Detroit Bankruptcy Storyline to Watch

Bloomberg BusinessWeek published a fantastic "Four Things to Know About Detroit" post last Friday, but it’s the first and last that are most relevant to the future of the process, and especially to the question of whether retired city employees will be facing cuts to pension and health benefits.

The race to file. The Detroit Free Press has fascinating details about Orr’s sprint to the courthouse. At the state’s request, the city’s pension funds delayed by five minutes an emergency court hearing to request a temporary restraining order that would have prevented the city from filing for bankruptcy. In that five-minute window, the city went ahead. The judge says she would have approved the temporary restraining order—had it been submitted before Orr filed.

Orr’s timing could also be tied to a hearing that had been scheduled for Monday by the pension funds seeking to prevent Governor Rick Snyder from signing off on any bankruptcy filing that could reduce pension benefits, saying that would violate the state constitution. To persuade the judge to approve the bankruptcy filing, Orr will have to prove that he negotiated with creditors in good faith. The maneuvers around the timing of the filing could undermine that claim.

How much does the city owe? Orr says Detroit has nearly $20 billion in debt and long-term obligations. Pension funds and bondholders have said in the past he’s inflating the numbers. Why would Orr do that? Because the more dire the city’s finances seem, the more aggressive he can be in pushing for concessions. Also, to be eligible for bankruptcy protection, the city must prove that it’s insolvent, meaning it has no way to pay its debts.

Already Michigan’s largest and most influential conservative editorial page* is crediting the state’s controversial Emergency Manager law, repealed by voters in 2012 and replaced by legislative Republicans in the subsequent lame duck session, with the success of Orr/Snyder bankruptcy strategy. But was Orr too clever for his own good? 

Ingham County Circuit Judge Aquilina declined to push over the first domino this morning, delaying that hearing until next Monday. But as we wait for that, the state Appeals Court could still weigh in, or the federal bankruptcy court may decide to intervene, stopping the involvement of state courts. Only one thing is for sure right now: We’ll know much more in a week.

*Full disclosure: I am not a conservative, but I contribute to the Detroit News Politics Blog.