DETROIT – It was an exceptionally busy day for Detroit's bankruptcy case, Judge Steven Rhodes, city pensioners, the Detroit Institute of Arts, Metro Detroit art patrons, Gov. Rick Snyder and the Michigan legislature.
As you might have read, predicted here last July in this blog, Lansing is weighing in with a lot of cash to help the City of Detroit's bankruptcy. "Lot" is a relative term, something we will discuss later on.
For now, you'll notice the money, some $350 million long withheld, comes AFTER the bankruptcy filing. This allowed the governor to sell to the legislature some form of financial assistance to the city but not suffer massive losses in the bankruptcy process. It can go to rebuilding, not end up lost in the murky abyss. The assistance also comes in January of an election year, enabling the governor to have pushback on the campaign train against those who have stood on line complaining bitterly that the governor's lack of financial support to the city, leaving Detroit in the lurch financially. They now have much less to protest.
Judge Rhodes today ruled creditors seeking to sell DIA art, believing Christie's appraisal came in too low by some two thirds, cannot have a second valuation. The judge said he did not have the authority to do so, is not certain the art is even a salable asset and thinks the State Attorney General's opinion that DIA art is in the public trust and therefore not an asset to be liquidated in a bankruptcy has merit. He also intimated part of the city's restructuring will require having an asset such as the DIA in place. He also noted that even if he had the authority to order the second appraisal he would not have done so. Case closed.
Judge Rhodes was less certain about what to do with an injunction retiree attorneys want trying to prevent the city's plan to reduce retiree lifetime healthcare benefits by nearly 90 percent. He held off ruling until next week but he told the attorneys involved, both city and retiree, that it's time to stop the litigation and get down to business. He told them to start negotiating a settlement tomorrow morning at 9 a.m.
This admonition came along with a much broader one. Judge Rhodes reminded everyone that his March 1 deadline for a Detroit plan of adjustment is 37 days away. He believes this kind of bickering does not lead to a solid plan of adjustment. He wants deals, good deals and he wants them fast. He also gave his requirements for the city's plan of adjustment. He wants a real one there as well! He intends to require a feasible plan.
He was quite serious and stern in saying so: "Now is not the time for defiant swagger or dismissive take-it-or-leave-it table slamming. This is nothing but a one-way ticket to Chapter 18. That is courtroom jargon for a second Chapter 9. The court will only approve a plan that is feasible. The court will not approve a plan just to get a plan done. This is an enormous responsibility the 37 days left should be well used!"
There can be no mistaking what he is after. He will require the city show, through testimony, its plan will work and that it will NOT be the business as usual that put it where it is now. He does not want to have to revisit the problem ever again. Frankly, no one else does either. This is where the real pain comes in.
Speaking of "real," let's get real about the money the state is sending Detroit's way. For all of the certitude the Judge is bringing to getting a plan of adjustment, there are a lot of questions remaining about what happened today overall. The State putting the wheels in motion for more money that they in Lansing say would back pensions and DIA art is largely spin. The bankruptcy process is very clear; creditors are to be treated equally. There are no "special classes of creditors." So by providing more money to the bankruptcy process, one is left wondering where that money will really go.Likely in the one small pot Kevyn Orr will ladle from to pay creditors pennies on the dollar.
Judge Rhodes has expressed this point repeatedly, and even did so today. He noted the adjustment plan will not allow for differing remedies for specific groups like retirees, their pensions or healthcare. The fact that the money may flow from Lansing to Detroit is a welcome one for those involved. The DIA put out a press release essentially thanking the governor and the legislature for its assistance, and Kevyn Orr's office did the same as you would expect.
But let's do some simple math here: The healthcare liability is roughly $6 billion; the pension liability is short by some $2 billion. A $7 billion liability or something just shy of 50 percent of the city's $18 billion debt is being discussed here. Three hundred fifty million dollars is a mere 2 percent of the total bill and 5 percent of the pension and healthcare liability. Three hundred fifty million dollars is a lot of money to you and me considering it's our tax dollars at work. But in the Detroit bankruptcy scenario it's really just teardrops in the ocean.
While there is considerable desire to fix Detroit, make its pensioners whole, provide the promised healthcare and save the art, it is not possible in the context of getting a high percentage on the dollar. So, in bankruptcy it is all about the negotiated and exceptionally painful "haircuts" creditors inevitably take. The State is doing apparently what it can, but the problem is so much larger than it can solve.
The Judge wants a plan that prevents that dreaded Chapter 18 and Kevyn Orr knows a feasible plan is his only option. But there is so little money left and the problems so large the pain is still going to be vast no matter how hard he and the governor or Judge Rhodes try.
There is room for some creativity, yet for all of today's activity, the daunting challenge of municipal bankruptcy continues to loom large. There is no easy fix, and there is no easy way out for the retirees, the creditors or the city itself. We will find out in the next six weeks just how painful it will become.