Tuesday, December 03, 2013

Detroit or bust

Tomorrow judge Stephen Rhodes will decide whether Detroit is eligible for Chapter 9 protection in the largest municipal bankruptcy in American history. Two-hundred prospective jurors have already been summoned to appear. It is difficult to imagine that the judge will simply announce that the city is ineligible and tell them all to go home.

More telling than the decision to approve the bankruptcy will be how he tackles retiree pensions and what he says about the question of negotiating in good faith. It is possible that he may leave the fate of retiree pensions undecided. That would be unfortunate for everyone (except the pensioners) because Detroit needs a comprehensive deal. Retirees will do better outside of Chapter 9 though, as the constitution offers protection to their pensions. Inside a bankruptcy case they are likely to receive a fraction on the dollar (of the unfunded portion of their pensions). But if the case does go ahead and include retiree pensions there is likely to be a fight over the extent to which Michigan's constitutional protection is trumped by federal bankruptcy law.

Tellingly the judge asked at one point during the hearings so far,

“Is there any other constitutional right, state or federal that is that absolute?” asked the judge. “Even freedom of the press isn’t that absolute, is it?”  

It will be interesting to see what he says about the issue of whether the city negotiated in 'good faith'--a prerequisite for bankruptcy to be approved. Although this question was hard fought over, I wonder if it is a little bit of a red herring? Perhaps it is the true that the emergency manager of Detroit overstated the chances of doing a deal. Or perhaps they always knew that bankruptcy was a very likely outcome and pretended it was not. Maybe they even decided long ahead of time that bankruptcy was really the only option, and decided to 'go through the motions'.

The problem with even the worst-case scenario is that you have to argue that Chapter 9 protection must be denied because the situation was so bad that the city had no other real option. Of course the creditors will say a deal would have been possible with more time. What seems more likely is that more time would have allowed for a blizzard of lawsuits. So even if the judge decides that there was not as much good faith as he would have liked to have seen, it is hard to see him deciding to deny eligibility.

A recent online piece about the Detroit case:

Detroit

Bankruptcy or bust

Nov 15th 2013, 14:22 by N.L. | CHICAGO

OVER the next few days it will up to one man, Steven Rhodes, a federal bankruptcy judge, to decide the fate of Detroit. In July the city filed for the largest municipal bankruptcy in American history. This was challenged by unions, retirees and creditors. Last week the trial wrapped up on whether the city was eligible to declare Chapter 9. Now it is up to Mr Rhodes to decide.

 Failure to win such protection would be a disaster for Detroit, which has some $18 billion worth of debt and liabilities. Creditors would undoubtedly sue. City services would continue to decline. Of course, bankruptcy, too, has its drawbacks. It is likely to result in cuts to pensions and health-care benefits, and the sale of city assets (possibly even its fine art). Cuts to retiree benefits have the public-employees unions up in arms.

 The unions and retirees claim the bankruptcy is an attempt to get around a ban on pension cuts in the state constitution. During the trial their representatives argued that the state did not negotiate in good faith prior to declaring bankruptcy, as is required by law.

The city disagrees. It says it tried to negotiate, but met with a lack of cooperation from debtholders. Rick Snyder, Michigan's governor who approved the bankruptcy filing, described the move as a "very last resort" when he took the stand last month. But he avoided questions about the impact bankruptcy might have on pensioners.

 How might the judge be leaning? It helps to look at his questions. Mr Rhodes has pressed lawyers opposing the bankruptcy to explain why municipal pensions in Michigan are sacrosanct, and whether this means the state must guarantee payment. “Is there any other constitutional right, state or federal that is that absolute?” asked the judge. “Even freedom of the press isn’t that absolute, is it?” [More...]

My other stories about Detroit:

Skid row, A state takeover of Detroit, once America’s third-largest city, looks likely, Feb 23rd 2013 | CHICAGO |From the print edition

Can Motown be mended? America’s biggest-ever city bankruptcy starts to roll, Jul 27th 2013 | DETROIT | From the print edition

Manna for Motown,  Uncle Sam offers a little help. Oct 5th 2013 | From the print edition

Buy to the sound of gunfire,  Some parts of Detroit are doing well Jul 27th 2013 | GILBERTVILLE, DETROIT | From the print edition

Iron Orr The city’s default spells pain for creditors, employees and residents Jun 22nd 2013 | CHICAGO | From the print edition

Nowhere to run,  The motor city flirts with fiscal disaster Dec 8th 2011, 16:17 | From the print edition