7.24.13

Oyez, Oyez, Oyez. U.S. Bankruptcy Judge Steven Rhodes will hold the first hearing in the Detroit municipal bankruptcy case-the biggest municipal bankruptcy case in U.S. history , in a few hours in front of scores of lawyers, protesters and reporters from as far away as Japan, China and Norway. Over its course, these proceedings not only will help determine the future for the city of Detroit and its 700,000 citizens, but also will have significant implications for every state and local leader because of the implications for state and local credit markets and the sanctity of public pension funds—and the balance between federal power and state constitutions. A key issue certain to be addressed this morning will be whether the bankruptcy filing automatically freezes litigation against Emergency Manager Kevyn Orr and his team, including a retiree lawsuit over proposed pension cuts. Another issue likely to be addressed by Judge Rhodes is whether or not to stay three state court lawsuits filed by retirees, current city workers, and Detroit’s pension funds in Michigan’s state courts.

Today’s opening in the U.S. Bankruptcy court comes after the Michigan state Court of Appeals yesterday granted state Attorney General Bill Schuette’s request to halt an Ingham County Judge Rosemarie Aquilina’s order withdrawing the city’s bankruptcy petition. (On Monday, Judge Aquilina scheduled a July 29 hearing on the merits of the lawsuit brought by Detroit’s General Retirement System and Police and Fire Retirement System.) The appellate court’s action effectively cancels that hearing. Unanimous orders were issued by Judge Patrick Meter, Judge Michael Kelly, and Judge Stephen Borrello. The Court of Appeals directed attorneys to file formal answers to the state’s request for appeal by 5 p.m. on Friday.The three-judge panel also said it would consider A.G. Schuette’s appeal of a ruling by Ingham County Circuit Judge Rosemarie Aquilina that the city’s bankruptcy filing violated the state constitution’s protection of public pension benefits—an issue on which Judge Rhodes will eventually have to opine: does Michigan’s state constitutional provision apply to debt restructuring in his federal bankruptcy court.

This morning’s hearing marks the first of several key dates in the city’s bankruptcy case—a case in which Judge Rhodes will first have to determine whether the city, in fact, is eligible for federal protection (is Detroit insolvent), and then, if he concurs, the bulk of the court proceedings will dwell on the plan of adjustment that Emergency Manager Kevyn Orr proposes.

Reader Reaction. One of our eBlog readers yesterday wrote: “Jim Spiotto (the 23 hour/day, famed municipal bankruptcy attorney from Chicago) is going to have to write several more chapters for his bankruptcy tomes,” noting that he thinks “tracking the legal and related intergovernmental/federalism aspects of the proceedings is invaluable: I think tracking the issues that relate to tax-exempt financing (from the very local to national to international implications) retro- and prospectively is critical. There’s going to be a lot of speculation offered and perhaps much less factual stuff.” The writer, who has followed and written about mandates and preemption for decades, also expressed concern that “somehow the ‘living’ issues get downplayed or overlooked. Detroit’s loss or deterioration of revenue base, lights, parks, jobs, safety, housing, health facilities, etc. is mind-blowing from what little I know. Tracking the ‘human side’ [is] most important. It’s like their city has lived through a decades-long unnatural disaster. Yes, local politics has produces some of the ugliness – but there’s more there than simple conclusions.”

What We’re Trying to Do. Thanks to a grant from the MacArthur Foundation, we have undertaken an in depth study of six cities which have or are experiencing some levels of fiscal distress: Detroit, San Bernardino, Chicago, Pittsburg, Baltimore, and Providence. This work is a follow-up of the Financial Tool Kit (Financial Crisis Toolkit (printable, created without digital tabs)) we produced last year so that local governments and states would, for the first time, be able—hopefully—to learn from the experience of others, instead of having to start all over again when a serious fiscal crisis threatens municipal bankruptcy. Among the kinds of questions we want to try and answer in looking at Detroit, for instance:

  • What options might be available for physically reducing the boundaries of Detroit?
  •  What are the implications of the fiscal crisis in Hamtramck to Detroit?
  •  How can a municipality realize benefits of shared services if the adjacent municipalities are also in fiscal distress?
  • Given the new efforts to consolidate and share services for Michigan school districts, is there any similar consideration of sharing municipal services?
  • Having devoted so much focus on Detroit’s fiscal crisis, what considerations are there with regard to potential changes in state laws?
  • If the clock could be set back five years, what might have been the three most critical steps that would have helped to prevent the current fiscal crisis?

Obviously, we are grateful to MacArthur, and we appreciate your questions, insights, and experiences.

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