In Detroit on Wednesday, a federal trial begins that will determine whether that city is eligible for the nation’s largest-ever municipal bankruptcy.
Hundreds of the city’s creditors are lining up to oppose the bankruptcy, arguing that Detroit is violating Michigan’s constitution and that if officials tried harder they could find enough savings to pay the city’s bills.
Officials here say a declining population, decades of mismanagement and at times corrupt city government has cost Detroit a lot of tax revenue, leaving it drowning in red ink.
So much so that in March, the governor appointed Kevyn Orr to be an emergency manager and take control of the city’s finances. He spent months crafting payment arrangements with some creditors, but hundreds of others rejected offers that amounted to accepting pennies for every dollar they were owed by Detroit.
Orr says that leaves Detroit with roughly $18 billion in long-term debt, and no other option but bankruptcy.
“There’s no way out,” Orr says. “The mountain of debt we have to climb over simply is insurmountable without some kind of process to resolve it. We simply cannot pay it. That’s it.”
Where Business Stands
Detroit’s business community overwhelmingly agrees with Orr.
Dan Gilbert owns Quicken Loans, the NBA’s Cleveland Cavaliers and in recent months has bought more than $1 billion worth of buildings in Detroit’s downtown. He’s betting that Chapter 9 protection will allow Detroit to get out from under its crushing debt load and pour money back into city services, which would help make his investments pay off.
“As hard as that is to sort of suspend democracy, for a short period of time if you will, my view is, let’s get it over with,” Gilbert says. “Let’s get it done. Let’s stop talking about it [and] go through the pain and then move forward, and I think it will fade into the background.”
But some of Detroit’s longest-standing creditors are fighting a bankruptcy declaration, arguing that it would create big problems for them.
At the headquarters of AFSCME Council 25, the union representing the majority of city workers here, a half-dozen retirees are making phone calls. Juanita Scott says Detroit’s potential bankruptcy puts her pension, her health care and her future on the chopping block.
“Because they’re going to cut my medical, that’s going to really hurt me bad,” says the 86-year-old Scott. “Right now I’m under three different doctors’ care and trying to stay in my neighborhood.”
Scott says she has to have a burglar alarm because all the houses around her are going vacant. “This whole thing of bankruptcy, it’s just bad,” she says.
The union leadership argues Detroit’s bankruptcy filing itself violates state prohibitions against cutting public pensions. Union attorney Herb Sanders even questions if Detroit is truly insolvent, because the state forbade city officials from approving tentative labor agreements that he says could have saved millions annually.
“When you think that the purpose of bankruptcy is to restructure debt, is to save the city money, and if that is your true intent then why wouldn’t you sign the collective bargaining agreement with the unions that would indeed do that?” Sanders says.
The Possibility Of Lawsuits
The union will argue in court Wednesday that Detroit did not bargain in good faith. But bankruptcy attorney Douglas Bernstein says the judge may see things differently.
“There’s no bright line which says what constitutes good faith and what isn’t good faith,” Bernstein says. “There’s isn’t an awful lot of precedent in Chapter 9.”
Bernstein’s firm worked with several of Detroit’s creditors who decided not to fight the city’s bankruptcy filing. He says those creditors and the city will be thrown into financial turmoil if the court finds Detroit is not eligible for Chapter 9 protection. The likely result would be a flood of lawsuits, he says.
“So they’ll be fending off all the creditors in a variety of courtrooms where everybody in the creditor body is trying to get the best deal for themselves rather than in an organized, unified setting in the bankruptcy court,” he says. “So you would have chaos.”
And chaos is the last thing Detroiters need in a city that has seen more than its share of it in recent years. Former officials sent to prison for corruption, high unemployment and crime rates, faltering city services and now a fight over what’s left in the city’s coffers.