Tuesday, Apr 24, 2018
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Bankruptcy on trial

Detroit’s future, and Michigan’s economic health, are at stake in a federal courtroom

More than a year ago, emergency manager Kevyn Orr announced that Detroit would become the biggest city in history to file for bankruptcy. This week, what is expected to be a long and complex bankruptcy trial finally began in federal court.

It would not be too much to say that U.S. Bankruptcy Judge Steven Rhodes holds Detroit’s future in his hands. The outcome is anything but certain.

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Mr. Orr, who was appointed by Michigan Gov. Rick Snyder to run the city in March, 2013, proposes a “plan of adjustment” to eliminate $7 billion in long-term debt. City workers and retirees will see significant cuts to their pensions.

At the same time, Detroit has put together a “grand bargain” in which philanthropists, the state, and arts supporters have come up with an $800 million package designed to shore up the city’s underfunded pension system and save the Detroit Institute of Arts, the city’s world-class museum, from a potential fire sale to please creditors.

Mr. Orr’s plan anticipates $1.4 billion in new money to improve municipal services. That would help restore some quality of life to a city where police can take nearly an hour to respond to a murder.

But two major city creditors, Syncora and Financial Guaranty Insurance, oppose Mr. Orr’s plan. They think it is unfair and illegal that they are being asked to lose more of the money they are owed then are the pensioners.

They want the city’s art treasures auctioned off to pay them. It is unclear whether that transaction would even be legal, or how much such a sale would be likely to raise.

The bankruptcy trial may last six weeks. No one can say how long it will take Judge Rhodes to rule, or what that ruling will be. He could reject the bankruptcy application, leaving the city to the mercy of the courts and its creditors.

Or he could ask the city to amend its proposal. Or he could accept it and allow Detroit to emerge from bankruptcy and attempt to build a future.

Whatever happens, two things are clear: Detroit, even in the best case, won’t have an easy road — although the city as last has an honest inventory of its problems and is trying hard to find solutions.

It’s also clear that an economically resurgent Michigan needs a healthy, or at least solvent, Detroit. We hope Judge Rhodes keeps that in mind.

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