Detroit on Monday wrapped up its historic bankruptcy case, which began with contentious opposition from creditors and ended with eleventh-hour deals enabling the city to shed $7 billion of its $18 billion of debt and obligations.
In closing arguments, attorneys for the city and others worked to convince U.S. Bankruptcy Judge Steven Rhodes that he should permit Detroit to emerge from bankruptcy before Thanksgiving.
They largely presented a view of harmony, emphasizing the plan's string of bilateral settlements had brought the biggest-ever municipal bankruptcy to conclusion at record speed, mostly through the groundbreaking "Grand Bargain." Under the deal, foundations, the state and the Detroit Institute of Arts will pitch in funds to ease pension cuts and avoid selling the city's art collection.
They also said Detroit's abundance of abandoned property provided the broke city with a unique way to compensate creditors.
The judge, who began the confirmation hearing on Sept. 2, said he will rule Nov. 7 on whether the 1,165-page plan is fair to creditors and feasible for the city to implement.
The July 2013 bankruptcy filing was the city's only avenue for addressing its fiscal woes, which included a big public pension burden, said Bruce Bennett, an attorney at law firm Jones Day who presented Detroit's closing arguments. About 150 court-ordered mediation sessions helped bridge differences with creditors, he added.
"This plan is very broadly consensual at this point and the city has settled with all the objectors and all the major economic players in the city of Detroit," Bennett said.
The city's biggest financial risks would be to misspend $1.7 billion targeted for restructuring and reinvestment initiatives, ignore investments in capital projects and information technology, and allow public pension funding to slide once again, Bennett said, answering questions from Rhodes.
"The labor organizations have to put pension funding high on their bargaining list," Bennett said.
Underfunding of the city's two retirement systems led Detroit to issue more than $1.4 billion of pension debt in 2005 and 2006 that became a lightning rod for contention in the bankruptcy case.
When the hearing ended, Kevyn Orr, Detroit's state-appointed emergency manager, praised the plan for its "broad-brush consensus," noting he feared the case "would be volatile until the end."
The case started off contentiously but wrapped up with the two largest holdout creditors, bond insurers Syncora Guarantee Inc and Financial Guaranty Insurance Co, settling in recent weeks. Earlier on Monday, an attorney for holders of much of the pension debt announced they signed off on a deal.
Bennett defended bankruptcy fees to the judge, who suggested Detroit turn to mediation or even litigation to ensure the costs are reasonable.
"Are the city's professional fees going to be high in a case like this? Of course they are. Because they are high does that mean they are unreasonable? Of course they are not," Bennett said.
As of Oct. 3, consultants had billed Detroit almost $137.2 million, with the largest tab from Bennett's firm, Jones Day, for $52.3 million, according to data from Orr's office.
The bond insurers' settlements included options on city property, which Bennett said allows creditors to invest in urban renewal while saving Detroit money.
The "Grand Bargain" was instrumental in winning support from the city's retirees. In his closing statement, Bennett said the city could not be forced to sell assets like art to enhance creditor recoveries - a point disputed by Syncora and FGIC before they settled. He also said Detroit was literally taxed out.
"Detroit's taxes are higher than many cities in the state of the Michigan and our services are not anywhere close to the best in Michigan," he said.
