Yesterday, at 4:07PM, on approval from Governor Rick Snyder, Detroit Emergency Manager Kevyn Orr ordered the City of Detroit to file for Chapter 9 bankruptcy protection under Title XI of the USC.  Sure.  Other cities have done this before — and people and businesses do it every day, but what’s the big deal?

The big deal is simple: Detroit is the largest municipality in history to declare itself insolvent.  This not only is going to be a major rule-writing moment in American legal history, but also has the potential to do as much harm as it does good over the long term.

The long term positives are fairly simple: Detroit, if successful, will be relieved of most of it’s obligations, and many of the others will be repaid at drastically reduced amounts, as ordered by a federal bankruptcy judge.  This will allow Detroit to begin paying its bills — without borrowing to do so, as it has for the past decade.  This is a good thing.

Detroit Mayor Dave Bing, Detroit Emergency Manager Kevyn Orr, Michigan Governor Rick Snyder

The bad news is what gets cut.  The Emergency Manager of Detroit made it clear that his priorities were people first, then creditors — meaning he wanted to protect pay, pensions and benefits for workers and retirees of the City of Detroit as much as he could.  He made this abundantly clear; but stated it was not off the table.  Creditors and contractors would be the next priority.  Creditors didn’t take kindly to this, and indeed, made THAT also clear.

Before all this can happen though, the filing sets in motion several things: the first is immediate relief from creditors.  As of the moment the bankruptcy was filed, for the moment, creditors lost all rights to any money for the time being.  This can, if the Judge allows, give Detroit enough relief to pay what’s necessary to keep it running: it’s employees, contractors and even things like the light bills.  What’s next, and likely beginning to happen today, is the investigation by the court of wether or not Detroit CAN qualify for a Title XI bankruptcy.  Just because one files doesn’t mean one qualifies.  This sets into motion a massive audit of EVERY creditor of every DOLLAR owed BY the City — likely including employees as well.  Next, creditors to the city have a right to appeal, and will likely use the excuse that the City/Emergency Manager negotiated in bad faith, just to hold the process up — as it’s their legal right to do so.  Assuming the City is found to be eligible, the Judge then decides what gets the axe, what gets paid, and who gets paid in what amounts; as likely, those who do get paid (speaking in the terms of creditors and contracts) will likely get paid only a portion, if not a FRACTION, of what they’re owed.

Because this move essentially lays waste to Detroit’s already junk-level bond and credit, the move also will not at all inspire confidence in businesses in Detroit, particularly those who DO business with Detroit.  My major fear is large employers will wind up packing up, and saying “So long, Detroit — it was a nice ride, we wish you the best of luck.”  Not only is this further revenue from taxes and spending lost, just one or two larges businesses to do so could inspire other businesses OR people to flee as well.  A CLEAR vote of no-confidence by the business sector if it were to happen.

Make no mistake, we’re witnessing history — the municipal equivalent of Lehman Brothers is happening as we  speak; which will write books and rules on how to accomplish such a bankruptcy in the future.

I see a Title XI as a mixed blessing for Detroit.  The good — DEFINITELY comes with the bad here.

“We have a great city, but a city going down hill for the last 60 years,” he said at an evening press conference. He said 38% of the city’s budget is being spent on “legacy costs,” such as pensions and debt service. He said police take almost an hour to respond to calls, compared to a national average of 11 minutes, and that 40% of street lights in the city are turned off.  That’s unacceptable,”
    — Kevyn Orr
    Emergency Manager, City of Detroit

Detroit city skyline shot courtesy of Mike Boening
www.memoriesbymike.zenfolio.com

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