More than a year after the city of Detroit became the largest municipality to declare Chapter 9 bankruptcy in U.S. history, the decision regarding the city’s proposed plan of adjustment and the beginnings of a new financial life is now a reality.
In the closing arguments of Detroit’s bankruptcy trial, the city’s legal representation held the floor most of the day, asking to confirm the plan of adjustment by reiterating the status of deals with creditors, the fate of the Detroit Institute of Art’s artworks and the pensions of city workers. The next step will be for U.S. Bankruptcy Judge Steven Rhodes to decide whether Detroit’s plan of adjustment is feasible. This decision will come on Friday, Nov. 7 at 2 p.m.
Bruce Bennett, the attorney from law firm Jones Day who is representing the city, reminded those present to not lose sight of how much has been accomplished in the 15 months and 8 days since Detroit filed for bankruptcy last July — a quick proceeding compared to other municipality bankruptcy cases. The city has come up with a broadly consensual plan — which includes agreement from all parties — that would discharge $7 billion in claims and reinvest $1.7 billion in the city.
Bennett lauded the city’s overall efficiency in compiling a plan, calling it “remarkable” that a thorough plan was created in a timeframe that was “not widely expected when the case began.” He added that the timing also helps to mitigate the negative effects that an ongoing bankruptcy has on a city.
“It is for your honor to take the next big step and confirm this plan,” Bennett said to Rhodes, adding that he’d like to see a ruling from the judge before Thanksgiving.
Bennett gave thorough explanations of each of the more contentious topics within the plan of adjustment.
He spent a good portion of his time Monday discussing the feasibility of the plan, highlighting the two major qualifications: that the city meets its financial obligations and be able to recover and provide adequate city services. Bennett walked through the previous evidence presented to the court again, noting the assessments made by Mayor Mike Duggan and the city offices that determined that the city is prepared to provide services.
Rhodes questioned Bennett about possible risks that could threaten the feasibility of the plan, including unknown variables such as as a new mayor and his administration. Bennett noted such variables are difficult to predict. He said the worst thing that could happen “is if the $1.7 billion is misused or perceived to be misused.”
Bennett reviewed the viability of increasing property taxes on Detroiters to help repay creditors. He used a “department store analogy” to explain why the city believes raising taxes would hurt Detroit. He said when people decide where to live, they will compare the taxes and services of cities. Bennett argued that higher taxes could give individuals incentive to leave Detroit, which would further decrease the city’s tax base and, in turn, level of services. Bennett said the more central question is whether or not taxes should be reduced.
Rhodes also specifically questioned Bennett about the topic of long-term pension recovery. The two discussed the projections for the plan, noting the possibility that pensions could fully recover eventually but acknowledging the complicated math and many variables that can affect the plan’s outcome.
While Rhodes already made the decision that the Michigan Constitution’s stated protection for pensions does not carry more weight than any other contract agreement within the U.S. Bankruptcy Court, he returned to the topic Monday in his line of questions for of Bennett. One individual objector pressed the issue, addressing some of the minor details of the Michigan Constitution’s requirements for each retiree.
In his explanation of the DIA settlement, Bennett addressed three major questions: whether the city is able to sell the DIA’s assets, whether liquidated assets can be used to pay creditors and whether the city should be compelled to sell assets at all.
Bennett said due to restrictions on the DIA’s art as part of a charitable trust, among other restrictions, it cannot be sold. He added that there is no legal obligation for the city to liquidate all its assets to pay off obligations. He also said the DIA serves as a “nationally prominent cultural institution,” maintaining it could also potentially draw people back to the city. Bennett argued the $466 million pledged through the grand bargain is the best possible outcome for the DIA.
Under the grand bargain, the DIA would no longer be owned by the city. Funding from the DIA, the state as well as nonprofit and for-profit organizations would prevent the sale of DIA artwork and reduce cuts to pensions. Though creditors argued failure to sell the art unfairly discriminated against them as compared to pensioners — initially believing more money could have been generated by selling the art — major creditors have since signed on to deals in which they are compensated in other ways.
Bennett expressed confidence in Rhodes’ expected decision regarding the DIA, saying he intends to return to Detroit after the bankruptcy as a tourist.
“I’m not in a rush; I understand the DIA will be here for a while,” he said.
Other speakers Monday were Steve Howell, special assistant attorney general for the state of Michigan, representatives from various city pension organizations and three dissenters.
Howell said the plan of adjustment is in the best interest of creditors. He said it is a chance for the city to move forward and grow, and called for this “unprecedented opportunity” to be approved by Rhodes.