Whatdawedonow? With the Motor City filing of both the plan of adjustment—the nearly 440 page document which proposes how Detroit’s accumulated $18 billion in debts will be divvied up between its 100,000+ creditors, and its accompanying disclosure document that lays out Kevyn Orr’s plan for spending $1.5 billion over the next decade to improve essential public services, public safety, and eliminate blight; many are asking what the next chapter in this historic municipal bankruptcy is. For starters, it marks an unprecedented step into the unknown at a most critical time, best summed up by the incomparable Jim Spiotto, who notes: “Chapter 9 is a little like open-heart surgery…Much can be done to repair the patient. But if it all takes too long, it can be fatal.” That is, now that the two documents have been filed with the federal bankruptcy court, the sands of the hourglass have started. The plans, as Mr. Orr made clear on Friday, are not necessarily final: he urged creditors to pursue settlements based upon the mediated sessions that have not gone on for weeks. At the same time, every hour from today forward marks time when funds Detroit does not have will lessen—and, consequently, reduce the pool from which to pay its creditors—and reduce the pool Mr. Orr has proposed to ensure a sustainable future. It was newly elected Mayor Mike Duggan, after all, who in his inaugural address last month asked residents and businesses contemplating leaving the city to give his new administration six months—promising that a new streetlight system operating in residential neighborhoods by the end of 2015, and $520 million poured into tearing down tens of thousands of dilapidated, empty buildings within six years. Thus, in the waning days of February, the city’s 100,000 creditors have a chance to negotiate amongst themselves, object to, propose alternatives—but finally vote on the proposal before U.S. Bankruptcy Judge Steven Rhodes—to whom the responsibility rests for determining whether it is fair. But the two documents now have become the twin foundations for Detroit’s future—and the stark numbers ―notwithstanding the sharp opposition from the city’s union leaders, retirees, and Wall Street ― mean that all sides are on notice that every day and dollar spent fighting the plan will guarantee there will be less available to allocate. It means that every attorney hired at $1,000+ an hour in attorneys’ fees means there will be $1,000 less for the city’s creditors to fight over and for any sustainable future for Detroit and its citizens. Delay now, as Mr. Spiotto reminds us, can be “fatal.”
So where does that leave the Motor City? Creditors must now either accept the settlement or negotiate another solution—with the clock running. The negotiations are complicated by continuing uncertainties: 1) Will the legislature in Lansing act on Governor Rick Snyder’s bipartisan plan to match foundation funds raised through the Detroit Institute of Arts that would add nearly $880 million to the pot? 2) Will Detroit’s suburbs agree to the proposed Detroit water and sewer regionalization plan that could provide as much as $47 million a year to the City of Detroit? 3) Will there be an agreement with regard to the city’s costly interest-rate hedges on $1.45 billion of pension debt? This issue was not incorporated in the city’s plan of adjustment, because Mr. Orr expects to file a third proposed resolution to Judge Rhodes this week. 4) Will the 6th U.S. Circuit Court of Appeals, which on Friday said it would hear arguments with regard to whether Detroit was eligible or not for federal bankruptcy protection, overturn Judge Rhodes? With the clock ticking down, the responsibility for making the decision—absent intervening action by the 6th Circuit, will fall on the musical shoulders of Judge Rhodes, who will have to determine if any final agreement Detroit works out with a majority of creditors is fair and feasible.
Paying Owed Taxes. An important provision in the city’s second document, its disclosure plan, is to fix a hole in the city’s revenue system that we noted in our report last year: “The city is considering the enactment of a local ordinance that would require employers to withhold city income taxes of reverse commuters.” Some $155 million in income taxes on Detroit residents—or nearly half the income taxes owed to the city in 2009—were not collected; 54 percent of the city’s residents who worked outside the city’s limits did not pay. When Motor City and state officials worked out a consent agreement in 2012, it included assistance for Detroit’s efforts to collect income taxes owed by city residents who worked in suburban jurisdictions, but that plan failed, as have other efforts to have suburban communities help. On Friday, a spokesperson for Gov. Rick Snyder said Mr. Orr’s disclosure plan is consistent with what was included in the consent agreement, noting: “It’s just a way for the state to help assist the city in ensuring effective and streamlined tax collection and compliance with existing laws and provisions…Details and particulars are in the early stages and will need to be worked out.
Recasting the Motor City’s Future? President Obama is set to announce two new manufacturing institutes—one in the Motor City and one in the Windy City—which are intended to attract and nurture businesses that will employ highly compensated workers, as well as serve as hubs of economic growth and opportunity. The Detroit institute is to lightweight and modern metals; Chicago’s is to focus on digital manufacturing and design technologies, with the U.S. Department of Defense heading up the $140 million initiative. The aim of the manufacturing institutes is to take advantage of the U.S. abundance of world-class universities to attract companies interested in being close to research and pools of skilled workers. The institutes are intended to bring together firms that are competitors to share ideas in the intermediate stage between invention and commercialization, or, as the White House explained it: “Manufacturing production is growing at the fastest pace in over a decade, and the president is committed to building on that progress.”