Detroit bankruptcy: Already, clock is ticking to get in and out

The plan calls for Detroit, burdened by $18 billion in debt, to emerge from bankruptcy in 15 months. The timeline is ambitious but realistic, say bankruptcy experts. But some speed bumps have already appeared.

Now that Detroit is declaring bankruptcy, it must face its next challenge: time.

The process the city wants to follow calls for a financial restructuring plan to be approved by a federal bankruptcy judge “as promptly as possible,” according to court papers filed Thursday. Emergency manager Kevyn Orr, working at the behest of Michigan Gov. Rick Snyder (R), said in the court filing that he wants the city to emerge from bankruptcy by September 2014, which is about when, under state law, the clock stops on his 18-month tenure. At that point, Mr. Orr can be replaced by a two-thirds majority vote of Detroit's city council.

“We are running out of time. There’s a lot of work to be done here even within those 15 months,” Orr told reporters at a press conference Friday. “We’re dealing with 60 years of deferred [fiscal] maintenance in 15 months.”

The time frame will require Orr to submit evidence that supports his plan, as well as deal with objections. His negotiations with more than 40 labor unions will continue, as will talks with groups representing pension systems of current retirees. On top of it all, Orr will need to submit a two-year city budget and figure out ways to keep the cash flow going to support Detroit's emergency, health, and safety services in the coming months.

“That’s a pretty heavy burden to undertake. He needs to move quickly,” says Douglas Bernstein, a managing partner at Plunkett Cooney, a law firm outside Detroit that specializes in bankruptcy law.

Bankruptcy experts agree that the timeline is realistic. The city is asking for an Aug. 19 deadline for objecting parties to file their claims as to why Detroit is not eligible to declare Chapter 9 bankruptcy. From there, the city hopes to be cleared for restructuring by November. The city is also asking the court to appoint a committee to represent public-sector retirees not covered by unions.

“We asked some labor organizations ‘will you represent these retirees,’ and some of them said, ‘No, we won’t.’ So we will be fair,” Orr said.

Detroit is the largest US city ever to enter bankruptcy – and its unfunded liabilities likewise are the largest ever seen in municipal finance. Orr’s office has already filed a 3,300-page list of creditors owed money from the city. Detroit is saddled with more than $18 billion in debt, including $3.5 billion in underfunded pension liabilities and $5.7 billion in other retiree benefits. Under Orr’s proposal, current retirees enrolled in the city’s health insurance system will be offered a new program that relies mainly on provisions of the US Affordable Care Act, also known as Obamacare.

There are already signs that the timeline Orr has proposed may be hitting some speed bumps. On Friday, Ingham County Circuit Judge Rosemarie Aquilina ordered the city's bankruptcy petition withdrawn, saying it violates the part of the state constitution that protects the pensions of union workers. Judge Aquilina is presiding over lawsuits brought by unions and pension systems that say the pension benefits guaranteed to them under collective bargaining are vulnerable in federal court if Detroit’s bankruptcy petition is allowed to move forward.

“It’s cheating, sir, and it’s cheating good people who work,” the judge told Michigan Assistant Attorney General Brian Devlin on Friday.

Her order may potentially gum up Detroit's bankruptcy process, moving it now into the Michigan Court of Appeals. Legal skirmishes over state-versus-federal issues will likely bog down the process, says Randye Soref, a bankruptcy attorney in Los Angeles who represented creditors when California's Orange County declared insolvency in 1994. “If there’s going to be a fight every step of the way, it’s going to take longer. That’s just the process,” Ms. Soref says.

In the meantime, Orr said, the Motor City will continue to pay its bills, and it recently established a special hot line for vendors who have questions, or who have hit snags, about receiving payment.

“Going forward, it’s business as usual. We will pay our bills … especially those that are critical,” he said.

Orr, a restructuring specialist from Washington whom the governor appointed as emergency manager in late March, dismissed critics who say his team did not do enough to negotiate agreements with creditors to stave off bankruptcy.

“What shocked me wasn’t the [debt] numbers. What shocked me was the tolerance for this behavior," Orr said of Detroit's practice of borrowing more and more to pay its creditors. "For decades, this has been going on … and, at best, it was unorthodox. People were outraged at my appointment. I wish there was more outrage over the last 10, 20 years,” he said.