Experts split on Detroit's fiscal recovery options

Experts split on Detroit's fiscal recovery options as Mich. governor mulls manager appointment

Associated Press
Experts split on Detroit's fiscal recovery options
.

View photo

FILE - In this Oct. 24, 2012 file photo, a pedestrian walks in Greektown in downtown Detroit. A state-appointed review team Tuesday, Feb. 19, 2013 determined Detroit is in a financial emergency, paving the way for Republican Gov. Rick Snyder to appoint an emergency manager who would need to come up with a new plan to get the city out of its fiscal crisis. (AP Photo/Carlos Osorio, File)

DETROIT (AP) -- In less than a month, Michigan Gov. Rick Snyder will decide whether the state will take over Detroit's broken finances and send in someone to oversee the city's fiscal recovery.

Regardless of Snyder's decision, the question may not be who can save Detroit, but how can Detroit be saved.

The city's options are limited, with experts split on what may be best: long-term, methodical restructuring with help from the state or cutting the city's losses now through municipal bankruptcy.

Detroit, with a population of about 700,000 residents, would be the largest city to file for Chapter 9 bankruptcy if that path is taken, according to James Spiotto, a municipal bankruptcy expert at the Chicago-based Chapman and Cutler law firm.

"Chapter 9 is meant to be the absolute last resort ... when all else fails and you are no longer capable of working with the state or anyone else to bring about a resolution," Spiotto said. "It would have an adverse effect on the credit market, not only for that municipality, but also for the state."

About 640 Chapter 9 bankruptcies have been filed since Congress enacted a revised Municipal Bankruptcy Act in 1937.

Recent cities that have filed for bankruptcy include San Bernardino, Calif., which took that route in August after learning it had a $46 million deficit. The largest municipal bankruptcy filing in U.S. history involved Jefferson County, Ala., which had more than $4 billion in debt when it filed in 2011. The most populous city in the U.S. to do so was the 290,000-resident Northern California community of Stockton, in June.

Detroit faces more than $14 billion in long-term liabilities, has a near-zero cash flow and a skyrocketing budget deficit that now is listed conservatively at $327 million, according to a state-appointed review team that looked at Detroit's books.

"Rome fell because it went broke, and France faced a national revolution when it went broke," said James McTevia, president of a Michigan-based firm that specializes in turnaround management. "If an emergency financial manager is not appointed immediately, the city should file for bankruptcy at once. The city's debt needs to be restructured."

The review team found that Detroit was in a "financial emergency" and forwarded its report to the governor. Snyder said he would carefully review the team's findings before deciding whether to appoint an emergency manager. If he does, Detroit Mayor Dave Bing would have 10 days to request a hearing.

Bing, who opposes a state takeover, has said that without an influx of money from the state, any emergency manager would face the same frustrations he's endured. Bing also opposes taking the bankruptcy route, but he says his restructuring plan approved last year by the state has been hindered by legal and other roadblocks.

"We have the plan, but we face significant challenges executing it in a timely manner," the mayor said Wednesday. "We are hindered by several factors, including the city charter, labor agreements, litigation, governmental structure, and a scarcity of financial and human resources."

Snyder called a news conference Thursday afternoon in Detroit to discuss the process. The governor's staff said he would not announce any decisions.

Bing, who was elected in 2009, has yet to say whether he will seek re-election.

Tom Barrow, an accountant who ran twice for Detroit's top office, said an emergency manager would usurp Detroit's control over city finances, spending and assets. Barrow, who lost to Bing in 2009, is considering another mayoral run this year.

Bankruptcy would keep the elected mayor and City Council in power, Barrow said.

"This is more about control than restructuring," Barrow said about the emergency manager option. "If we go into a Chapter 9 that will minimize the influence of the state. All of a sudden they become a secondary player.

"Under Chapter 9 the city runs itself, enters into agreements with creditors and bond holders."

Those actions would be overseen by a bankruptcy judge.

The city can pass a resolution for bankruptcy protection on its own, but that would have to be approved by the state and filed by an emergency manager, Barrow added.

Tonya Phillips, who grew up in Detroit and lives on the city's east side, said she is resigned to the idea of some form of outside intervention.

A deal between Bing and Snyder nearly a year ago promised some state resources and expertise if the city met certain milestones and deadlines. The City Council gave its OK to the agreement but was slow in approving some outside professional contracts tied to it.

The state, in turn, initially held millions of dollars in bond money in an escrow account that Detroit needed to meet payroll and pay some other bills.

"I hope the city and the state can come to an agreement that doesn't involve an emergency manager so the Democratic process won't be compromised," said Phillips, an attorney. "If the city cannot achieve it on its own and if the state isn't able to assist in any other kind of way — and the jury is still out on that — I think the city will have to explore (bankruptcy)."

Rates

View Comments (139)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign for 2 yrs. & get a $300 prepaid Visa. Click here.

    AdChoicesVerizon FiOS ®Sponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

    CNBC
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

    Bloomberg
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

    Reuters
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Norwich Information Security MS

    Online, accredited, top ranked. NSA Center of Academic Excellence. Recognized by the Department of Homeland Security. Download your free brochure!

    AdChoicesNorwich UniversitySponsored
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • 10 rock-solid stocks for conservative investors

    10 rock-solid stocks for conservative investors Shares with low volatility can beat their indexes with less risk Bloomberg News/Landov U.S. Bancorp is the cheapest S&P 500 stock

    MarketWatch
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Best Womens Wrinkle Creams 2014

    Mom reveals simple wrinkle solution that has researchers very excited. Try this free solution today to look and feel years younger.

    AdChoicesBellaLabs.comSponsored
  • Play

    Tues., Sept. 16: Watch Humana Stock

    Humana, Global X Social Media Index ETF and Majesco Entertainment are among stocks to watch. WSJ's Chris Dieterich discusses the details with Michael Casey. Photo: Humana

    WSJ Live