has seen signs
of revival in its urban core following the near-death experiences of GM and
Chrysler. Unfortunately, its municipal finances remain beaten down by the
city's long and precipitous decline over the past several decades. Labor
and legacy costs, incurred when the auto industry thrived and the population
well exceeded a million citizens, are now heavy shackles on a city whose
population has dropped to 700,000. Those costs, combined with a
dysfunctional municipal government that has been unable to make necessary
reforms, are leading Michigan's governor Rick Snyder and Treasurer Andy Dillon to
launch a process to appoint an emergency fiscal manager for the city, a step
that could well lead to a Chapter 9 bankruptcy filing.
filings by municipalities and governmental entities have, despite dire
predictions, remained fairly rare. The few recent well-publicized
filings that have occurred have been driven by unusual circumstances. Jefferson
County, Alabama faced the double body blow of corruption, cost overruns and
financing with complex derivatives in connection with the upgrade its sewer
system that ultimately saddled the County with over $3 billion in debt, and the
invalidation of an occupational tax that provided the primary source of its
unrestricted general fund revenues. California municipalities Stockton
Bernardino faced huge underfunded pension liabilities and the residual
effects of the collapse of the residential housing market.
Those cases are already proving to be
litigious and difficult, as the dearth of precedential law makes novel issues
much tougher to resolve. However, a bankruptcy filing by Detroit would
dwarf all of them in size and complexity.
It is possible that such a case could effectively be
"pre-negotiated", in a manner similar to that of the automobile
companies. In this instance, the State of Michigan, rather than the U.S.
Treasury, might promise to provide the necessary financial backing in exchange
for concessions from Detroit's bondholders, unions, and retirees. The new
arrangements would then be implemented through a bankruptcy filing in order to
take advantage of certain powers afforded to municipal debtors under the
Bankruptcy Code, such as the ability to reject burdensome contracts.
Pre-negotiated cases, however, are difficult enough to
achieve with business enterprises. With
a city of the size of Detroit, a bankruptcy case could very easily devolve into
a morass of litigation that could drag out for many months or even years. There
is no question that a Chapter 9 filing for Detroit should be the absolutely
last resort. Unfortunately, the time is fast approaching when there will
indeed be no other options.
Read more articles at Kelley Drye &
Warren LLP's Bankruptcy
Law Insights blog
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