The fate of Detroit in his hands: Judge reviews plan to write off $7bn of debt and rescue city from bankruptcy

Today a judge will review a debt restructuring plan to rescue Detroit from bankruptcy. The scheme protects pensions, but creditors claim it has left them shouldering an unfair share of the burden

Allowing Detroit to declare bankruptcy was one thing, getting it out of it was always going to be another. How do you magically slash $18bn (£10.1bn) in debt and simultaneously put a city as proud – and as dilapidated – as Motown back on its financial feet again?

With great grit and speed, it seems. And a touch of ruthlessness. A process that could have taken years will instead come to a climax starting on Tuesday morning in the courtroom of Judge Steven Rhodes.

It will be his job to review a sweeping debt restructuring plan that has been hammered out in marathon negotiations in the months since the original bankruptcy filing in June 2013. He can approve it if he deems it fair and workable or reject it if he doesn’t. The fate of Detroit, literally, is in his hands.

Most parties to the potential deal, but not all, want it approved. Thus America’s biggest municipal bankruptcy in history would be brought to a swifter-than-expected end and the city would be freed to begin addressing its many urgent woes, ranging from the blight of so many abandoned buildings, the decrepit state of its emergency services and the disrepair of the city infrastructure – fixing the street lights (half don’t work) would be a start.

 

“None of it will get wiped out until the plan is confirmed and the judge issues an effective date,” Bill Nowling, spokesman for the city’s emergency manager Kevyn Orr, remarked of the debt. “And it happens really fast after that. I think – with the exception of a few remaining holdouts – all of our creditors recognised we could not let the city languish in endless bankruptcy proceedings.”

The climb back would still be a long one. Once the cradle of the American car industry and the sounds of Motown, Detroit has seen its population plummet from  1.8 million people in 1950 to barely 700,000 today. Its very life and its tax base have been eaten away by middle-class flight that only accelerated as violent crime rose and services declined. Communities all across the Midwest have experienced similar decay as industries have foundered and jobs have vanished. But nowhere has it been on the scale seen by Detroit.

The plan now on the table would eliminate $7bn of the city’s debt as it were overnight. And it would put $1.5bn directly into its coffers to begin the task of reviving its services, for example updating the computer networks of the emergency responders that are older than some of the people who have to work  with them.

Most striking is the relative lack of pain that would be inflicted on city workers and particularly its retired workers who feared their pensions might have to be slashed. There are twice as many municipal pensioners in Detroit as there are city employees actually working. While annual cost of living increases have been scrapped, the levels of pension payments are mostly preserved. 

Also seen off have been demands from some creditors that the city sell off the contents of the Detroit Institute of Arts, its most cherished cultural entity.

The city negotiators got there in part by tapping into the generosity of private donors, philanthropic foundations and the coffers of the state of Michigan which together rounded up $816m. Dubbed the “grand bargain”, that money protected pensioners and the Institute of Arts. However, there remain scores of other creditors – institutions and ordinary investors – who will argue before the court that they are being short-changed and unfairly treated.

The Michigan Theatre was saved from demolition by being transformed into a car park The Michigan Theatre was saved from demolition by being transformed into a car park (AFP/Getty)

Most vociferous has been a bond insurance company called Syncora Guarantee which in court filings last week complained that the man most responsible for formulating the plan, Detroit’s bankruptcy mediator Gerald Rosen, has unfairly and illegally favoured city pensioners over  unsecured creditors like Syncora. The company described what Mr Rosen had engineered as biased and a “quasi-political manoeuvre”.

“It has been a very fast-track bankruptcy, which Syncora has no issue with,” a company lawyer, James Sprayregen, said. “Syncora’s issue is the lack of transparency of the process and the unfair treatment of its claims.”

READ MORE: The rise and fall of Detroit
Detroit cuts off water to thousands of residents
Corruption at Detroit's City Hall

Judge Rosen is expected to hear from no fewer than 80 witnesses, all representing groups with a stake in the outcome, including large creditors and bondholders who stand to receive only a fraction of what they are owed – bond insurers like Syncora would get only pennies on the dollar – and the big municipal unions. The latter will argue that in fact they are sharing in the pain, but that there is no alternative to accepting the deal.

“No one may be happy with the plan of adjustment, but it should bring this insolvency to an end,” Bruce Babiarz, of the Police and Fire Retirement System, said on the eve of the trial.

“Many are looking forward to getting on with their lives knowing that their pensions are secured and there is optimism for the future of what was once among the greatest cities in the world.”

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