Oct 312013
 

On Monday, Gov. Rick Snyder of Michigan defended Detroit’s bankruptcy filing as a final effort to prevent the city’s lengthy financial decline.  “‘This is a crisis,’ the governor said in United States Bankruptcy Court. ‘It still is a crisis today.’”

The governor was testifying in the trial on whether Detroit met federal eligibility rules when it filed for Chapter 9 bankruptcy in July of this year.  He approved the bankruptcy filing on July 18 based on the recommendation of Kevyn Orr, Detroit’s emergency manager.

Mr. Orr also testified on Monday about the reasons behind the bankruptcy filing, citing mounting debts, subpar city services, and “lack of options for a turnaround other than bankruptcy.”

Gov. Snyder is considered responsible for “forcing the state’s largest city into the biggest municipal bankruptcy filing in American history.”  During his testimony he said Detroit’s financial plummet was one of the most important problems he inherited when taking office in 2011.

Per Detroit’s Chapter 9 filing, it has an estimated $18 billion in debt, including billions of dollars owed to its 23,000 retirees.  Adding to issue is the city’s operational budget.  Detroit runs a budget deficit of “almost $1 million per day, and is unable to provide basic levels of police and fire protection for its 700,000 residents.”

According to Gov. Snyder, he tried to counteract the financial meltdown by entering an agreement with Detroit’s mayor, Dave Bing, under which the city would “cut losses and streamline operations in return for $137 million to pay its bills.”  However, he contends that the city’s failure to honor the agreement left him with no choice but to “declare a financial emergency under state law.”

Union attorneys are challenging Gov. Snyder about whether Mr. Orr made honest attempts to negotiate concessions on pensions before proposing bankruptcy as a solution.  The governor avoided answering specific questions about the kinds of cuts that might be made during bankruptcy proceedings.

The issue being brought before the court is whether public-employee pensions are expressly protected under the Michigan Constitution.  This is in addition to the eligibility requirements Detroit must meet for the bankruptcy proceeding to continue.

Mr. Orr described a city “so destitute that payroll checks were bouncing, and frightened children armed themselves with rocks and sticks to fight off assaults on their way to school.” The trial should last several more days, with union leaders still slated to testify.

Experts seem to suggest that an approval of the Chapter 9 filing will result in an immediate appeal, so the outcome remains murky. What is clear, is that as these proceedings drag on, this will result in a large amount of legal fees.