In July 2013, Detroit officially became the largest city in U.S. history to file for Chapter 9 bankruptcy. With the final arguments being presented Monday, the Daily has summarized some of its major topics and where they currently stand.

Pensions of City Workers

Last year, the General Retirement System and the Detroit Police and Fire Retirement System argued that Detroit was not eligible for bankruptcy because any bankruptcy case would result in a cut to pensions, which are protected by the Michigan Constitution. U.S. Bankruptcy Judge Steven Rhodes, who is overseeing Detroit’s bankruptcy, ruled that pensions were no different than other contracts and that, not withstanding of the Michigan Constitution, the city was eligible to file for chapter nine bankruptcy. The Federal Bankruptcy Code allows a city to file for Chapter 9 bankruptcy if it followed correct procedures.

After Detroit filed for bankruptcy, the city negotiated the cuts to pensions. With the grand bargain, a public-private agreement made between the state, Detroit Institute of Art donors and others, funneling more money toward pensioners and reducing cuts, the city’s retirees voted to approve the plan. The Detroit Free Press reported the cost-of-living adjustment would be eliminated for civilian pensioners, who also accepted 4.5-percent cuts to their monthly checks. Police and fire pensioners did not accept any cuts to their monthly checks, but the COLA was reduced from 2.25 percent to 1 percent.

Detroit Institute of Arts

One of Detroit’s biggest assets is the DIA, which has been operated as an independent nonprofit since 1998 and without municipal support for a number of years. The value of the DIA’s works of art and other city assets were appraised in response to creditors who wanted to know their value.

After Emergency Manager Kevyn Orr ordered the appraisal of the DIA collection in August 2013, advocates for the DIA went to Michigan Attorney General Bill Schuette, who determined that the art is held in “public trust” and cannot be sold to satisfy creditors. Orr said he had no particular plan to sell the art and only needed to know its value as a part of the restructuring process.

The DIA became the centerpiece of the negotiations spearheaded by U.S. District Judge Gerald Rosen that resulted in the grand bargain. Under this agreement, 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. Under this plan, the DIA would be removed from city ownership and placed outside the reach of creditors.

However, creditors argued that failure to sell the art unfairly discriminated against them compared to the pensioners. This issue has been resolved, with major creditors signed on to deals in which they are compensated in other ways.

The Grand Bargain

The “grand bargain” was necessary to get the unions and retirees on board with the city’s bankruptcy plan. Without it, dividends paid out to unsecured creditors would have been unattractively low to retirees. Judge Steven Rhodes, a bankruptcy judge for Michigan’s Eastern District Court, indicated early in the case that he might not confirm a plan with direct draconian cuts to pensions.

Creditors

The city of Detroit owes billions of dollars to creditors. Part of the challenge of the plan of adjustment was organizing these creditors into classes, specifying how the city is intends to treat each class and coming to an agreement about what they are getting from the city, such as cash, bonds or nothing at all.

Major creditors such as Syncora and Financial Guaranty Insurance Co. are no longer opposed to their plans with the city. Both Syncora and FGIC settled for a combination of cash from bonds and development rights. Syncora settled for $25 million along with credits to purchase Detroit real estate while FGIC settled for $74 million cash from bonds, also with real estate credits, the Free Press reported. Syncora also received parking facilities and an extension of their operating lease on the Detroit-Windsor tunnel while FGIC received the site of Joe Louis Arena. Some small creditors have still not come up with agreements, but it is unlikely that they will be able to stop the confirmation of Detroit’s plan.

Bonds

In 2005, then-Mayor Kwame Kilpatrick had the city issue “certificates of participation” as a mechanism for funding pensions and getting around the debt limit, which the city had reached. Syncora and FGIC insured these COPs.

After the city argued that the COPs were illegal and proposed giving a low recovery rate to the investors who bought into them, FGIC filed a lawsuit against Detroit’s proposal to exit bankruptcy, saying it was illegal discrimination.

There are a variety of bond types, but every major class has signed off on what they are set to receive. Some of them are receiving new bonds in the same amount while others are getting a “haircut” depending on which class they are in.

Blight Removal

One of the requirements for confirmation of a plan of adjustment is that it be feasible. Feasibility is generally interpreted to mean the plan will work to solve the financial problems of the debtor. Detroit is saying it has to use money that previously went to pensions and creditors to reinvest in the city in various ways, such as blight removal. The city also wants to make other changes to increase the quality of life in Detroit, such as improving lighting and the city’s police and fire departments.

Part of the question of feasibility is whether Detroit has enough money to do what it needs in order to solve these problems and make improvements to attract people to live in Detroit and pay taxes.

Water Shutoffs

Amidst the issues of water shutoffs across the city at the end of the summer, many citizens and others called for Rhodes to issue a stop to the shutoffs, calling them an infringement of human rights. However, Rhodes ruled in September that he has no power over water shutoffs and cannot force the city to provide water.

The water authority is shutting off water to homes and businesses because of outstanding accounts on those locations, which is what other utilities also do. Detroit’s bankruptcy did not cause these shutoffs.

Laura Bartell, law professor at Wayne State University, and University Law Prof. John Pottow served as references for this article.

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