Get the Facts: 27 FAQ’s About Detroit’s Bankruptcy

July 19, 2013

in Michigan News

Q. 1: Why was it necessary for Detroit to use a Chapter 9 bankruptcy filing to address its financial problems?

A.: Detroit is in a financial crisis. Without major changes, the city is expected to run out of cash by December 2013.  The city can’t borrow any more money, as it has for nearly a decade, to pay its bills.  It can’t raise taxes, since its tax rates are already at the legal maximums.  The city has an obligation to provide for the safety and welfare of its residents and without a comprehensive restructuring of its obligations, the city’s ability to do that is compromised.  That situation must change to improve the quality of life for Detroit’s 700,000 residents and to attract new businesses and jobs to the city. Six decades of mismanagement and ignoring financial realities have brought us to this point. It’s time to fix the problem. Negotiations with creditors weren’t successful, so a bankruptcy filing was the last viable option to fix the city’s finances and start to provide Detroit’s 700,000 people the basic public services they need and deserve.  Bankruptcy is the quickest way to get Detroit on a sound financial footing so it can meet the needs of its residents and be able to grow and prosper in the future.

Q. 2: Why didn’t the negotiations work?

A.: Fixing the city’s finances will require sacrifices from investors and many others.  We had hoped those sacrifices would be worked out in good faith negotiations.  Unfortunately, it became clear that those negotiations wouldn’t be successful for a number of reasons. There was no guarantee all the parties would agree.  There was strong disagreement about the restructuring plan.  Detroit is in a crisis and we’ve got to get going on the solution. A bankruptcy filing was the last viable option to fix the city’s finances and start to provide Detroit’s 700,000 people with the basic public services they need and deserve.

Q. 3: What does Chapter 9 bankruptcy mean?

A.: A court-supervised Chapter 9 restructuring gives the city an opportunity to resolve its financial crisis by providing additional tools that are not available outside of a federal court process.  It provides a breathing spell during which the city can focus on restructuring and begin the process of sorely needed reinvestment.  In addition, it allows the city to continue to work toward agreements with its vast and fragmented creditor groups.  In the absence of agreements, the bankruptcy process can be used to bind non-consenting creditors.  Detroit will continue to pay its employees and its vendors for essential services.  It will continue to provide essential services to its 700,000 residents.

Q. 4: Why couldn’t the city solve its financial issues on its own?  How can a judge decide what is the best for Detroit?

A.: A court-supervised process is the best and most efficient way to secure a strong, viable future for Detroit.  Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past six decades have brought Detroit to the brink of ruin, both financially and operationally.  All other options to fix Detroit’s finances have been exhausted.  Detroit and its residents deserve better and we think a court-supervised restructuring is the best way forward.  In this process, the city still will be the entity to propose its own restructuring plan and negotiate that plan.

Q. 5: How long will the city be in bankruptcy?

A.: That is hard to predict because the process can be affected by a variety of factors.  Kevyn Orr and his team remain committed to moving forward with the speed, discipline, and efficiency of a corporate restructuring.

Q. 6: How could the city file so soon after just presenting its plan a month ago?  Was that enough time to negotiate in good faith?

A.: We have held a series of meetings and negotiations and exchanged a significant amount of information.  It quickly became clear that the city could not achieve consensual savings from its major creditors outside of a court-supervised process for a variety of reasons.  First, there are large groups of creditors, including retirees and bond holders, that are unorganized and unrepresented.  Having a forum in which to organize those creditors so that negotiations may ensue and binding solutions be developed is necessary for the restructuring to conclude.  Second, some of the creditors with whom the city has met have refused to consider any changes to the city’s obligations.  Resolutions with those creditors would have to be supervised by a court.

Q. 7:  Does this mean the city won’t pay creditors or contribute to pensions any more?

A.: Chapter 9 bankruptcy allows the city time to focus on restructuring and revitalizations.  These obligations will be addressed as part of the restructuring process.

Q. 8: Will the city continue to pay employees, retirees and vendors?

A.: Current employees will continue to receive their paychecks without interruption and will maintain their medical benefits and vacation privileges.  The city will maintain current vendor contracts for essential goods and services and expects to continue to pay suppliers of such goods and services during the bankruptcy proceedings on a regular basis.

Q. 9: What does this mean for union contracts?

A.: The city will work with its various unions to address employee issues as part of its restructuring so that the city has an affordable long-term cost structure.

Q. 10: Will the city continue to provide essential services (police, fire, trash pickup) to residents?

A.: Yes, it will. There will be no change in services.  In fact, over time, as the process of reinvestment begins, we expect to provide an improved service, which Detroit’s residents deserve.

Q. 11: Will the city begin selling certain assets, such as Belle Isle or the art in the DIA?

A.: The city continues to evaluate all legal options to maximize creditor recoveries and to provide funds to reinvest in the city and regain its place among America’s great and vibrant cities.

Q. 12: Will Detroit’s bankruptcy filing impact the creditworthiness of other Michigan municipalities and the state itself?

A.: Detroit’s situation is unique and it should not affect other cities or the state.

Q. 13: What happens next?

A.: Most importantly, the city intends to begin investing in its operational initiatives to improve services to Detroit’s residents and businesses.  In addition, the city will continue to hold discussions with its creditor groups to seek consensual resolutions to obligations where possible.

Q. 14: What are the emergency manager and his team proposing?

A.: Kevyn Orr and his team presented a restructuring proposal to the city’s creditors on June 14.  That proposal remains the basis for the city’s negotiations with creditors.

Q. 15: Won’t Detroit’s Chapter 9 filing have a negative impact on the city’s creditworthiness and reputation that will further impede Detroit’s ability to secure a strong, viable future?

A.: The filing was a decision we did not take lightly.  However, it is the only viable option to secure a strong future for the city and its residents.  The city had exhausted all other options.  Detroit’s situation is well known and reasonable observers will recognize that the city had no other choice but to file for Chapter 9 protection.  Longer term, we expect to have the processes and protocols in place to ensure that the reforms we make today will continue well into the future.  In time, the short-term challenges we face today will yield to a brighter, more stable future for Detroit.

Q. 16: Wasn’t PA 436 and the process leading up to declaring a financial emergency just a pretense for filing Chapter 9.  Wasn’t bankruptcy the goal all along?

A.: The goal is to create a strong, viable Detroit that can deliver basic essential services to its 700,000 people.  That was the point of the consent agreement between the city and the state of Michigan that was entered into more than a year ago and which the city never implemented.  That was the point for declaring a financial emergency in March.  That was the reason an emergency manager was appointed and why a comprehensive city restructuring plan was proposed in June.  The goal is a strong and viable Detroit.  If this can be done in a negotiated way with creditors and stakeholders, the city will take that path.  If not, then it will use other legal means to accomplish the goal. A bankruptcy filing was the last viable option to fix the city’s finances and start to provide basic public services to Detroiters.

Q. 17: Why the rush to file?  Why not give more time for negotiations?

A.: It would be irresponsible not to file at this time.  Detroit residents can’t wait for better services and safer neighborhoods.  The emergency manager and the city’s restructuring team have worked for months to create a path to solvency. Together, they have held more than 100 meetings with stakeholders and negotiated in good faith with its creditors and unions.  Those meetings have not put the city closer to a restructuring deal and it simply doesn’t have the financial resources to continue them without the structure provided by the Chapter 9 protection.  Chapter 9 provides a process that can bring all of the city’s 43 unions, 53 creditors and other stakeholders to the table to arrive at a fair solution in an efficient and timely manner.  At this point, without Chapter 9 protection, there is no likelihood that the city can reach a negotiated solution with its creditors and stakeholders.

Q. 18: This is the largest municipal bankruptcy in U.S. history and there has been speculation that it will have a big effect on the capital markets, especially on lending to public entities in Michigan.  Did those factors have any influence on this decision?

A.: This decision was based on what’s best for the 700,000 people of Detroit and the state of Michigan.  Filing for bankruptcy is the only viable option to provide the people of Detroit with the essential services that they need and deserve in a timely manner and to restore Detroit. Michigan can’t become a great state unless its largest city is healthy and strong.  This filing puts Detroit on a path to have a solid financial footing. We won’t speculate about how the financial markets will react to this filing.

Q. 19: About 20,000 retirees from the city of Detroit are worried about their pensions and health care coverage.  Can you give them any assurance that they’ll be protected in bankruptcy court?

A.: There’s the bankruptcy filing and other pending litigation against the state on this issue.  Because of that pending litigation, it wouldn’t be appropriate to comment on that. We’re sensitive to the concerns of the retirees.  While the pension funds do have assets, the challenge is that they have been underfunded and mismanaged.  We are confident that all of the city’s creditors will be treated fairly in this process.

Q. 20. What about the claim from the retirees that the Michigan constitution protects their pensions? Do you agree with them?

A.: That’s a legal question that will have to be decided in the courts.  Given that it’s already in the courts, it wouldn’t be appropriate to comment on it at this time.

Q. 21: What about a state bailout for the city or for the retiree pensions?

A.: The answer to that is “no.” That’s not an option. We don’t want to reward mismanagement. Keep in mind that we didn’t create this crisis.  Sixty years of decline created this crisis. We’re making the tough decision to fix this problem so the 700,000 people of the city of Detroit get the basic public services they need and deserve and we can start to make Detroit great again.

Q. 22. So the state isn’t going to do anything to help Detroit and its 700,000 residents?

A.: The state has done a great deal to help Detroit and its people.  There’s long list of things that the state has done to help Detroit over the past few years.  Those include:

  • Blight elimination.  Detroit is one of five Michigan cities that will share in $100 million in federal funds to demolish abandoned properties.
  • Economic development.
    • Last year, the governor signed legislation to allow the 163-acre State Fairgrounds property to be used for economic development.
    • Governor signed a bill that supports the development of a $650 million event center in downtown Detroit to be the new home of the Red Wings.
    • The state is an active partner in revitalizing the Eastern Market, the Globe Building and the riverfront.
  • Belle Isle offer:  The state offered to lease Detroit’s treasured Belle Isle Park and handle restoration and maintenance, while allowing the city to retain ownership.
  • Transportation
    • The governor signed an agreement with Canada to build the New International Trade Crossing in southwest Detroit.  That will generate 12,000 direct jobs.
    • The state helped develop a regional transit authority to allow Wayne, Oakland, Macomb and Washtenaw counties to integrate all modes of public transportation.
    • The state is partnering with community leaders to launch the M1 Rail, a proposed 3.3-mile rail line on Woodward Avenue that will benefit commuters, job providers, and help attract visitors.
  • Children/Education
    • In February 2013, the Michigan State Police and the Michigan Big Brothers Big Sisters Alliance formed a partnership to serve at-risk youth in Detroit and other urban areas.
    • The Education Achievement Authority was created to provide a bold, innovative system of public schools that focus on the progress of each student.
      • The system opened in September 2012 with 15 of Detroit’s lowest-achieving schools.

Q. 23: What would you tell a Detroit retiree who’s barely getting by today and is worried about seeing a big cut in their monthly pension?

A.: We’re not going to speculate about what might happen with pensions, because this legal process is just starting. We’re sensitive to the concerns of the retirees.  While the pension funds do have assets, the challenge is that they have been underfunded and mismanaged.  We are confident that all of the city’s creditors will be treated fairly in this process.

Q. 24: How do you think Detroiters will react to this bankruptcy?

A.: We won’t speculate on how people will react.  What they should remember is that their needs have been secondary in the city for too many years.  That the focus was on gimmicks and tricks to kick the financial can down the road and not on making sure the police or fire department would come when people called or that their garbage would be picked up or that their streetlights would be on at night to improve their safety.  They should remember that the emergency manager has a plan to invest $1.25 billion in the city services over the next 10 years.  They also should remember that this process will give Detroit a fresh start, so it can grow and prosper in the future.

Q. 25: What is your response to municipal bond market experts who say that Kevyn Orr’s restructuring plan to treat holders of general obligation bonds the same as holders of riskier securities breaks the long-standing “faith and credit” assumption for municipal bonds in the market and if implemented could have major repercussions? 

A.: We’re not going to speculate about that.  Obviously, the bankruptcy judge will make the final determination.

Q. 26: There have been some reports about the city having to pay $100 million or more for the attorneys and consultants handling this for the city.  Couldn’t those dollars be used for pensions or something else?

A.: This is a very complicated matter and it needs to be done right. The city and Kevyn and his team have brought in some of the top experts in the country to work on this and they’ve gotten discounts on fees.  This is not a do-it-yourself project.  These experts are working to solve a financial crisis 60 years in the making.  They’re doing their best to put the city on a sound financial footing and position it to grow and prosper in the future.

Q. 27: Attorney General Schuette has issued an opinion that the art at the Detroit Institute of Arts can’t be sold off to help the city out of its financial problem.  Do you agree with that or do you think art lovers should be worried about losing the DIA art?

 A.: That’s a complicated issue.  The city continues to evaluate all options to maximize creditor recoveries and to provide funds to reinvest in the city and regain its place among America’s great and vibrant cities. Since this is all in the courts now, it’s not appropriate to say more than that.


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