Detroit Bankruptcy: The Next Step in the Grand Bargain

On Tuesday, June 2, 2014, the Michigan state senate passed a number of important bills, all of which are aimed to help lift Detroit out of its $18 billion bankruptcy.  Approval by Governor Rick Snyder is all but guaranteed, as he has been a vocal advocate for providing state money to Michigan’s largest city.  The measures had been previously approved by the state house of representatives on May 22.

The speed at which the bills passed through the state house and senate illustrate the state’s commitment to have the so-called “Grand Bargain” in Detroit’s debt adjustment plan in place by the time that U.S. Bankruptcy Judge Steven Rhodes has set the first hearing (June 24) on Detroit’s debt adjustment plan to determine if it is fair and feasible.

Under the “Grand Bargain” Michigan will contribute nearly $195 million up front, while another $466 million pledged over 20 years by philanthropic foundations and the Detroit Institute of Arts, would be used to ease pension cuts for city retirees. As we mentioned in the previous post, the “Grand Bargain” would also protect city art works from being sold to raise money to pay creditors.

Where is Michigan coming up with $195 million dollars?  The answer is not big motors, but big tobacco.  The bills passed on Tuesday would allow the state to withdraw money from its “rainy day fund” and replenish it over time from the state’s share of a national settlement with U.S. tobacco companies.

Michigan’s contribution is not as philanthropic, however, as it seems at first blush.  Although invaluable to Detroit at this present juncture, the contribution is envisioned to save the state hundreds of millions of dollars in the long-run in legal fees and social services.

Although the “Grand Bargain” is but a signature away from being in place, Detroit residents and pensioners should not yet celebrate.  Many creditors, including those we have mentioned in previous posts, continue to vehemently oppose the proposed plan.  A giant hurdle has been crossed, but many more stand in the way of confirmation.

 

Published In: Bankruptcy Updates, Elections & Politics Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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