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Detroit bankruptcy case goes to court

Photo: AFP

A court case began Wednesday to determine if Detroit will become the biggest ever US city to be declared bankrupt. City officials say the move will help Detroit solve its crippling debt problems, but unions and pension funds are strongly opposed.


An extraordinary court case that could decide the future of one of America’s most iconic cities began on Wednesday as a trial set to determine whether Detroit will be allowed to file for bankruptcy got underway.

Detroit, once a symbol of American industrial might and the home of a thriving automotive industry, filed for bankruptcy protection in July this year, becoming the biggest ever US city to do so.

At stake is the chance to restructure and reduce Detroit’s estimated $18 million in long-term debts that administrators say is crippling the city - though not without the cost of cuts to workers’ pensions and health benefits.

‘Mountain of evidence’ shows Detroit is insolvent

In order to benefit from bankruptcy protection city managers will need to convince Judge Steven Rhodes that the city is insolvent.

In Wednesday’s opening statements, the lead attorney for the city, Bruce Bennett, said consultants retained by the city will present a “mountain of evidence” during the trial that will show just that.

“This is one of those cases where the data speaks very clearly and persuasively on its own. It needs no gloss,” he said.

Indeed, there is plenty of evidence to attest to Detroit’s immense financial difficulties. At the last count, the city was home to some 78,000 abandoned buildings, just 40 percent of the street lights work and the number of public parks has dropped from over 300 to about 60 in recent years.

As jobs have dried up, an exodus of residents has seen the city’s population shrink to less than 700,000, from a peak of 1.8 million in 1950, and only 53 percent of property owners paid their 2011 property taxes.

Unions stand opposed

But as well as proving that Detroit is insolvent, the city’s authorities will also need to show that they followed a number of key steps before filing for bankruptcy, such as holding “good-faith” negotiations with creditors, which include unions and pension funds.

However, the unions claim that Kevyn Orr, a bankruptcy expert hired by Michigan Governor Rick Snyder in March to halt Detroit’s fiscal free-fall, never gave them an opportunity to negotiate on proposed cuts in employee pensions and healthcare.

Representing the city's pension funds, Jennifer Green, of law firm Clark Hill, said in court on Wednesday that the city had been fully intent on filing for bankruptcy long before talks were held with unions in July.

She said emails and documents from city and state officials showed the city had planned to take the bankruptcy route weeks ahead of filing its claim on July 19.

Meanwhile, lawyer Sharon Levine, representing the American Federation of State, County and Municipal Employees, argued that the city spent months “mapping out its path” to bankruptcy, rather than considering compromises that could keep Detroit solvent.

Unions also claim Orr failed to look at other ways to keep the city solvent, including selling the water and sewer system and even the city's art collection.

The unions fear that bankruptcy will mean a considerable loss to their members in slashed benefits, particularly their pension funds, to whom the city owes an estimated $9 billion.

Around 300 protestors, mostly union members, gathered outside the courthouse on Wednesday to voice their opposition to the bankruptcy filing, many directing their anger towards Orr.

‘Death spiral’

The court hearing is expected to last between five to 10 days, with Orr and Governor Snyder among those set to testify.

Orr’s team has argued that should Judge Rhodes rule against them, the consequences for Detroit would be dire.

They estimate that, without bankruptcy protection, an unsustainable 65 percent of Detroit's annual revenue would go directly to repaying debts by 2017.

“Without this, the city's death spiral ... will continue,” Orr said when Detroit first filed for bankruptcy in July.

If Judge Rhodes rules that Detroit is eligible for bankruptcy protection, the debate is likely to then turn to how exactly the city’s debt should be restructured.

While this will almost certainly see workers and retirees losing out, one group set to benefit will be the hedge funds who have reportedly bought up hundreds of millions of dollars worth of the city’s distressed debt at low prices.

By using their leverage during the restructuring process to enforce a higher rate of repayment on the debt they own, these so-called “vulture funds” could stand to turn a quick profit from Detroit’s bankruptcy.

The trial is also being watched closely by cities across the US dealing with financial difficulties of their own, who will be hoping the case will help clarify what criteria large municipalities need to meet to make a successful bankruptcy claim.

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