Detroit files bankruptcy amid 'dire and untenable financial situation'

By Caroline Salls

Pittsburgh, July 18 - The City of Detroit made a Chapter 9 bankruptcy filing Thursday in the U.S. Bankruptcy Court for the Eastern District of Michigan.

According to court documents, emergency manager Kevyn D. Orr sought approval on Tuesday from Michigan governor Richard D. Snyder to make the Chapter 9 filing on behalf of the city. Snyder approved the request on Thursday.

"The city's financial emergency cannot be satisfactorily rectified in a reasonable period of time absent this filing," Snyder said in a letter granting his consent for the filing.

Snyder said the city cannot currently meet its basic obligations to its citizens or its creditors. The governor said Detroit has more than $18 billion in accrued obligations and its tax rates are at their legal limits.

"Detroit simply cannot raise enough revenue to meet its current obligations, and that is a situation that is only projected to get worse absent a bankruptcy filing," Snyder said.

Detroit listed more than $1 billion in both assets and debt.

'Breathing spell'

According to a news release, the automatic stay provisions of the Bankruptcy Code, gives Detroit "a unique opportunity and a breathing spell during which the city can focus on restructuring and continue the process of sorely needed reinvestment."

The city said the stay also allows it to continue to seek restructuring agreements with its creditor groups and, if necessary, to bind non-consenting creditors to a debt adjustment plan.

Detroit said it will continue to pay its employees and maintain contracts with vendors that provide the city with essential goods and services.

"The goal remains to resolve Detroit's dire and untenable financial situation and make the city a safe and attractive place in which to live, work, invest and do business," the release said.

"We worked tirelessly and in good faith with our creditor groups to explore an out-of-court restructuring, but it has become clear that the city cannot rectify its financial emergency in a timely manner without the commencement of a Chapter 9 case," Orr said in the release.

"Through this process, Detroit will finally be able to get its house in order and regain its place among America's great and vibrant cities."

Background

On June 14, Orr presented a comprehensive restructuring proposal to the city's creditors.

After more than a month of negotiations, Detroit said it became clear that out-of-court agreements could not be reached in a timely manner, or at all, with some groups of creditors, including some retiree and bondholder groups.

Even where it made progress in negotiating agreements with some financial counterparties, the city said disagreements erupted, and it was forced to begin a lawsuit just to maintain access to its casino tax revenues.

"With cash dwindling, the city does not have the time or resources to wait longer to pursue its financial future through the Chapter 9 process," the release said.

"Even without fixing the city's core problems, the city simply does not have, and is not projected to have, the cash to meet its current and accrued obligations. Nor does the city have the ability to access the capital markets or raise revenue through additional taxes.

"The city cannot borrow its way out of this problem as it has tried to do in the past."

Retirement systems' action

The General Retirement System and the Police and Fire Retirement System of the City of Detroit announced Thursday that they filed a civil action against Detroit emergency manager Kevyn Orr and Governor Rick Snyder in the Ingham County Circuit Court, Lansing, Mich., in an effort to block a city bankruptcy filing.

In the suit, the retirement systems challenged the authority of the emergency manager and governor to approve bankruptcy proceedings for Detroit "that would in any way impair the accrued financial benefits of the retirement systems' plan participants and beneficiaries."

By allowing any impairment, the lawsuit claims that the emergency manager and the governor would be in violation of their respective oaths of office, which require them to support and uphold the Michigan Constitution.

Restructuring proposal

According to the city's release, the restructuring proposal the emergency manager and his team presented to creditors on June 14 is the best plan to resolve Detroit's financial problems and put it on the path of fiscal sustainability for the future.

The city said the proposal will ensure delivery of essential services, devote resources for much-needed reinvestment in the city and its infrastructure, maximize recoveries for creditors consistent with their legal priorities and the city's financial wherewithal and overall restructuring needs and establish affordable pension and health insurance benefits for the city's 30,000 current and retired employees.

Miller Buckfire & Co., Jones Day, Ernst & Young LLP and Conway MacKenzie Inc. are advising the City of Detroit on its restructuring.

Detroit's Chapter 9 case number is 13-53846.

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