Rod Meloni: On Chapter 9's doorstep

Detroit on brink of filing for municipal bankruptcy

Author: Rod Meloni, Local 4 Business Editor, @RodMeloni
Published On: Jul 16 2013 06:29:44 PM EDT   Updated On: Jul 16 2013 07:16:49 PM EDT
Rod Meloni - more 4 your money
DETROIT -

We appear to be in the latter stages of the waiting. By all accounts the City of Detroit is ready to file for Chapter 9 Municipal Bankruptcy.

It might come tomorrow, it might be Thursday or even Friday. We do not have a specific time nailed down just yet. But by all indications, by all public statements by the Governor in the past 36 hours, the talking stage is about to end and the action phase is about to begin.

Watch: Is EM Orr negotiating Detroit’s debt in good faith?

This is an exceptionally unhappy moment that has been roughly half a century in the making. While it is sad, it also must happen. For all of the wrangling that’s been the hallmark of the consent agreement process, the emergency manager process; of all the gum flapping about whether the city is insolvent or whether it is any one person or entity’s fault, the fact of the matter is this day was inevitable.

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Detroit was built on the old General Motors business model; defined benefit pensions, lifetime healthcare, featherbedded union jobs kept in place by managers afraid of strikes. If General Motors [and yes Chrysler] ended up in federally funded “quick rinse” bankruptcy under those circumstances, why would anyone believe Detroit would escape the same fate? The only difference here is there are no federal funds forthcoming.

There was considerable caterwauling about how the State of Michigan pushed Detroit into bankruptcy and it could easily have prevented it simply by pulling up a Brinks truck to the city/county building and dropping off bailout cash. That’s how it would have worked in the “old days”. That bailout likely would have come without any requirement of restructuring in a fashion that would prevent the need of another Brinks truck. There isn’t enough money in the entire state to staunch the city’s red ink which currently approaches $18 Billion. And yet I predict the State of Michigan will provide restructuring funds once the Chapter 9 is affirmed by a bankruptcy judge.

You may wonder where that idea comes from. Well, let’s think back a few months to a news conference held by Mayor Bing and Kevyn Orr in the early days of his tenure. The Kresge Foundation and other business leaders chipped in big bucks to buy ambulances and police cars for the City of Detroit. These vehicles will be leased to the City and maintained by a trust that will only put City of Detroit first responders in them. The City itself will have no part in the maintenance, care or staffing of the entities that will service these vehicles. Though unspoken at the time, this spoke volumes about how entities bound by fiscal responsibility viewed the City and its business model. They wanted nothing to do with it. Yes, they wanted to offer help but more seriously wanted to ensure the city’s propensity to mismanage money was allowed nowhere near their equipment. The State of Michigan will likely adopt a similar position.

Once a Bankruptcy Judge has the case and decides the City qualifies for bankruptcy the State will likely become more interested in loosening the purse strings and provide some of the greatly needed cash the City of Detroit will need to emerge and become a well running, fiscally sound municipality once again. This might take a couple of years, but the Governor has told me repeatedly that at some point the State will likely step in and assist the city financially when conditions are right.

So here we stand waiting for the other shoe to drop, the when, not if of the largest municipal bankruptcy in American history. Detroit will be the national headline story when the paperwork gets filed. It’s an important story for this nation [saved by the arsenal of Democracy not so long ago] to watch and learn from. It is also a renewal that’s needed to allow Detroit to rise again from the ashes just as GM and Chrysler have done.