Detroit bankruptcy stalls amid court action

Michigan governor Rick Snyder defended his decision to force Detroit into bankruptcy as a necessary step to halt its decades-long decline and resolve its spiralling debt crisis.

But even as he was pleading for patience during the lengthy process ahead to fix the city’s finances, a state judge was ruling that he had overstepped his authority by approving the city’s bankruptcy filing. A judge in Ingham County, home to Michigan’s capital, Lansing, ruled that Mr Snyder’s action had violated the state constitution because it could cut the pension benefits of retired public employees.

The judge, Rosemarie Aquilina, said pensions were protected under state law, and issued an order that the bankruptcy filing be withdrawn. Her ruling was immediately challenged by Michigan’s attorney general, who appealed to the state’s Court of Appeals on the grounds that the Chapter 9 bankruptcy filing stayed all legal proceedings related to Detroit’s debt obligations.

While the ruling may be overturned, it underscored the mounting tension in the city and the legal battles ahead as bondholders, retirees and other creditors attempt to recover money owed them by the city.

Mr Snyder and Detroit's emergency manager, Kevyn Orr, estimate the city's debt and other long-term obligations at $18 billion. After weeks of mostly unsuccessful negotiations with creditors to settle debts, Mr Orr recommended a bankruptcy filing to Mr Snyder this week. The city then filed for Chapter 9 on Thursday, minutes before Judge Aquilina was to hold a hearing on the employee pension funds' constitutional challenge to a potential bankruptcy proceeding.

The president of one public employees’ union hailed the judge’s decision. “There is too much at stake to play political games with the hard-earned retirement security of Detroit’s public workers,” said Lee Saunders, head of the American Federation of State, County and Municipal Employees union.

But Mr Snyder and Mr Orr were resolute on the need for a bankruptcy filing at a joint news conference yesterday. Mr Snyder, a Republican who has pushed a pro-business agenda in the state, said Detroit had no other options to deal with its debts and improve city services ranked among the nation’s worst. “This is the time to say enough is enough in terms of the downward decline of the city of Detroit,” he said.

Now that the city has filed, Mr Snyder and Mr Orr said they wanted to reassure Detroit’s 700,000 residents that police, fire and other essential services would continue to function. Mr Orr, who was appointed by the governor, predicted that residents might start to see improvements soon, saying that the bankruptcy filing offered “breathing room” and would allow Detroit to use its limited resources to put more police cars and ambulances into service.

Depending on the outcome of the appeal of Judge Aquilina’s order, the initial bankruptcy hearings could begin as soon as next week. Yesterday, Judge Steven Rhodes was picked to oversee the case. Judge Rhodes is a hometown selection, having served for 28 years as a bankruptcy judge in the Eastern District of Michigan.

The initial stages of the case will consist of Mr Orr and possibly state officials showing that there was no available remedy for Detroit’s troubles other than bankruptcy. “We didn’t make this decision in haste,” Mr Orr said. “This is a decision that has been winding its way through the city for the better part of six decades.”

Employee unions and creditors may argue otherwise - either by challenging the size of Detroit’s debt, or Mr Orr’s assertions that he bargained in good faith to reach out-of-court settlements with bondholders, retirees and others. Some labour unions had accused Mr Orr of using bankruptcy as a threat during negotiating sessions.

Mr Orr said that, despite marathon talks with creditors, there was little or no movement toward settlements. “We are finally at a point where we simply can’t kick this can down the road any further,” he said. There is no blueprint for Detroit’s recovery at this point.

In the short term, Mr Orr said that a deal with two secured creditors, Bank of America and UBS, to accept 75 cents on the dollar for $340 million in liabilities would free up casino revenues that could be used for city services. The arrangement would provide the city with about $11 million a month in casino receipts. That cash is critical to keep the city safe and functional during a drawn-out bankruptcy process.

Mr Orr said he expected Detroit to emerge from bankruptcy before his term as emergency manager ends in 14 months. For Mr Snyder, placing the state’s largest city in bankruptcy is a calculated risk that its decline could be reversed under court supervision. He said that he did not anticipate any direct state or federal money would be needed in the effort, but that government grants to help remove abandoned buildings and improve Detroit’s infrastructure would be essential to the city’s comeback.

New York Times