Is Detroit’s Bankruptcy Nearing Its End?

View of downtown Detroit. Source: freep.com
The votes have been counted, and it appears the City of Detroit has crossed a significant hurdle toward resolving its bankruptcy.

From today’s Detroit Free Press:

Detroit retirees voted to accept pension cuts and allow the Detroit Institute of Arts to spin off as an independent institution, reflecting a critical endorsement of the city’s restructuring blueprint to resolve the largest municipal bankruptcy in U.S. history.

With all votes counted, the two separate classes of pensioners — civilians and police and fire — voted “yes” to back the grand bargain, giving the city significant momentum in its fight against holdout financial creditors.

A quick rundown for those who haven’t kept up with the bankruptcy details.  Shortly after Detroit filed for bankruptcy protection, it became clear that one of the city’s most valuable assets was the art collection at the Detroit Institute of Arts, which is owned and operated by the city.   Christie’s auction house was asked to do an appraisal of the city’s art collection last fall, and estimated that the collection was valued at $870 million.  The art collection, along with the city’s Water and Sewerage Department (which delivers water to the vast majority of the metropolitan area’s 4.5 million residents), have long been known to be the city’s most valuable assets.

Once the art appraisal figure was announced, however, Michigan Governor Rick Snyder, Detroit Emergency Manager Kevyn Orr, the state legislature and the Detroit philanthropic community began working overtime on what would ultimately be called the “Grand Bargain”.  Major foundations in the city were able to pledge $466 million toward the city’s bankruptcy in an effort to save the DIA’s collection.  As noted in the link, Gov. Snyder was able to push through a $195 million commitment from the state for the same purpose.  All that was left was an agreement on pension cuts from Detroit retirees — not only enabling the city to hold onto its art collection through the DIA, but allow the city to complete its plan of adjustment and exit bankruptcy in quick fashion.  The DIA and its collection would be transferred to a charitable trust as part of the Grand Bargain, to prevent it from further exposure in municipal dealings.

A major campaign ensued beginning about six weeks ago as retirees were mailed ballots on the issue.  Two classes of pensioners were noted, with different packages for each.  Again from the Detroit Free Press:

Civilian pensioners accepted 4.5% cuts to their monthly checks, an elimination in annual cost-of-living-adjustment (COLA) increases and a claw back of excessive annuity payments. Police and fire pensioners accepted no cuts to their monthly checks and a reduction in COLA from 2.25% to 1%.

Despite the vigorous and at times antagonistic campaign, police and fire pensioners approved the measure by a margin of 82%-18%, and civilian pensioners approved their deal by a 73%-27% margin.  The results were released late last evening.  The whole deal will be put before U.S. Bankruptcy Court Judge Steven Rhodes beginning August 14 to determine its legality, fairness and feasibility, and it’s possible that Detroit could emerge from bankruptcy as soon as this October.

However, the city is not completely out of the woods.  There are other creditors who vehemently disagree with the Grand Bargain, and they will receive their day in court.  Notable among them are a group of bond insurers and hedge funds who control $1.4 billion in pension debt on bonds issued under Mayor Kwame Kilpatrick.  Dissenting pensioners have already filed their objection before the court, and will have their hearing, too.

And there are still real questions about the viability of the city, even after such a deal.  Bankruptcy Judge Steven Rhodes appointed an expert to evaluate the city’s restructuring plan, and the 226-page report was recently obtained by the Detroit News.  The city’s biggest long-term threat to financial sustainability?  The low skill level of city workers and its outdated IT system.  From the report, via the Detroit News:

“I believe the success, or failure, of Detroit’s revitalization will hinge on the people employed by the City and the officials elected by the residents in the coming years,” Kopacz writes, noting the average skill level of city workers is “low and outdated.”

“Lack of even modest technology and up-to-date systems, as is the case with the City, ensure that employees will not perform at competitive levels to their peers in the private sector or even in municipalities that are efficient.”

Clearly this is far from over.

Yet, even as uncertainty continues to reign over the Motor City, good news still emerges.  The M-1 Rail Project, a streetcar line that will connect downtown, Midtown and the New Center area with a streetcar line along Woodward Avenue, begins construction on July 28.  It represents the most significant addition to public transit in Detroit in the last 60 years (People Mover notwithstanding), and could be the first leg of a new streetcar network in Detroit.  Little Caesar’s Pizza founder and Detroit Red Wings owner Mike Illitch announced plans for a new Red Wings arena district, a 45-block development that would include a new hockey arena, residential and commercial development and entertainment uses, just north of downtown and adjacent to the Tigers’ Comerica Park and the Lions’ Ford Field.  And yes, it would be just south of the bustling Midtown area and located on the new M-1 streetcar line.

For good or bad, Detroit continues to be a city worth watching.

3 thoughts on “Is Detroit’s Bankruptcy Nearing Its End?

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