Four unanswered questions about the Detroit bankruptcy
Capably fulfilling journalism’s obligation to be “the first draft of history,” The Detroit Free Press yesterday published an 8,000-word account of how the city’s bankruptcy was resolved. This “backstory” bookends “How Detroit went Broke“ (6,000 words; September 2013),” in which Free Press reporters explained the decades-long tailspin into insolvency.
Credit to the Free Press for its aggressive reporting, but some important questions have yet to be answered about how the bankruptcy process unfolded.
- Who else did Gov. Rick Snyder consider appointing Emergency Manager other than Kevyn Orr? According to the Free Press, “[t]he governor’s first two choices turned down the job.” Snyder was under no compulsion to appoint a bankruptcy lawyer. When Orr was appointed in March 2013, about three months before the city’s official filing, bankruptcy was not supposed to be a foregone conclusion. (Recall that, in ruling Detroit eligible for Ch. 9 in December 2013, Judge Steven Rhodes dinged the city for failing to negotiate in good faith with creditors prior to filing for bankruptcy.) Judge Rhodes’ independent expert, Martha Kopacz, assessed the city’s municipal reform efforts to be underwhelming thus far. She suggested that the bankruptcy process had been too exclusively focused on Detroit’s balance sheet. But maybe that was inevitable, given Orr’s background. Did either of Snyder’s first two picks individuals have experience in operational turnarounds in either the public or private sector, or were they other bankruptcy attorneys?
- What game were city attorneys playing with the Detroit Institute of Arts? Early on in the restructuring, before the grand bargain, they reportedly informed the DIA that “[s]elling art might be inevitable.” But municipal bankruptcy law is deliberately structured to protect cities from having to liquidate public assets. This is not an arcane legal provision, but one of Ch. 9’s most characteristic features. Judge Rhodes, in his oral opinion confirming the city’s plan of adjustment, expressed deep skepticism that the city could have succeeded in selling the art even had it tried. (“…in any potential litigation concerning the City’s right to sell the DIA art, or concerning the creditors’ right to access the art to satisfy its claims, the [anti-sale] position of the Attorney General and the DIA almost certainly would prevail.”) The city itself claimed to be equally skeptical, when fending off arguments by its Wall Street creditors that a plan that protected the art was unfair. But if there was no legal basis for believing that the art was in danger, how did Orr and his team get away with threatening the DIA into believing that it was?
- How interesting did the mediation negotiations get? Any other unusual deals/roads not pursued? Gag-ordered mediation intensifies the anti-democratic character of municipal bankruptcy. The Free Press account abundantly confirms an objection that then-holdout creditor Syncora once leveled at chief mediator Judge Gerald Rosen, that he was up to far more than just “mediating.” Rosen’s influence over the plan, and thereby Detroit’s future, may have even surpassed that of Orr, the duly appointed authority. Perhaps because of the breadth of the mediation order, it’s hard to identify many specific contributions that the “charismatic” Orr made that went into the eventual bankruptcy plan, but Rosen dominated.
- “Republicans and others were finally sold on the idea that the grand bargain would protect state government from being sued over city pension cuts or having to increase spending on welfare and health care programs to save impoverished retirees.” Emphasis added. Were Michigan legislators seriously scared into bailing out Detroit (contributing $200 million to the grand bargain) because they were afraid of being sued over decisions Detroit may have made to cut employee pensions? Should retirees have gone after the state, according to Judge Rhodes, “[t]he claim…would not be a frivolous claim.” He raises the possibility that Article IX, Section 24, Michigan’s famous constitutional pension protection, provides retirees with state-sponsored insurance against pension cuts imposed in a municipal bankruptcy. Though there will never be another Detroit-style grand bargain, this could be precedent-setting. In future municipal bankruptcies, it is conceivable that a powerful union could use the threat of openended litigation to compel state government to backstop pension cuts just as Michigan ended up doing for Detroit. That would imply that, at least in states that have constitutional pension protections, municipal pension liabilities are state liabilities.