All eyes on Detroit for bankruptcy ruling
Sixteen months after its historic bankruptcy filing, Detroit will learn today whether its plan to shed $7 billion in debt can proceed, clearing the way for an end to the case and an unprecedented restructuring of Michigan's largest city.
The 1 p.m. announcement — and widely expected approval — by U.S. Bankruptcy Judge Steven Rhodes will be closely watched.
Retirees, Wall Street, struggling communities nationwide and others are waiting to hear the fate of an iconic industrial town that became a symbol of urban decay before Gov. Rick Snyder last year approved the biggest municipal bankruptcy filing in the country.
Retirees in particular will learn whether Rhodes allows Detroit to reduce pensions that are protected by the state constitution. Retirees faced steeper reductions before bankruptcy mediators created a unique deal that required state legislation to soften pension cuts and shield the Detroit Institute of Arts collection from creditors.
"No municipality the size of Detroit has ever done this before," Bingham Farms-based financial consultant Jim McTevia said. "Naturally, they are blazing a new trail in everything."
The case proceeded quickly despite the size and scope of Detroit's financial problems, which included $18 billion in debt before the city filed bankruptcy in July 2013. The crisis led Snyder to sideline Detroit's mayor and the City Council and install an emergency manager, whose contract will end when the city formally exits bankruptcy.
Rhodes set a quick pace early in the case, packing two trials and key deadlines into a 15-month period and prompting the city and creditors to beef up their legal teams. The city's lead law firm, for example, has dispatched more than 100 lawyers to work on the case.
The speed of Detroit's bankruptcy is an aberration but similar to that of General Motors and Chrysler, which raced through bankruptcy court in 2009, said Douglas Bernstein, a Bloomfield Hills bankruptcy attorney.
"Take a look at the other municipal bankruptcies. Much smaller ones are still finding their way through the process after two years," he said. "This is remarkable for its speed and efficiency."
The city's legal bill tops $140 million and will rise in coming months. That's more than the General Motors' bankruptcy, which cost about $120 million.
The expense is due, in part, to negotiations that led to key deals with almost every creditor — including retirees, pension funds, banks and bondholders — that reluctantly agreed to settlements to avoid deeper cuts.
Rhodes must determine if the city's plan is fair, equitable and in the best interest of creditors.
Chief District Court Judge Gerald Rosen, the lead bankruptcy mediator, and Snyder, Mayor Mike Duggan, Emergency Manager Kevyn Orr and other officials plan to hold a rare press conference inside the courthouse a half hour after Rhodes issues his ruling, according to an advisory issued late Thursday by Snyder's office.
Duggan and the Detroit City Council recently reclaimed control of city operations but the bankruptcy plan includes layers of oversight aimed at preventing a repeat financial collapse.
Political strategist Eric Foster said residents are starting to see improvements in service delivery, which has been critical throughout the bankruptcy process.
"People are seeing things that make them feel hopeful of what Detroit's future will be," he said. "They are pretty satisfied with what's going on and the fact that these steps were necessary to be a part of changing what Detroit has been."
After more than 15 months, Detroit is left with a deal endorsed by every major creditor.
"Largely consensual is great, but it didn't start out that way. And because it didn't, it cost a lot of money," the city's bankruptcy lawyer Bruce Bennett said. "And it was done in record time."
The plan in front of Rhodes would let Detroit free up cash for improved city services by reducing retiree costs.
Orr, the bankruptcy plan's architect, wants to cut unfunded pension costs 54 percent from $3.13 billion.
Under the plan, the city would cut pensions for general retirees 4.5 percent and eliminate annual cost-of-living increases. Police and firefighter pensioners would see their 2.25 percent annual cost-of-living-adjustment reduced to about 1 percent.
Detroit also wants to recoup up to $239 million from retirees whose optional annuity savings accounts were credited with interest earnings that exceeded the retirement system's actual investment returns. Some members of Detroit's General Retirement System face additional reductions in their monthly pension checks of up to 15.5 percent through the annuity savings fund recoupment, or clawback.
The plan would free up cash and let the city invest $1.7 billion in new police cars, fire trucks and other public safety equipment. About $440 million would be spent fighting blight and the city would spend millions more upgrading computer systems.
"The city believes it's put forth the strongest possible plan that's confirmable that the city can adhere to for the next decade to improve services," said Orr's spokesman, Bill Nowling.
Barring new developments, the bankruptcy does not appear to set legal precedents because a higher court has not weighed in on any disputed rulings.
"If anything, the case is an indication of how creative the process can be," Bernstein said.
He was referring to the so-called "grand bargain," a deal that protects the DIA art collection while minimizing pension cuts. The grand bargain required state legislation and included $195 million from state taxpayers and $466 million from foundations, corporations and private donors.
Another creative deal helped resolve disputes with two bond insurers who went from fighting the bankruptcy plan to agreeing to develop land downtown, including riverfront property and the Joe Louis Arena site.
"Nobody would have ever dreamed of this solution," Bernstein said. "A grand bargain and an agreement to develop the downtown. That's a pretty good deal if it pans out."
Rhodes' ruling today is likely to attract a packed house of some of the players in the case.
House Speaker Jase Bolger, whose support for the state aid for pensions was integral to solidifying the grand bargain, said he plans to be in attendance.
"It will be an historic day," Bolger said.
Speaker Pro Tem John Walsh, the Livonia Republican who shepherded the grand bargain legislation through the House, said he thinks the bankruptcy has served as a unifying moment for the region and the state.
"It created a new dialogue for the entire state to stop pointing the east and west and north and south finger," Walsh said. "It allowed people to say 'You know what, we're in this together.' "