Detroit on Thursday became the largest American city to file for bankruptcy, a historic move sure to ignite complex battles in coming months with creditors, pensioners and unions who stand to lose significantly as the state tries to rescue a city whose failure Gov. Rick Snyder said was 60 years in the making.
Bankruptcy and restructuring experts said the filing will initiate a new round of battles in federal court, potentially setting national precedents on matters ranging from whether bondholders get repaid when cities run out of money to whether public pensions, previously thought to be sacrosanct under the Michigan Constitution, are protected in municipal bankruptcies.
Financially troubled cities around the nation will be watching what happens in the Motor City for lessons that could apply to them.
In the end, state-appointed emergency manager Kevyn Orr’s attempt to reach out-of-court settlements could not overcome opposition from unions, retirees and a long list of lenders to whom the city owes as much as $20 billion.
“There’s some real benchmark laws that could be set here,” said Jim McTevia, a leading turnaround management expert in Bingham Farms. “There are going to be a number of issues that a normal bankruptcy doesn’t cover.”
Orr filed a Chapter 9 bankruptcy petition Thursday in U.S. Bankruptcy Court for the Eastern District of Michigan that is the largest of its kind in terms of population and the size of the debts and liabilities involved. Bankruptcy experts said the outcome is sure to have sweeping impact on how other troubled cities around the country resolve financial difficulties. But Snyder said the size of debt involved mattered less to him than the city’s inability to provide services to its 700,000 residents.
Snyder, who approved the filing, called the move “a last resort to return this great city to financial and civil health for its residents and taxpayers.”
“I know many will see this as a low point in the city’s history,” Snyder said in his order authorizing the filing. “If so, I think it will also be the foundation of the city’s future — a statement I cannot make in confidence absent giving the city a chance for a fresh start, without burdens of debt it cannot hope to fully pay.
“This was a difficult decision,” Snyder said, “but it’s clearly the right decision because there are no other viable options.”
Bing: ‘Difficult for all’
Mayor Dave Bing, who called it a difficult day, said Orr called him in the afternoon to tell him about the filing.
“One of the things that I want to say to our citizens is that as tough as this is, I really didn’t want to go in this direction,” Bing said. “But now that we are here, we have to make the best of it. I think Kevyn and the team that he brought together has a lot of history of succeeding. This is very difficult for all of us, but if it’s going to make services better off, then this is a new start for us.”
Orr, who appeared with Bing at an evening news conference, said he hopes to get through the bankruptcy process by late summer or fall of next year. He did not answer questions about what impact he expects bankruptcy to have on thousands of city retirees or creditors of the city, saying those talks are ongoing. Orr said he believes the city has been negotiating in good faith.
“We don’t have time for more delaying tactics, more litigation, business as usual,” he said. “We’ve been saying that again and again and again. Everybody knows I have an 18-month term, and I have 15 months left in it. So, we’re going to start. And we’re going to give the level of services that the city needs.”
The filing begins what could be a lengthy fight over whether the city is eligible for Chapter 9 protection and to define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating debts and liabilities.
Race to courthouse
A sign of just how contentious the matter likely will remain came as pensioners and their pension funds made a last-ditch effort Thursday afternoon to stop the bankruptcy filing but were beaten to the courthouse by minutes.
An attorney for the pension funds who was seeking a temporary restraining order in Ingham County to block the historic bankruptcy filing said he felt blindsided because he agreed to delay an emergency hearing by five minutes at the request of attorneys for Snyder.
During those five minutes, he said, attorneys filed the bankruptcy petition in Detroit, which generally results in a stay in all other pending lawsuits involving the city. Ingham County Judge Rosemarie Aquilina later issued a temporary restraining order preventing further actions to cut pension benefits, but said she would have issued one to stop the bankruptcy filing altogether, if given the chance.
The judge said the bankruptcy filing was made at 4:06 p.m., five minutes before her emergency hearing began.
A furious Ronald King, a lawyer representing Detroit’s General Retirement System and the Detroit Police and Fire Retirement System, said he agreed to the five-minute delay that he now believes was not requested in good faith.
“There’s no denying this was a race to the courthouse this afternoon and yet another example of usurping the will of the people,” King said.
Snyder, in a telephone conference with reporters, declined to comment on King’s accusations, citing ongoing litigation. He conceded that recent lawsuits may have affected the timing of the bankruptcy filing by “a day or so,” but said the filing was imminent regardless.
Union sees hurdles
In an additional court filing late Thursday, the city said it is insolvent, which is one criteria that must be met before a court can approve a petition for bankruptcy.
Still, a top official at the city’s largest union, the American Federation of State, County and Municipal Employees Council 25, predicted a tough challenge for Orr to prove the city’s eligibility for bankruptcy, required for the case to proceed.
“I still think they have some hurdles to cross because I think they filed prematurely,” said Ed McNeil, special assistant to the president of AFSCME Council 25. “I don’t think they’ve proved insolvency. They have a list of people they can’t pay, but there’s an even bigger list of people they are still paying, and they have a bunch of friends and consultants getting paid. They haven’t been doing this process in good faith, and we’ve been saying that all along.”
Orr, who in June released a plan to restructure the city’s debt and obligations that would leave many creditors with much less than they are owed, had warned consistently that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.
Snyder signed off on the filing in a letter attached to court documents.
“It is clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available,” Snyder said in the letter. “In other words, the city’s financial emergency cannot be satisfactorily rectified in a reasonable period of time absent this filing.”
Orr spokesman Bill Nowling said: “Pension boards, insurers, it’s clear that if you’re suing us, your response is ‘no.’ We still have other creditors we continue to have meetings with, other stakeholders who are trying to find a solution here, because they recognize that, at the end of the day, we have to have a city that can provide basic services to its 700,000 residents.”
Lawsuit over pensions
This week, the city’s two pension funds, which have claims to $9.2 billion in unfunded pension and retiree health care liabilities, filed suit in state court to prevent Orr from slashing retiree benefits as part of a bankruptcy restructuring.
Ambac Assurance Guaranty, which insures some of the city’s general obligation bonds, has also objected to Orr’s plan to treat those bonds as unsecured, meaning they’re not tied directly to a revenue stream and would receive pennies on the dollar of their value. Ambac and other creditors have threatened to file suit.
One of Orr’s deal with creditors, widely reported to be Bank of America Merrill Lynch and UBS AG, to pay a $344-million swap with a $255-million debtor-in-possession loan, appeared to be instrumental in the timing of the bankruptcy filing.
The deal gives the city access to $11 million a month in casino tax revenues that Orr has said is key to maintaining city services while negotiations, in or out of bankruptcy court, take their course with other creditors and unions.
Strategy of filing
Plunkett Cooney bankruptcy lawyer Doug Bernstein, who is not involved in the bankruptcy and is not representing any parties related to it, said Thursday that the timing of the filing likely was driven by a growing number of legal challenges.
That included the Ingham County cases.
Aquilina was to hold a hearing on the city workers’ and retirees’ challenge to stop the city from filing bankruptcy. The employee groups, and separately the city’s two pension funds in another lawsuit, argue that the governor — who has to sign off on city bankruptcy filings — cannot do so if the plans include reducing pension benefits, because the state constitution explicitly protects public pensions. If the state has such plans, it wasn’t immediately presented in the court filing.
Bernstein said preventing the court hearing on Monday was likely a key part of the strategy.
A ruling in favor of the employees could put a halt, at least temporarily, to any moves by Orr and Snyder to proceed with a bankruptcy petition. A bankruptcy filing immediately stays all such court proceedings.
“The stay kicks in as soon as the filing,” Bernstein said. “The key is taking advantage of the automatic stay. Because of the lawsuit filed by the pension funds and the hearings coming up Monday, it became a factor, so to the extent that (Orr) wanted to continue negotiations with creditors, now the city is forced to” file for Chapter 9.
Plans for protests
The Rev. Charles Williams II of Historic King Solomon Baptist Church, president of the Michigan chapter of the National Action Network, who has fought against state intervention in Detroit, said opponents plan daily protests next week.
“The emergency manager and Gov. Snyder failed,” Williams said. “Emergency management was supposed to keep us from going into bankruptcy.”
Williams said his group also will call on President Barack Obama and other officials to prevent Orr from leading Detroit’s bankruptcy, saying they want it to be handled by “our elected officials and not the emergency manager, because he’s already proved to be a failure.”
The eligibility fight could be prolonged if creditors mount a significant challenges. In other communities that have filed for Chapter 9 protection, such fights have extended the process a year or more, including Jefferson County, Ala., and Stockton, Calif., two of the largest municipal bankruptcy filings so far in the U.S.
Detroit’s debts and liabilities dwarf both of those communities, making it by far the largest of its kind in U.S. history.
The stakes involved are enormous. Analysts warn a bankruptcy could drive up bond costs for cities statewide, and the losses that could be forced on the city’s 30,000 current and retired city workers remain unknown.
City Council President Pro Tem Andre Spivey said he understood that negotiations Orr was having with creditors weren’t as fruitful as he had hoped they would be, and that he hopes the bankruptcy process will be relatively quick. But he stressed to residents that they needn’t worry about the impact of the filing immediately.
“City services we provide will not be shut down,” Spivey said. “We’ll still be providing services, but the challenge is where we’re going to get to as we go through the bankruptcy process.”
The city has lost more than half of its population over the past 60 years. In 1950, the city was the fifth-largest city in the country with a population of about 1.8 million.
(article by M.Helms, N.Kaffer, S.Henderson and J.Schaefer, P.Egan, T.Baldas)