The Fine Art of Balancing. Yesterday, in the wake of Michigan Governor Rick Snyder’s unprecedented announcement of an emerging bipartisan consensus in the legislature on an “incremental commitment to solve a problem,” which would provide for moving forward with “an investment of up to $350 million over the next 20 years in Detroit,” federal judicial mediators  issued a statement praising the state’s involvement: “The mediators wish to express their appreciation for the constructive and positive role the Governor has now agreed to play in helping resolve key issues in the bankruptcy case…We hope that the Governor’s announcement will further assist the parties in reaching as many agreements as possible which can be included in an agreed-upon plan of adjustment.” Detroit Emergency Manager Kevyn Orr described the plan as an “unprecedented” effort to help the city fulfill its commitments and preserve its art: “It is now time for the remaining parties to set aside the bargaining rhetoric and step forward and join this settlement to help this great city regain its footing and become once again an attractive place to live, work and invest.” Nevertheless, the combined promise of nearly $700 million over the next two decades not only falls far short of what Mr. Orr has estimated as the Motor City’s $3.5 billion unfunded pension liability, but also the Governor’s proposal has raised squeals from others of the 100,000+ creditors of Detroit. Because both Governor Snyder and the foundations have pledged the funds contingent on their use by the Motor City’s pensioners, especially its low income retirees, and for the Detroit Art Institute—that is—outside Detroit’s chapter 9 municipal bankruptcy proceedings, the Motor City’s full faith and credit bondholders might question the concept of “full faith and credit,” or as the insightful and perspicacious Lisa Washburn of Municipal Market Advisors puts it: “We’ll need to see how this impacts city-creditor negotiations and how the plan of adjustment addresses the requirement for the equitable treatment of similar creditors if a large, earmarked source of money is ultimately pledged for a single creditor group.” The blurred lines could be especially difficult to discern with regard to the pension bonds issued by Detroit—partial payment of those obligations could lead to higher future borrowing costs for the Motor City, hampering its ability to invest in its post-bankruptcy future. In the nonce, the events are likely to lead to further legal challenges by bond holders and insurers even as Mr. Orr seeks to dot the i’s and cross the t’s on his plan of adjustment by as early as the end of next week. 


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