The deepening financial crisis in Detroit has intensified hints that the city could opt for bankruptcy, but financial experts warn the move could cost taxpayers millions, stall economic development and take years to be resolved in the courts.
Bankruptcy is an option if the city can’t win major concessions from its unions and if the state’s tough new emergency manager law is suspended or repealed.
Under the law passed in March, an emergency manager appointed by the governor would have the power to throw out union contracts, sell off assets such as the Detroit Water & Sewerage Department and other powers to fix the city’s fiscal crisis.
Attorney General Bill Schuette said he is undecided whether Michigan would revert to its old emergency manager law if opponents get enough signatures to put the repeal question on the ballot next year.
But bankruptcy would be a worst-case scenario, warned Brad Coulter, who specializes in municipal turnaround and bankruptcy services.
“That’s where the opponents of an EM maybe don’t quite understand the consequences if (the law is) repealed, and Detroit has no choice but to file for bankruptcy; I think it’s going to be an expensive, time-consuming potential disaster,” said Coulter, director of O’Keefe & Associates Consulting in Bloomfield Hills. “It’s unchartered territory as to how long a city the size of Detroit will take to wind its way through bankruptcy.
“I’ll guarantee you this: It’s not going to be a quick in-and-out of bankruptcy that we saw with GM and Chrysler. That’s not going to happen.”
Others contend a Detroit bankruptcy could be an advantage because city officials would have more control over the outcome than if it were under the thumb of a state-appointed emergency manager.
A city Detroit’s size has never filed for bankruptcy. In the late 1970s, Cleveland defaulted on its bank loans, but never filed for Chapter 9. There were bankruptcy filings in Orange County in 1994 and Vallejo, Calif., in 2008, and both emerged from it after their finances were restructured.
Source: The Detroit News | LEONARD N. FLEMING