Happy Anniversary, Detroit Bankruptcy

Posted in: General Bankruptcy

Detroit’s historic bankruptcy was filed on July 18, 2013, one year ago today.  When the bankruptcy was filed by emergency manager Kevyn Orr , the city was nearly $20 billion in debt.  In the five preceding years, the city spent an average of $100 million more than it brought in.  Orr had failed to reach agreements with creditors to restructure Detroit’s debt outside of court and believed that bankruptcy was the best option.

In a December 2013 ruling following a nine-day trial, Judge Steven Rhodes declared Detroit eligible to proceed with Chapter 9 bankruptcy.  He held that the city met all factors for insolvency, was unable to pay its debts, and was unable to provide a minimum level of basic services to residents.

Opponents of the bankruptcy had argued that the city did not negotiate in good faith with creditors, particularly those retired city workers receiving pensions.  Those workers also argued that their pensions were protected by the Michigan state constitution.

In February 2014, Orr filed a proposed plan of adjustment in the city’s bankruptcy case. The plan called for spending $1.5 billion over the next ten years on improvements to the city, including blight removal, technology upgrades, and infrastructure repairs.  The investments aimed to prevent further population loss and revitalize the city once known as the Paris of the West.  The plan’s impact would be felt heaviest by non-uniformed city retirees, who would see their pensions cut by nearly one-third if the plan was approved.  The plan would spare pensions for police and firefighters somewhat, with those pensions cut by only ten percent.

In April 2014, Detroit reached a settlement with a large group of unsecured bondholders.  In June 2014, Michigan lawmakers passed a series of bills with bi-partisan support to allocate $194.8 million for Detroit in a one-time influx of money.  The bills help alleviate cuts to the city’s pensioners and insulate artwork at the Detroit Institute of Arts from sale.  The bills also indemnify the state from lawsuits relating to the bankruptcy filing and provide for a nine-member committee to oversee the city’s finances, budget, and contracts.  The state’s contribution added money to the $366 million already pledged by charitable foundations and the $100 million pledged from the Detroit Institute of Arts.

City employees and retirees were given an opportunity to vote on Orr’s plan of adjustment, and the results will be announced on July 21.  Next, Judge Rhodes will hold a hearing in August and rule whether or not to accept the plan of adjustment.