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Michigan Governor and Detroit’s Manager Call for Patience
Michigan Governor and Detroit’s Manager Call for Patience
(about 4 hours later)
DETROIT — Michigan’s governor and Detroit’s emergency manager called for patience and cooperation from residents, employees and creditors on Friday, as the city enters what is expected to be a long process of recovery in bankruptcy court.
DETROIT — Gov. Rick Snyder of Michigan on Friday defended his decision to force Detroit into bankruptcy as a necessary step to halt its decades-long decline and resolve its spiraling 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 the governor had overstepped his authority by approving the city’s bankruptcy filing.
Rick Snyder, the state’s Republican governor, and Kevyn D. Orr, the emergency manager, said Detroit’s historic bankruptcy filing on Thursday gives the city “breathing room” to continue operating as it copes with its long-term debts and obligations.
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Rosemarie Aquilina, said pensions were protected under state law, and issued an order that the bankruptcy filing be withdrawn.
“This is the time to say enough is enough in terms of the downward decline of the city of Detroit,” Mr. Snyder said at a news conference on Friday morning in downtown Detroit.
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.
The bankruptcy filing was challenged Friday afternoon when Judge Rosemarie E. Aquilina in Ingham County, home to Michigan’s state capital, issued a declaratory judgement in lawsuits brought by the city’s pension funds. The judge ruled that the decision by Mr. Orr and Mr. Snyder to file for Chapter 9 bankruptcy violates the Michigan constitution, which protects accrued pension benefits. The state’s Attorney General immediately filed an appeal of the judge’s decision with the Michigan Court of Appeals.
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.
Detroit is the largest American city ever file for Chapter 9 bankruptcy, and 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. Snyder and Detroit’s emergency manager, Kevyn D. Orr, estimate the city’s debt and other long-term obligations at $18 billion.
“Today is business as usual in Detroit,” Mr. Snyder said. “People are still coming to work, they’re going to get paid, and regular services are still going on.”
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.
Mr. Orr, who was appointed to by the governor, predicted that residents may even start to see improvements in city services, saying that the bankruptcy filing will allow Detroit to use its limited resources to put more police cars and ambulances in service.
The president of one public employees’ union hailed the judge’s decision on Friday. “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.
“I anticipate the citizens of the city will start seeing some of these changes in the next 30 to 60 days,” Mr. Orr said.
But Mr. Snyder and Mr. Orr were resolute on the need for a bankruptcy filing at a joint news conference on Friday.
But those representing tens of thousands of city employees and retirees said they still intended to fight the case, particularly for the thousands of retirees who depend on city pensions.
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.
“Apparently Governor Snyder and Kevyn Orr want Detroit’s public-service workers to rely on their children for food and shelter, or have to work until they die,” said Lee Saunders, president of the American Federation of State, County and Municipal Employees.
“This is the time to say enough is enough in terms of the downward decline of the city of Detroit,” he said.
A federal judge could be appointed as soon as Friday to begin hearing motions in what is the largest municipal bankruptcy case in American history.
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 will continue to function.
The city, which is under Mr. Orr’s authority under a state statute, will be required to prove to the bankruptcy judge that Detroit insolvent and had no other option but a Chapter 9 filing.
Mr. Orr, who was appointed by the governor, predicted that residents might start to see improvements soon, saying that the bankruptcy filing offers “breathing room” and will allow Detroit to use its limited resources to put more police cars and ambulances into service.
Mr. Orr has estimated Detroit’s long-term debt at more than $18 billion. The city has also run deficits in its operating budget for several years and cannot support itself with declining tax revenues.
Depending on the outcome of the appeal of Judge Aquilina’s order, the initial bankruptcy hearings could begin as soon as next week.
On Friday, Judge Steven W. Rhodes was picked to oversee the case. Mr. 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.”
“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.”
Mr. Orr expressed confidence that the city can emerge from bankruptcy before his term as emergency manager ends in 15 months.
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.
But there is no road map for Detroit’s recovery. Bondholders, retirees, unions and other creditors could push for the sale of city assets to recover money.
Some labor unions had accused Mr. Orr of using bankruptcy as a threat during negotiating sessions.
Beyond that, residents worry that city services will become worse while Detroit is in court, and that business expansion will stall out in the interim.
Mr. Orr said that despite marathon talks with creditors, there was little or no movement toward settlements.
“For a struggling family, I can see bankruptcy, but for a big city like this, can it really work?” said Diane Robinson, an office worker in the city for 20 years.
“We are finally at a point where we simply can’t kick this can down the road any further,” he said.
But others, including some Detroit business leaders who have seen a surge in private development downtown, said bankruptcy seemed the only viable choice – and one that might lead to a complete overhaul of city services.
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 worst thing we can do is ignore the problem,” said Sandy K. Baruah, president of the Detroit Regional Chamber. “We’re finally executing a fix.”
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.
For Mr. Snyder, placing the state’s largest city in bankruptcy will test his pro-business philosophy that has been credited with helping Michigan recover somewhat from the recession and the government bailouts and bankruptcies of auto giants General Motors and Chrysler.
Mr. Orr said he expected Detroit to emerge from bankruptcy before his term as emergency manager ends in 14 months.
He called the Chapter 9 filing a “fundamental step” in bringing some order to the city’s rapidly deteriorating conditions.
For Mr. Snyder, placing the state’s largest city in bankruptcy is a calculated risk that its decline could be reversed under court supervision.
“What would happen if we didn’t do this?” Mr. Snyder asked. “Detroit would continue to go downhill.”
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.
The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public-sector unions, and by leaders of other financially challenged cities around the country. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.
Leaders in Washington and in Lansing, the state capital, issued statements of concern late Thursday. A White House spokeswoman said President Obama and his senior team were closely monitoring the situation.
“While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities,” Amy Brundage, the spokeswoman, said in a statement.
The debt in Detroit dwarfs that of Jefferson County, Ala., which previously had been the nation’s largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation’s most populous city to do so.
Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin, but ultimately found solutions other than federal court. Detroit’s struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County’s downfall.
Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.
All of that makes bankruptcy — a process that could take months, if not years, and is itself expected to be costly — particularly complex.
“It’s not enough to say, let’s reduce debt,” said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”
The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general-obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general-obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general-obligation bonds have been seen as among the safest investments and all but certain to be paid in full.
Leaders of public-sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts.
Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy.
“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Ms. Denniston said. “Detroit is going to be a huge test kitchen.”
Mary Williams Walsh contributed reporting from New York.
