Q&A: Detroit's bankruptcy plan is set but a flight to solvency hasn't left the runway yet

DETROIT – The city of Detroit said Monday it needs more time to wrap up critical deals with creditors before it will be ready to officially emerge from bankruptcy.

A judge had signed off on Detroit’s reorganization plan on Nov. 7, but didn’t specify a formal end date. Detroit now says it could be ready by Dec. 8, and Judge Steven Rhodes set another hearing for Dec. 15.

Q: Why is an exit date important?

A: Detroit is poised to borrow $275 million from Barclays Capital, much of it to pay off other obligations and to start improving city services, when it is released from Chapter 9. The debt eventually will be turned into bonds carrying an interest rate of 4.75 per cent or less and will be backed by income tax revenue. The final documents are being wrapped up, attorney Heather Lennox said Monday.

“The city is more credit-worthy than it would have been 18, 19 months ago because the balance sheet is cleaned up for the first time in a great while,” said Doug Bernstein, a bankruptcy expert.

Indeed, emergency manager Kevyn Orr compared the city’s past borrowing to getting fleeced at a “payday loan store.” Detroit is erasing $7 billion of debt in bankruptcy.

Q: Why wasn’t Detroit immediately released from bankruptcy when the plan was approved?

A: John Pottow, a professor at the University of Michigan law school, compared it to buying a house. A buyer and seller reach an agreement but it still takes days or weeks to close the deal. In this case, it involves a series of compromises with creditors and other parties.

“The city has won,” he said. “But you don’t get the house until you have the closing.”

Rhodes will have no patience for long pauses. On Nov. 12, he said Detroit can’t afford delays in regaining solvency.

Q: Pension cuts of up to 4.5 per cent are a big part of the plan. How soon will they take effect?

A: Probably by March 1, attorney Ron King of the city’s main pension fund said Monday.

Roughly 12,000 non-public safety retirees are also losing annual cost-of-living payments. Public meetings are planned for December to explain the changes. Retirees at risk of falling below the poverty line can apply for aid from a new fund. The only hit to 9,000 police and fire retirees is a reduction in the cost-of-living payment.

The cuts would have been worse if not for an $816 million bailout arranged by the state, foundations and the Detroit Institute of Arts, with help from Detroit’s chief federal judge, Gerald Rosen, and other mediators.

Q: Are there any notable threads still hanging?

A: Mayor Mike Duggan, who took office while Detroit was going through bankruptcy, has been irritated by some of the more than $100 million in legal fees and consultant contracts charged to the city. The judge ordered mediation for Dec. 3-4. Rhodes said bankruptcy law requires him to decide if fees are reasonable.

Pottow said the fees are “huge” but relatively small when compared to the size of Detroit’s multibillion-dollar case. Even if the judge disallowed 10 per cent, he said, any leftover money wouldn’t affect deals that have been struck between the city and its many creditors.

“Trivial,” the professor said.


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