07 May 2012

Detroit May Have to File Bankruptcy

Story first appeared in The Detroit News.
Some Lansing Bankruptcy Lawyers contend bankruptcy still is possible for Detroit, despite a recently signed agreement with the state to financially restructure the city.

Many don't want to openly talk about the possibility, but others contend a Chapter 9 bankruptcy is possible if the economy further stalls or efforts falter to control municipal legacy costs and expenses.

Strategically, bankruptcy has to be kept on the table. There is no less probability of bankruptcy than there was previously. As a practical matter, the collateral damage from a bankruptcy may be so great that in the end the governor simply would simply not allow it to happen.

By law, Michigan cities can't file for bankruptcy unless they are under an emergency manager. The threat of one last month prompted the Mayor and the City Council to sign a consent agreement this month to create a nine-member financial advisory board and hire a chief financial officer and program management director to manage key reforms.

Last week, the Michigan Governor repeated his opposition to bankruptcy, but he refused to take it off the table should the consent agreement fail.

That's a hypothetical. As a practical matter, to say absolutely anything is a very dangerous proposition. The idea is to try to avoid it by working together but that's depending on us progressing.

The governor said he wants the reforms in Detroit to take place quickly so that issue starts going into the background and not becoming relevant.

The mayor has said repeatedly that he opposes bankruptcy but argued any restructuring would fail without some extra financial assistance from the state.

A State Rep. who serves on the House appropriations committee, said there's still some fear that Detroit could have to file Chapter 9. He noted the city faces incredible challenges with the consent agreement, including approval of a three-year budge for the first time in history. But he said some restructuring is necessary to keep the city from bankruptcy.

If the city doesn't get any money, the answer to that question is, yes, there is a possibility that that could happen.

Whispers of bankruptcy began late last year when the mayor announced that the city could run out of cash by April.

That prompted the governor to order a fiscal review of the city and create a financial review team to pore through the city's books. Its review prompted the governor to press for a consent agreement.

To solve its immediate cash crunch, the city borrowed $137 million in state-backed bonds.

The city has long-term liabilities of $12 billion and risks losing millions more if its credit rating is downgraded, according to Traverse City Bankruptcy Lawyers.

Bankruptcy would be a costly alternative that would cost taxpayers millions as the process could take up to five years, experts say. One advantage: Unlike an emergency manager, a bankruptcy judge could restructure bonds or debts to vendors.

Should it happen, Detroit would be the largest city to file for bankruptcy. Cleveland defaulted on its bank loans in the late 1970s but never filed, say Chicago Bankruptcy Lawyers.. There were bankruptcy filings in Orange County in 1994 and Vallejo, Calif., in 2008 and both came through Chapter 9 after their finances were restructured.

A former chief of the Detroit Police Department who recently served on the governor's financial review board for the city, said there's no danger of bankruptcy unless Detroit fails to adhere to the financial agreement. That's unlikely because of consent agreement safeguards including the hiring of a chief financial officer and program management director. If there's a failure in any of those areas, there's that possibility.

The hard decisions still have to be made, and they are going to have to be made on things like how many employees can the city afford, what functions are going to have to be spun off to other providers, what functions are simply going to be eliminated altogether.

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