Bankruptcy in the City of Detroit Custom Case Solution & Analysis

Part 1: Business Case Data Researcher

Financial Metrics:

• Total long-term liabilities: $18 billion (Exhibit 1).
• Pension underfunding: $3.5 billion (Exhibit 2).
• Other Post-Employment Benefits (OPEB): $5.7 billion (Exhibit 2).
• General Fund deficit: $198 million (FY2012).
• Revenue decline: 20% drop in tax revenue between 2000 and 2012 (Exhibit 3).

Operational Facts:

• Population: Declined from 1.8 million (1950) to 700,000 (2012).
• Public services: 40% of streetlights non-functional; average police response time 58 minutes.
• Governance: Kevyn Orr appointed as Emergency Manager (EM) under PA 436 by Governor Rick Snyder (Para 4).

Stakeholder Positions:

• Kevyn Orr (EM): Prioritizes restructuring debt to restore service delivery.
• Public Pension Funds: Argue constitutional protection of benefits; oppose impairment.
• Governor Snyder: Supports EM intervention to avoid total municipal collapse.

Information Gaps:

• Specific recovery rates for individual bondholder classes.
• Detailed legal analysis of Michigan state constitutional language regarding pension impairment.

Part 2: Strategic Analyst

Core Strategic Question

How can Detroit restructure its $18 billion debt burden while restoring basic municipal services without violating state constitutional protections for pension obligations?

Structural Analysis

Legal/Constitutional Framework: Michigan Constitution Article IX, Section 24, creates a significant barrier to pension reduction, treating accrued financial benefits as a contractual obligation.

Strategic Options

• Option 1: Out-of-Court Settlement. Negotiate haircut percentages with all creditors. Trade-off: High probability of holdout creditors blocking the deal; lengthy timeline.
• Option 2: Chapter 9 Bankruptcy Filing. Seek federal court intervention to force debt adjustment. Trade-off: High legal fees; risk of pension impairment litigation; negative impact on municipal credit rating.
• Option 3: Asset Monetization. Sale or long-term lease of city assets (e.g., Detroit Institute of Arts, water department). Trade-off: High political backlash; one-time cash inflow does not solve structural deficit.

Preliminary Recommendation

Proceed with Chapter 9 Bankruptcy. The scale of the $18 billion debt exceeds the city's capacity for voluntary negotiation. Federal oversight is necessary to override local political friction and force a standardized haircut across all creditors.

Part 3: Operations and Implementation Planner

Critical Path

1. Formal Chapter 9 filing and eligibility determination.
2. Asset valuation of non-essential city holdings.
3. Negotiation of the Grand Bargain (pension protection via philanthropic/state funds).
4. Development of a Plan of Adjustment (POA) to exit bankruptcy.

Key Constraints

• Legal Precedent: The court must rule that bankruptcy allows for pension modification, contrary to state law.
• Political Capital: The EM must maintain support from the state government to secure the funding necessary for the Grand Bargain.

Risk-Adjusted Implementation

The plan assumes the Grand Bargain succeeds. Contingency: If philanthropy fails, the city must implement a two-tier pension system or significant benefit reductions, risking prolonged civil unrest and labor strikes.

Part 4: Executive Review and BLUF

BLUF

Detroit cannot grow its way out of an $18 billion debt hole. The only viable path is a Chapter 9 filing coupled with the Grand Bargain. The primary objective is not debt repayment, but the restoration of basic municipal functions—police, fire, and lighting. Without these, the tax base will continue to erode, rendering any restructuring moot. The strategy must prioritize capital investment in infrastructure over total creditor satisfaction. The legal risk regarding pension impairment is high, but the alternative is permanent municipal insolvency.

Dangerous Assumption

The assumption that the court will permit the impairment of pension obligations despite the Michigan Constitutional language. If this fails, the entire debt restructuring model collapses.

Unaddressed Risks

• Execution Risk: Managing municipal services during the bankruptcy process. Failure to improve response times will lead to further population flight.
• Political Risk: The potential for a gubernatorial change in Michigan, which could withdraw state support for the transition.

Unconsidered Alternative

Regionalization of essential services (water, sewage, transit) under a state-controlled authority to offload debt and improve operational efficiency without direct city management.

Verdict

APPROVED FOR LEADERSHIP REVIEW.