One year after a federal judge approves Detroit’s bankruptcy exit plan, progress has been made while looming challenges remain, especially city pensions
The City of Detroit has more than enough cash to pay its daily bills. Thousands of busted streetlights have been replaced. City retirees still receive pension checks, and valuable paintings remain ensconced in the gilded halls of the Detroit Institute of Arts.
That’s the good news. But a year after a federal judge approved a cost-cutting and reinvestment plan in the nation’s largest-ever municipal bankruptcy case, Detroit’s financial future still hangs in the balance.
Among the greatest concerns: a multibillion-dollar pension bill that starts coming due in less than a decade.
The city is on the hook to make a balloon pension payment estimated at more than $100 million in 2024 alone. But if the pension investments do not perform as anticipated, the bill could be significantly higher.
So far, the early returns for the investments since the bankruptcy are falling short. City officials and their watchdogs are already considering paying more into funds much sooner than prescribed by the city’s bankruptcy exit plan confirmed only a year ago. It’s unclear how Detroit would foot the bill.
On Nov. 7, 2014, federal bankruptcy Judge Steven Rhodes gave a green light for Detroit’s government to cut more than $7 billion in unsecured liabilities and pour $1.4 billion over 10 years into basic services to rehabilitate the city reeling from a decades-long population exodus, disinvestment and cash drain. At one time, the city’s liabilities were estimated at more than $18 billion before creditors and pension holders took a financial haircut.
It was officially known as a plan of adjustment. In reality, it amounted to Detroit’s second chance.
Some, especially retirees, remain embittered by pension cutbacks. But those who designed and approved the plan praise the city’s hard-fought decisions forged in bankruptcy as a financial reckoning years overdue.
“I think the early indicators exceeded our expectations,” former Detroit emergency manager Kevyn Orr said in an interview late last month.
Orr, a seasoned corporate bankruptcy lawyer, became the city’s viceroy in March 2013, ushering Detroit into a rare Chapter 9 bankruptcy and commanding the city through months of tense negotiations to clean up the balance sheet before leaving office late last year at the bankruptcy’s conclusion.
Since then, trying to tear down thousands of blighted homes and commercial buildings while improving city services including public safety have been expensive and slow ordeals. Fixing the city’s high poverty rate, unemployment and poorly performing schools were largely left out of the bankruptcy process despite impeding the city’s revival.
Many acknowledge it’s tough to come up with a complete report card on the city’s bankruptcy plan after less than a year. But in an interview, Rhodes, the case’s presiding judge, echoed Orr’s early assessment: “My impression is that the city is actually doing better at this point in time than we had projected during the bankruptcy case.”
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The city officially quit bankruptcy in December 2014, essentially capping the nation’s largest Chapter 9 case, which raced through court after the city almost ran out of money, stopped paying its pension bills and filed for bankruptcy protection in July 2013.
Leading architects of the city’s restructuring have been lauded with awards for their work. At least three books are in the works on the case and its 24-day trial featuring dozens of witnesses, thousands of exhibits and average Detroit residents saying no to Orr’s sweeping restructuring plan. But many others, including some of the city’s leading business and philanthropic leaders, cheered the end to the city’s financial crisis despite the costs.
Until this summer, when Hillview, Ky., population 8,000, filed for Chapter 9 protection, no one dared follow in Detroit’s costly footsteps. The city alone spent $165 million in fees for an army of lawyers and consultants.
“We certainly know many people were hurt during the bankruptcy, but what would have been the alternative and how would they have been hurt under the alternative?” said Michigan Treasurer Nick Khouri, who now chairs the city’s financial oversight commission created during the bankruptcy.
Modern-day soothsayers once envisioned doomsday scenarios for Detroit: The city would be trapped in bankruptcy court for years. Defaulting on the city’s debt would ripple throughout the municipal bond market. Detroit would be unable to borrow from creditors again.
None came true.
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