Eyes on Detroit

As Michigan news junkies closely follow the news surrounding Detroit, and whether or not the city will enter into a consent agreement with the state [Update: it did], or whether Gov. Rick Snyder will appoint an emergency financial manager (EFM), one word that has come up from time to time is: bankruptcy.

That’s a big can of worms. What would happen if the city went into Chapter 9 bankruptcy?

Well, the thing is, it can’t, said Butzel Long attorney Max Newman.

“In order to file Chapter 9 the city would need permission from the state. And there’s no basis in law for the state to give that permission,” Newman said. “The state would have to pass legislation to allow it.”

But that doesn’t mean that he would rule it out. That’s because, he said, if the Michigan Supreme Court finds the state’s EFM law to be unconstitutional, one way or the other, legislators are going to have to drop everything (probably interrupting their summer break) and quickly rework the EFM law, or draft legislation to allow the state to authorize the city’s bankruptcy.

There wouldn’t be much difference between the two, Newman said. Neither option brings in any money to the financially troubled city.

“The biggest difference would be that the emergency financial manager statute gives the manager the power to open collective bargaining agreements without court supervision. In a Chapter 9, court supervision would be required,” he said. “As long as the city has a revenue stream, either one could be useful.”

That’s one of the reasons Detroit can’t do what other communities have done when they’ve entered Chapter 9 — cut deeply into even essential services, namely the police department. One example is the city of Vallejo, Calif., which laid off nearly half its police department while it worked through a bankruptcy. But if Detroit does that, Newman noted that it would be mighty difficult, if not impossible, to attract businesses and residents that are sorely needed to build up the city’s tax base.

Whether by emergency manager, consent agreement or bankruptcy, the city is going to have to get its biggest creditors — the unions and bond holders — to the table.

“They’re going to have to restructure their bond debts and union contracts no matter what,” Newman said. “If they can’t do that, the problem is way beyond any emergency financial manager or Chapter 9 issues.”

In any event, eyes are on the city of Detroit because there has been nothing like it before. The wealthy county of Orange County, Calif., went bankrupt, but that was different, Newman said, because it was the result of malfeasance on the part of the treasurer. The revenue stream necessary for working through the bankruptcy was solid. And the bankruptcy in Harrisburg, Pa., is different because, although the city is much like Detroit in that its troubles stemmed from a decline in manufacturing, its nowhere near the size of Michigan’s largest city.

“There has never been anything exactly like this. In the history of Chapter 9, there hasn’t been anything like Detroit,” Newman said.

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