Bankruptcy Judge Steven Rhodes has approved Detroit's plan to restructure $7 billion of the city's $12 billion debt load following a nearly two-month trial. But how did Detroit get to the point where it became the largest U.S. city to file for bankruptcy and what will keep the city from further fiscal irresponsibility?
QUESTION: WHY DID DETROIT FILE BANKRUPTCY?
Continue Reading Below
ANSWER: The city's slide into insolvency was not swift. In fact, it took years to reach a point where bankruptcy court protection was necessary to allow Detroit to wipe out some of its debt. As the city's population dropped, so did its property and business tax base. Operating expenses, past bills, and pension and health care obligations outpaced annual revenues by millions of dollars. Much of the money Detroit had in any given year already had been earmarked for those and other bills, leaving little to pay for even adequate city services. A failed plan to pay off pension debt also compromised millions of dollars each year in casino tax revenue Detroit desperately needed.
Q: WHO WAS BEHIND THE BANKRUPTCY?
A: Bankruptcy lawyer Kevyn Orr was appointed emergency manager over Detroit's finances in March 2013 by Republican Gov. Rick Snyder. The following June, Orr put thousands of city creditors on notice that unless agreements were reached to adjust the debt owed them by the city that Detroit would file for Chapter 9 bankruptcy. Orr has said he discussed his options with Snyder prior to the July 18, 2013 bankruptcy filing in federal court.
Q: WHAT HELPED CONVINCE BANKRUPTCY JUDGE STEVEN RHODES TO ACCEPT ORR'S RESTRUCTURING PLAN FOR DETROIT?
A: Rhodes on Friday approved Detroit's plan of adjustment — essentially the city's post-bankruptcy restructuring blueprint. The plan outlines the total amount of debt, how the city will pay off some of it, how much each creditor will receive and the steps Detroit will take to improve city services. The plan had to be approved by at least some of the city's creditors. The city was able to reach early deals with some banks. It also convinced about 30,000 city employees, retirees and pensioners to accept smaller than anticipated cuts to pensions. Their approval of the plan earlier this year preceded stepped-up negotiations and deals reached with major bond holders during Detroit's bankruptcy trial.
Q: HOW WILL THE CITY'S BANKRUPTCY HELP THE AVERAGE DETROIT RESIDENT?
A: Part of Orr's restructuring plan includes $1.7 billion over 10 years to improve city services. About $440 million of that will be used to eradicate blight and help demolish the more than 40,000 houses standing vacant in Detroit neighborhoods. Another $430 million is promised to improve police and fire services, and response times to 911 calls. Detroit has been criticized for having some of the slowest police response times in the country.
Q: WHAT'S THE FUTURE OF CITY-OWNED ART IN THE DETROIT INSTITUTE OF ARTS?
A: The potential auction of thousands of pieces in the DIA to help settle some creditor debt was a major point in Detroit's bankruptcy petition, restructuring plan and the bankruptcy trial. A unique agreement called the "Grand Bargain" allows the state, major foundations. corporations and others to donate more than $800 million over 20 years to a fund that will be used to soften cuts to Detroit retirees by helping to pay city pensions. As part of the deal, artwork in the DIA and the building they are housed in will be placed into a trust.
Q: ARE THERE SAFEGUARDS TO PREVENT DETROIT FROM INCURRING SO MUCH DEBT IN FUTURE YEARS?
A: A Financial Review Commission will work with city officials to make sure the bankruptcy court-approved plan of adjustment is followed. The state treasurer will chair the commission. Its nine members will include Detroit's mayor, City Council president, director of the Michigan Department of Technology, Management and Budget, and five appointees by Gov. Snyder.
Q: WHAT LESSONS CAN OTHER CITIES LEARN FROM DETROIT?
A: How Orr and Snyder tackled Detroit's bankruptcy can be seen as a playbook for other cities confounded by — and struggling with — huge debt. Detroit's entrance and exit from bankruptcy appeared quick and efficient and done in about 15 months. There were many partners from the state, to foundations, to companies like General Motors, Ford and Chrysler. It also showed that quickly reaching the best deals with major creditors can set the tone for negotiations with others. Rhodes also ruled early on that municipal pensions are not protected by the Michigan Constitution, something that can be cited as precedent in future Chapter 9 bankruptcies.
Q: WHAT HAPPENS TO ORR?
A: Mayor Mike Duggan and the Detroit City Council voted in September to end Orr's contract after 18 months and shift control of city operations back into the hands of voter-elected leaders. Orr keeps the title of emergency manager, but his duties primarily are limited to shepherding Detroit through the bankruptcy trial.