Detroit was the largest city in the US to ever file for bankruptcy, making this past week a rather momentous occasion in Michigan’s financial history. After a remarkably quick and efficient litigation process, which bankruptcy experts fully believed would take months or maybe even years, the city of Detroit is finally on it’s way to a financially viable future.
Judge Steven W. Rhodes of the United States Bankruptcy Court approved the city’s exit strategy, declaring it fair and feasible. The plan, which will allow Detroit to work towards freeing itself from crippling financial ruin, allows the city to cut more than $7 billion in unsecured liabilities, and also to reinvest $1.4 billion over the next decade in public services and blight removal around Detroit.
But, while the court’s decision is certainly cause for celebration, the reality is that the hard work has only just begun. “We are starting this journey, not ending it.” says James E. Spiotto, a bankruptcy attorney who specializes in municipal bankruptcy. “Bankruptcy is just debt adjustment, but that’s not a solution. What you really need is the recovery plan. We can’t lose sight of that.”
So what is this recovery plan that took the city months of arbitration and conciliation talks behind closed doors to achieve? Well, it’s very complex, and leaves many of the city’s pensioners taking cuts on their monthly checks, along with higher healthcare costs and an end to overall cost-of-living increases.
In addition, Detroit’s financial creditors are taking substantial losses. Companies like bond insurer Syncora Guarantee, and Financial Guaranty Insurance Company, who will only receive 14 cents to the dollar on their debts. However, the city does intend to offer the possibility of financial gains made on real estate and other infrastructure projects planned for prime locations within the city, which will help to offset the low recovery rates.
But another aspect of the city’s exit strategy, which Judge Rhodes described as miraculous, involves the Detroit Institute of Arts’ ‘grand bargain’. This astounding commitment to the city of Detroit will raise $100 million, 80% of which the DIA has already accumulated in pledges from local Michigan companies like Penske Corporation, DTE Energy and Quicken Loans.
This ‘grand bargain’ provides a significant investment in the city’s pensioners, along with providing the museum’s art collection with new ownership that will protect it from the possibility of future bankruptcy.
In the words of Judge Rhodes, “What happened in Detroit must never happen again.”