Governor, emergency manager defend Detroit bankruptcy

Detroit’s historic bankruptcy filing aroused opposition from angry investors, public employees and retirees Friday, as state leaders framed the action as their best shot at putting the ailing city on a road to recovery.

Flanked by posters of the city’s skyline with the words “Reinventing Detroit,” the state-appointed emergency manager said Friday that he hopes the roughly $19 billion bankruptcy will provide the fiscal breathing room needed to repair the city’s infrastructure and restore basic services.

“Does anybody think it’s okay to have 40-year-old trees growing through the roofs of dilapidated houses?” asked emergency manager Kevyn Orr at a news conference with Michigan Gov. Rick Snyder (R). “Does anybody think our children should walk through the streets, dark, home from school at night in October? Does anybody think that they should call the police and not be able to come on time because they’re already out on calls? No.”

Defending the decision to file for bankruptcy, Snyder said: “Now is our opportunity to stop 60 years of decline.”

But the widely expected move stirred cries of protest from bondholders and anxiety among the city’s 9,700 workers and 20,000 retirees. Harrison J. Goldin, who was comptroller of New York during the city’s 1970s fiscal crisis and who is now advising municipal bond insurer Ambac Assurance, warned that “the State of Michigan is making a grave error.” (Ambac said it had up to $170.3 million of exposure to two of the city’s general obligation bonds.)

The decline of Detroit.

Standard & Poor’s dropped Detroit’s bond rating to its lowest level, predicting that the city would struggle to persuade a bankruptcy judge to back far-reaching restructuring and then would have trouble getting investors to trust the city again.

“Once you file bankruptcy, you don’t just flip a switch and everything is fine,” said Steve J. Murphy, S&P’s managing director for public finance. “The challenge is, you’re severely damaging your reputation and credit standing.”

In a hint of the difficult road ahead, an Ingham County Circuit Court judge on Friday ordered that Detroit’s federal bankruptcy filing be withdrawn. Judge Rosemarie Aquilina said it violated state constitutional protections of pension benefits.

In response, state Attorney General Bill Schuette asked the Michigan Court of Appeals to stay the trial court rulings while appeals proceed.

Orr said that during the bankruptcy, employees would be paid and the city would pay its bills — and perhaps, for the first time in awhile, pay those bills on time. He said there will be a hotline that city vendors can call if they do not get paid.

Orr also said he would appoint a committee to represent retirees in negotiations over underfunded pension plans.

But, he said, there was little choice other than bankruptcy, given Detroit’s towering debt and limited tax revenue. Comparing the city’s revenue to its basic spending needs and debt payments, he said, “There’s no way home from that equation.” He added: “I’d be happy to listen to any other plan someone can come up with given the restraints we’re working under. The reality is . . . with $12 billion in unsecured debt, there’s precious little we can do.”

Detroit’s filing Thursday was the largest municipal bankruptcy in the nation’s history, marking a low in a long decline. Once a symbol of American manufacturing might, Detroit stands as the epitome of urban blight with 70,000 abandoned homes and about 11,000 cases of arson a year. Once the nation’s fourth-largest city with nearly 2 million residents, Detroit has seen its population dwindle to fewer than 700,000.

“As the city started spiraling down to the abyss, it started spending money on essential services and not funding its long-term liabilities,” said Jim Millstein, a former senior U.S. Treasury official and restructuring expert. “And it committed the fundamental sin of borrowing money to pay operating ex­penses.”

Orr has said he wants to use bankruptcy to erase many of Detroit’s debts and then invest $1.25 billion in upgrading services and infrastructure.

“It’s a lot like a broken company,” said William J. Pulte, whose family came from Detroit and built the nationwide Pulte Homes. “Now they need to reinvest in the entity to make sure they don’t continue to spiral downwards.”

Pulte is part of a nonprofit Detroit Blight Authority that clears empty homes and cleans up trash; it has so far cleared about 5 percent of the city. Pulte hopes Detroit can devote at least $500 million more to the anti-blight campaign. “It’s a monstrous job,” he said.

Meanwhile, other demands face the city even in bankruptcy — especially from unions. Detroit has consistently failed to give enough money to its pension plans. The biggest unsecured creditor, with $2 billion in claims, is the city workers’ general retirement system; the separate retirement system for police officers and firefighters is the city’s second-largest unsecured creditor, with $1.4 billion in claims.

Don Taylor, president of the Retired Detroit Police and Fire Fighters Association, said he hopes “at the very least that current retirees’ pensions remain secure and in force.” He said he expects modification of health-care benefits but fears that retirees might be given small amounts toward buying insurance under President Obama’s new health-care plan.

There are 8,200 retired police officers and firefighters but only about 3,000 working and contributing to the system, making it difficult to maintain payments. Taylor and the association’s office have moved out of the city. He said his wife longed for some countryside and wanted to raise miniature horses.

The association has also differed with Orr over the adequacy of the pension fund, whose trustees assume that investments will yield an 8 percent return. Orr says that is unrealistic. He projects a return of about 7 percent, which means the pension fund would be 20 percent short of what is needed, Taylor said.

Rep. John Conyers Jr. (D-Mich.) asked Friday for a House Judiciary Committee hearing on the Detroit bankruptcy, declaring: “I am concerned that the bankruptcy process is being misused to unilaterally abrogate obligations otherwise protected under law, such as pension, health care and other legal obligations.” He called it “anti-democratic” and said it could have a “deleterious effect in Michigan and nationwide.”

But other public officials met the news with resignation.

“It was looking more and more like an inevitability, so I was not surprised by the announcement. And frankly, I think it presents an opportunity — and I think it needs to be looked at as such,” said Kenneth V. Cockrel Jr. (D), a member of the Detroit City Council.

Cockrel said that constituents were not calling his office to express support or criticism for the bankruptcy but were seeking practical advice.

“ ‘Okay, what does this mean?’ Those are the calls that I’m getting,” Cockrel said. “ ‘What does it mean for city services?’ ‘What does it mean for my pension?’ A lot of those questions at this point are frankly unanswered questions.”

In March, as Detroit faced an estimated debt of $19 billion, Michigan named Orr as emergency manager, vested with extraordinary powers to rewrite contracts and liquidate some of the city’s most valuable assets. That led to once-unthinkable proposals, such as forcing public employees to cut their retirement benefits or demanding that investors in municipal bonds — long considered among the safest investments — take pennies on the dollars they lent to Detroit.

Some experts say that Orr offered so little, as little as 10 cents on the dollar, that some of the creditors figured they could do no worse in bankruptcy court.

“We are trying very hard to be fair,” Orr said Friday.

The bankruptcy filing on Thursday begins a one- to three-month process to determine whether the city is eligible for Chapter 9 protection and who might compete for the limited settlement money Detroit has to offer. But it could be years before the city emerges from bankruptcy.

On Friday, the credit agency Moody’s Investors Service said the bankruptcy filing, and the disputes over who would be asked to make sacrifices, augured a period of uncertainty for bondholders.

“While not unexpected, the filing opens the door to what will likely be an unprecedented litigation scenario,” the agency said. “Before issues like bondholder recovery levels and what level of services city residents will experience become clear, the bankruptcy is likely to be a complicated and protracted process.”

David Fahrenthold contributed to this report.

Steven Mufson covers energy and other financial news.
Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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