Bankruptcy Roundup: Detroit Becomes Largest C-9 Bankruptcy in U.S. History

(Breaking Update) Judgment day came for the City of Detroit as a municipal bankruptcy petition was officially filed after months of speculation that escalated in recent days.

Speculation about an filing considering "imminent" spread like wildfire this week that Detroit would file for Chapter 9 protection via its Emergency Manager Kevyn Orr, a bankruptcy specialist brought in earlier this year to handle the city's growing debt woes. Orr made it known that he planned to file if a large portion of the city's long-term debt, estimated at a range between $15-17 billion, couldn't be renegotiated with various creditors. Some, but not all, was. He estimated it at a 50-50 chance early this summer that Detroit would eventually file under Chapter 9.

This likely explains the timing behind a lawsuit aimed at the city, Orr and state Gov. Rick Snyder. The General Retirement System of the City of Detroit and Police and Fire Retirement System of the City of Detroit initiated a civil action less a day earlier against the three parties, perhaps trying to force more negoitations. The suit challenges the authority of Orr and the governor to authorize proceedings “that would in any way impair the accrued financial benefits of the Retirement Systems’ plan participants and beneficiaries.” The suit notes such benefits are protected by a 1963 article of the state constitution.

“The recent statements regarding an imminent bankruptcy filing prompted the Retirement Systems to take more immediate action,” said Ron King, the attorney representing the groups. Bruce Nathan, Esq., of Lowenstein Sandler LLP, has been following Chapter 9 developments throughout the country for nearly two years and has predicted that a major city filing out of a place like Detroit could potentially raise the profile of filing under Chapter 9, if not inspire a spike in filings not seen before.

Meanwhile, across the country, a California judge in the already filed case in San Bernardino has warned both sides that she will not look fondly upon continued gamesmanship (calls for delays, weak/vague challenges, etc.) in the coming weeks. U.S. District Court Judge Meredith Jury reiterated that she has no plans to waiver on moving forward with the scheduled hearing regarding the city’s Chapter 9 eligibility on Aug. 28. San Bernardino officials filed a summary judgment motion last week, just more than 11 months since its filing, claiming it has met all requirements mandated for a Chapter 9 filing.

A previous city news release noted “systemic” financial problems that would languish and that “clearly, reductions to the expenditures side of the budget are not going to product the level of savings that will be needed to balance the budget.” The budget shortfall was estimated at $46 million at the time of filing.

Both municipalities, like many U.S. cities struggling with heaping debt, are having problems tied to expensive contracts with current and retired public workers, especially for pension and health care costs that are zapping its budget. There are also noted problems involving shrinking tax rolls (San Bernardino from a deep real estate bust, Detroit from a quickly shrinking population mixed with high crime levels and unemployment) and their effects on resources.

-Brian Shappell, CBA, CICP, NACM staff writer

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