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Detroit’s bankruptcy exit gains judge’s approval

November 7, 2014, 8:25 PM UTC
Abandoned Detroit
Bjarte Rettedal—Getty Images

After 16 months, the biggest municipal bankruptcy in history came to an end Friday afternoon with the acceptance by federal Judge Steven Rhodes of a so-called plan of adjustment to Detroit’s troubled finances, proposed by the city.

Under the plan, Detroit will be relieved of $7 billion of debt and will invest $1.7 billion in substandard services such as police, fire and emergency medical services, as well as lighting, sewers and blight eradication.

The exit was notable because it capped a period of time that was much shorter than experts had predicted, based on smaller U.S. cities mired in longer bankruptcy proceedings. The negotiations and agreements underpinning the city’s plan were fraught with far less fighting and stalemate than had been expected, given the stakes.

Initially, municipal unions whose pension funds were greatly underfunded faced the possibility that tens of thousands of members and retirees could lose up to a third of their monthly payments. The bankruptcy filing also raised the specter of a forced sale of billions of dollars worth of art, owned by the city but managed by the Detroit Institute of Art.

Instead, under a so-called “grand bargain” brokered by a mediation panel, the state, private foundations and corporations spent $800 to transfer the art from the city to the museum, with the stipulation that the unions agree to benefit cuts. Municipal unions will lose as little as 4% of promised retirement pay, while inflation allowances also were trimmed. Post-retirement medical benefits also were cut.

The settlement was much harsher for corporate creditors. Syncora, a bond insurer, was paid the equivalent of 14% of its claim. Another bond insurer agreed to accept the opportunity to develop a piece of prime waterfront property to increase the value of its settlement.

“We are starting this journey, not ending it,” James E. Spiotto, a bankruptcy lawyer told the New York Times. “Bankruptcy is just debt adjustment, but that’s not a solution,” he said. “What you really need is the recovery plan. We can’t lose sight of that. We won’t know for five, ten, 15 years whether Detroit has solved its systematic problem.”

With Detroit’s estimated $18 billion of debt, reaching what state finance experts deemed to be a crisis level in the face of dwindling cash, Gov. Rick Snyder in March 2013 appointed Kevyn Orr, a bankruptcy partner at the law firm of Jones, Day as Emergency Manager. The suspension of the mayor’s authority and that of the city council sparked protests and legal challenges. Bankruptcy followed four months later.

The bankruptcy has been hailed by groups inside the city as well around the state as the best path for Detroit to regain a sense of normalcy. Once a thriving center of the automobile industry with roughly two million inhabitants, poor services, crime and racial tension sparked a non-stop exodus, the current population numbering in the neighborhood of 700,000.

Last November, the election of Mike Duggan, a white Democratic politician, suggested that city residents were desperate to try new methods for halting the city’s decline. For nearly 40 years the city had been ruled by African-American mayors.

Duggan and Orr, an African-American, forged a cooperative relationship as both realized that the suspension of elected government might soon be coming to an end. A state-appointed panel is empowered to supervise city finances for the next five years, in an effort to avoid a relapse.