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Detroit emerges from nation's largest municipal bankruptcy

Detroit's bankruptcy is over, officials say, and the city's emergency manager is moving on

The nation’s largest municipal bankruptcy ended Wednesday when the lawyer overseeing Detroit’s fiscal recovery declared the crisis over and gave elected officials control of their own budget for the first time in 20 months, a deal made possible in large part by the city’s exquisite art collection.

The bankruptcy closeout was hailed by city officials as an opportunity to begin rebuilding what was once one of America’s most robust cities. But the city now faces pressure to control spending as it tackles the problems that arose during the decades of decline that turned Detroit into a poster child for blight and urban decay.

At a news conference, Mayor Mike Duggan warned that it would be years before the once-booming center of the automobile industry could stand on its own without oversight from a state commission assigned to watch its spending. Duggan said Detroit’s residents should not wake up Thursday and expect a miracle.

“The reality is tomorrow is not any different from today,” he said, citing a list of problems facing Detroit. They include improving police response times, speeding up demolition of dilapidated houses to clear blighted neighborhoods, and preparing snow-removal plans for the winter.

All of those issues speak to the broader problem of Detroit’s struggling public services, which went downhill as wealthy and middle-class residents fled to the suburbs and as city leaders failed to balance the budget in the face of a declining tax base and rising pension costs.

“We still have enormous challenges delivering the services in the city every day, but at least now we are no longer a city that’s in bankruptcy,” Duggan said. “So we’re going to start fresh tomorrow.”

Detroit’s emergence from bankruptcy protection was swift compared with other cities. The Northern California city of Vallejo was in bankruptcy for nearly three years, from 2008 until the end of 2011. Stockton declared bankruptcy in June 2012 and took more than two years to come out of it, and San Bernardino has been in bankruptcy since August 2012.

But Detroit had things that smaller cities did not have, mainly the Detroit Institute of Arts, a museum with a collection estimated to be worth hundreds of millions of dollars. One report from Artvest Partners, a New York art investment firm, estimated that the collection could fetch up to $1.8 billion if sold at auction.

The museum proved key to a deal dubbed the Grand Bargain, which led to the creation of an $816-million fund donated by the state, foundations and philanthropists. In exchange, the museum was moved into a charitable trust, which ensured that its contents would not be sold off to pay creditors. The money in the fund will go toward patching holes in Detroit’s pension funds.

Detroit’s restructuring plan, which was approved by Judge Steven Rhodes last month, will erase $7 billion in debt. It will cut pensions of nonuniformed public employees by 4.5% and eliminate their cost-of-living increases. Police and firefighters will see cuts in their cost-of-living increases.

Rhodes called the Grand Bargain the cornerstone of the restructuring. Attorneys who represented the Detroit Institute of Arts during the negotiations, Alan S. Schwartz and Joshua F. Opperer, said in a statement that the deal “ensures that there are good days ahead for our city, our region, and arts and culture in the century to come.”

Bankruptcy experts said the ability to negotiate the Grand Bargain, and to push through the highly contentious cuts in public pensions, was a reflection of the negotiating partners’ determination to prevent Detroit from turning into a case study for financial catastrophe.

“It shows what smart, competent people can do,” said Laura Beth Bartell, a bankruptcy professor at Wayne State University Law School in Detroit. “When everyone realized the situation, there wasn’t a lot to argue about.”

The situation was dire, and it became clear just how dire in March 2013, when Republican Gov. Rick Snyder appointed Kevyn Orr, a Washington bankruptcy lawyer, to become Detroit’s emergency manager. Orr took over a city with $18 billion in debt, where everything from street lights to police services were failing. Residents complained of having to wait nearly an hour for officers to arrive if they dialed 911.

“Detroit today is a shell of the thriving metropolis that it once was,” Orr said in July 2013, when he declared that protection under Chapter 9 of federal bankruptcy laws was the only way out of Detroit’s financial hole.

Orr’s letter recommending that Chapter 9 end painted a far different picture. “If the city takes advantage of this unique opportunity to shed the problems of the past and stays on the path that has been blazed in the restructuring, Detroit is poised to grow and thrive,” Orr wrote to Snyder on Tuesday.

With his job done, Orr offered his resignation. Snyder happily accepted it during Wednesday’s news conference.

“The bankruptcy will wrap up today. Kevyn will wrap up today, and the financial emergency in the city of the Detroit will be defined as wrapping up today,” Snyder said.

“We’re happy to have you returning home for the holidays,” he told the smiling Orr.

For at least three years, Detroit will be in a “control period,” during which a state-appointed financial review commission will approve all city budgets, all contracts worth more than $750,000 and all collective bargaining agreements. If the city balances its budget for three straight years and pays its bills, it will move into the “noncontrol period.”

The review commission will remain in place for an additional 10 years no matter what, and the city could revert back to the control period if it fails to manage its spending.

But Duggan said he expected to move Detroit out of the control period in three years.

Bartell said she was optimistic about the city’s finances being back in local hands.

“Mike Duggan wants to be the mayor who turns the city around,” said Bartell, citing some positive signs such as better street lighting, rising property values and the return of some young people to Detroit’s downtown.

Sandy Baruah, chief executive of the Detroit Regional Chamber business group, agreed that increased local control could be a good thing. “But it also creates a little pause in the business community, because we were happy with state oversight of spending,” he said.

He said the big question would be whether Duggan and the City Council can attract new development to Detroit.

“We know money is circling the city,” Baruah said. “I think we have a year, maybe 18 months, to capitalize on being the bright, shiny object before everyone moves on to the next story.”

Despite the smiles and congratulatory comments at the news conference, the path out of Chapter 9 was not always smooth.

Orr at one time was quoted as disparaging Detroit, calling it “dumb, lazy, happy and rich” for too long. And there was initially fierce resistance to the idea of cutting pensions.

But in July 2013, retirees voted to approve the 4.5% cut, clearing the way for the restructuring plan to move forward.

Detroit wasn’t the first city to cut pensions, but it was the largest, and some economists said it should serve as a warning to public-sector employees elsewhere.

“The conspicuousness of the city’s bankruptcy, the size of its debt, and the long-term erosion of its tax base, combined with the retiree cuts, should give pause to those expecting retirement benefits from the public sector,” said Olivia S. Mitchell, professor of business economics and public policy at the Wharton School at the University of Pennsylvania, and executive director of the Pension Research Council.

Detroit's woes extended beyond the auto industry's exodus and its pension costs. The city also was not helped much by some of its recent civic leaders.

Between 2002 and 2008, then-Mayor Kwame Kilpatrick ran what prosecutors later described as a “private profit machine” out of City Hall by taking bribes and rigging millions of dollars of contracts for a friend's excavating company. In 2013, Kilpatrick was convicted of 24 charges, including racketeering conspiracy, and sentenced to 28 years in prison.

Duggan ran as a write-in candidate in 2013 to replace outgoing Mayor Dave Bing, who opted not to run again. A political novice with a business background, Duggan promised to pull the city out of its doldrums, and became the first white mayor of Detroit since the 1970s.

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Copyright © 2016, Los Angeles Times

UPDATE

6:57 p.m.: This story was updated throughout with new details and information.

This story was originally posted at 11:52 a.m.

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