Syncora Guarantee Inc., an aggressive bond insurer, aims to put a collection of city-owned assets to work, avoids the counter-productive prospect of issuing new debt backed by meager tax revenue and essentially turns a holdout creditor into a downtown investor.

This from the same creditor that spent months and untold resources pressuring the city, court and public opinion to back its argument that improvements to basic services were unnecessary; that called federal mediators biased; that said the path to a "fair and equitable" settlement for unsecured creditors required at least a partial liquidation of the DIA's 66,000-piece collection.

Until it didn't. It's still to soon to declare the "grand bargain" safe and complete. But the $816 million plan, backed by foundations, the state and DIA donors to bolster city pensions and protect the DIA collection, is losing one of its fiercest adversaries in Syncora's decision to settle.

That's a huge step forward for Detroit's path out of bankruptcy, and it likely will not be the last.

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Daniel Howes' column runs Tuesdays, Thursdays and Fridays.