A federal judge is expected to rule Friday on a restructuring plan that would allow Detroit to exit bankruptcy protection, the latest step in the city’s complex path out of decades of financial woe.
Detroit had sought Chapter 9 bankruptcy protection on July 18, 2013, in the nation’s largest such filing by a municipality.
At stake are claims from a variety of creditors, including current city workers, retirees, bondholders and residents of Detroit whose services including police, fire and water have taken severe hits.
In his ruling, U.S. Bankruptcy Judge Steven Rhodes will have to balance the competing monetary claims while dealing with separate, often conflicting political positions of the groups who have been bargaining for months to reach the final compromise.
The restructuring plan is expected to trim more than one-third of Detroit’s estimated long-term debt and create a financial control board to oversee city actions in the coming years.
Detroit, once the symbol of U.S. economic and manufacturing might, has gone through decades of pain as key industries such as car production moved away and people fled to the suburbs. With its tax base eroding, the city curtailed services, forcing even more residents to leave. Wide swaths of the city have been abandoned and left in ruins.
The bankruptcy became a political issue, as some city groups fought to keep elected officials in control, while others, including some in the state, insisted on an outside manager with extraordinary powers.
Kevyn Orr was appointed to handle the bankruptcy as Detroit emergency manager. The position came with more power than a typical city mayor, including enforcing contracts and ordering layoffs. Orr handled the months of negotiations and forced the parties into an agreement that took bits and pieces from everyone.
The bankruptcy plan eliminates about $7 billion of debt from the city’s books while reinvesting $1.7 billion in neglected city services. Detroit and its suburbs will be linked more closely because of a regional water authority designed to save money for taxpayers.
The Detroit Institute of Arts, formerly part of the city, will be financially independent and supported by some tax dollars. At one point, the threat was to sell off the museum and its artworks to raise money to fund the municipal debt.
In the early days of bargaining, Orr also threatened pensions and was prepared to pay bondholders about 10 cents on each dollar of debt.
In the final deal, many pension holders could see almost a full recovery while some bondholders are expected to receive as much as 75% of the amount due.
The city’s plan also calls for borrowing $275 million in exit financing.