02.21.14

The Bell Lap. Detroit expects to file its municipal bankruptcy plan of adjustment in federal court today, filling in the blanks from its 99-page draft plan and related disclosure document to demonstrate to the court how it proposes to treat its 100,000+ creditors and provide for a sustainable future for the Motor City. The document is intended to provide a comprehensive blueprint of the “haircuts” the city proposes to give to each of its creditors, who are owed an estimated $18 billion. Because of the conflicts with Michigan’s constitution with regard to pension obligations, and because the plan is expected to propose to treat its general obligation bonds as unsecured, the plan could have repercussions for state and local leaders throughout the nation. The final document is expected to propose that some creditors receive as little as 20 cents on the dollar. Critically, the document is expected to lay out for U.S. Bankruptcy Judge Steven Rhodes Detroit’s plans for streamlining operations and enhancing essential public services in areas such as police and fire protection, blight removal, and public transportation. Given the unprecedented number of creditors and not only the depth of the cuts Detroit Emergency Manager Kevyn Orr will be proposing for creditors—but also the significant discrepancies, the plan is almost certain to trigger legal challenges, although Mr. Orr’s urgency is heightened because his tenure as the state-appointed controller of Detroit is scheduled to expire next September.

The 99-page draft plan, which many believe Mr. Orr released to stimulate and press for a final round of negotiations to gain the support of a significant majority of the city’s creditors, was unique in that it proposed steeper cuts to banks and the city’s municipal bondholders than it would seek from the Motor City’s retirees—and, because, unlike in any previous municipal bankruptcy, the draft incorporated nearly $850 million from charitable foundations, the State of Michigan, and the Detroit Institute of Arts—funds intended to make up for pension underfunding, especially for the lowest income retirees, in exchange for spinning off the city-owned art museum as an independent charitable trust. In addition, the draft incorporated hoped for annual payments from the lease of the as yet unconcluded negotiations with its suburban neighbors of the Detroit Water and Sewer Authority. Similarly, the proposed state contribution awaits approval by the Michigan Legislature. Thus, even though this “final” plan to be submitted today may be a prelude to putting all the pieces of this historic jigsaw puzzle together—the silence from the 6th U.S. Circuit Court of Appeals in Cincinnati with regard to the appeal of Judge Rhodes’ decision last Fall finding the Motor City eligible for chapter 9 federal municipal bankruptcy could render all these hard-scrabbled efforts moot.

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