Historic ruling: Judge set to decide Detroit bankruptcy

DETROIT — For Detroit, bankruptcy is near a remarkable conclusion.

Judge Steven Rhodes will rule Friday on whether Detroit's government can slash more than $7 billion in unsecured liabilities and reinvest $1.4 billion over 10 years in basic services to rehabilitate the city.

If the judge approves the plan, Detroit would exit Chapter 9 bankruptcy within weeks, capping a historic case that sped along faster than many experts expected after the city declared insolvency on July 18, 2013.

The ruling comes after a historic 24-day trial featuring 41 witnesses, 2,327 exhibits and 46 individuals expressing their objections to Detroit emergency manager Kevyn Orr's sweeping restructuring plan.

The city has reached settlements with all its major creditors, including retirees, unions, bondholders, bond insurers and banks. The only objectors remaining are more than 600 individuals, as well as business contractors and people who sued the city and won settlements before the bankruptcy.

"Obviously this case has gone more smoothly than anyone expected," said Laura Beth Bartell, a bankruptcy professor at Wayne State University Law School. "It's a real triumph for everyone involved."

Rhodes will read his ruling in open court at 1 p.m. today at the Theodore J. Levin U.S. Courthouse in downtown Detroit. He plans to issue an official written opinion later in the month.

The judge has two choices.

"All he can do is confirm or refuse to confirm," Bartell said. "He can tell people why he's refusing to confirm, but that's not going to happen, because if he had concerns about confirmation we would know by now."

When the bankruptcy started, the city faced furious opposition from retirees, unions and financial creditors, making an amicable and speedy resolution appear unlikely.

But the emergence of a deal to reduce pension cuts and preserve the Detroit Institute of Arts — which the Free Press dubbed the grand bargain — helped soothe the objections of retirees and unions who spent the first half of the case fighting pension cuts.

The grand bargain would allow the city to accept $816 million over 20 years from nonprofit foundations, the State of Michigan and DIA donors to reduce pension cuts and save the museum as an independent institution.

At one point, Orr threatened to consider selling DIA treasures to pay off debts and reinvest in services — which financial creditors were pushing for — but he eventually embraced the grand bargain and concluded that selling DIA property would be difficult or illegal.

Throughout the case, several major financial creditors argued that the grand bargain was illegal, but they have since dropped their objections after reaching settlements with the city.

Several attorneys involved in the case who spoke on condition of anonymity to avoid angering the judge said they expect Rhodes to confirm the city's plan of adjustment, despite his misgivings about the plan.

During the trial, Rhodes appeared irked that the city acquired a $275-million exit financing deal that was secured, instead of acquiring unsecured financing. The city has pledged its income tax revenue as collateral on the deal with London-based Barclays.

Rhodes also peppered Detroit bankruptcy attorney Bruce Bennett with questions about how the city can justify giving pensioners a better deal than financial creditors.

If he approves the plan, general pensioners will get 4.5% cuts on their monthly checks, the elimination of annual cost-of-living-adjustment (COLA) increases and a clawback in excessive interest from annuity savings. Police and fire pensioners would get only a reduction in their COLA increases.

But Judge Rhodes must still approve the plan. He must determine that it treats creditors fairly and gives the city a feasible chance of returning to solvency and restoring basic services for neglected residents.

"He's a brilliant guy. He will again address all the objections that have been made to the plan," WSU's Bartell said.

Inside Detroit's plan of adjustment

Core to plan of adjustment is a $440-million blight removal initiative, a $274-million investment in police, and a $156-million investment in the Fire Department.

The $1.4-billion reinvestment initiative includes $483 million in anticipated new revenues, which would come from higher bus fares and improved tax collection.

The city is also projecting $358 million in cost savings from establishing a more efficient city government, which could theoretically make the reinvestment plan $1.7 billion.

Consultants and the expert witness Rhodes hired to assess the plan's feasibility have raised questions about the ability of the city's workforce to adjust, saying large numbers of workers and even managers lack skills and education needed for their roles. Part of the city's plan of adjustment calls for spending millions on training and retraining workers, in addition to an overhaul of the city's human resources operations.

The prospect of emerging from bankruptcy leaves Detroiters both optimistic about improving city services but also concerned that the city's rebound will be long-lasting.

Dameon Wilburn, who lives in the Joy Farms neighborhood, said the city's bankruptcy filing has already brought visible improvements.

"For about 15 years, the streetlight in front of my house was off," she said this week. "Within the last year or so, it's come on. … For me, the lights in my neighborhood are working, the trash is getting picked up. Since I'm paying the taxes for that, that's what I look for."

She also noted a more vibrant downtown with people wanting to move back into the city and investors looking to spend money and start new businesses.

Southwest Detroiter Mary Ellen Brennan sees some of the same things. Brennan was initially against the state appointing an emergency manager who, under state law, can make unilateral decisions about city operations and finances without the approval of elected officials. She said she has nonetheless come to view the bankruptcy filing and court proceedings as the right thing to do.

"I see a few more lights on in different parts of the city as I travel," she said. Trash collection "is on the money — I mean they're there right on time. That's one visible change."

Midtown resident Bryant Tillman, an artist, said he has been pleased with growth in that part of the city but also worries it's all happening too quickly.

"I know everyone wants to fix things up and improve the city and services," he said. "I hope they can assimilate the people who are already here, because if you try to do renewal too fast, they might displace people instead of assimilate them."