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Detroit's Historic Bankruptcy Approval Is Just Start of Healing

Detroit isn't out of the woods yet.
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Detroit isn't out of the woods yet.

The bankruptcy court ruling Friday that approved a complex restructuring of the city's $18 billion in accumulated debt ends one of the most costly and contentious chapters in the city's long-running financial decline.

City officials say the 15-month legal proceeding gives Detroit an historic chance to reverse a long decline caused by the collapse of its industrial economy and the exodus of businesses and residents after a deterioration of city services.

The ruling lifts a huge debt burden, but it's just a first step on a long road to the return of the Motor City. Detroit needs to restore services, rebuild crumbling infrastructure and set itself on a sustainable path for the future, analysts said. Most of all, it needs to attract people and businesses to a city that has lost more than half its population over the past 60 years.

"It's all built around the idea that, hopefully, there will be people that will come back to the city."

"Detroit has a core problem with its revenues. They've been in decline for years," said Lisa Washburn, a municipal finance analyst with Municipal Market Advisors. "This bankruptcy has not done anything to address that issue. It's all built around the idea that, hopefully, there will be people that will come back to the city."

The plan approved Friday by Judge Steven Rhodes removes a heavy load from the city's budget by cutting the cost of long term liabilities. Under the terms of the deal, negotiated with unions, creditors and bond insurers, among others, the city will cut some payments to investors and retirees and set aside funds to try to rebuild its battered infrastructure and restore badly needed services.

Plan highlights

Highlights of the 1,600-page plan include:

  • Pension cuts -- Despite dire pronouncements early in the process, city workers and retirees were spared some of the deepest cuts in retirement benefits. Police and fire department retirees will get smaller cost of living increases; general pensioners will see their checks cut by 4.5 percent, no cost of living increase and a "clawback" of some annuity payments. Both will see big cuts in their health care benefits.
  • Creditors -- Holders of so-called "general obligation" bonds will get between 34 to 74 cents on the dollar, depending on the type of issue. Two major bond insurers -- among the longest holdouts to the plan -- will get 14 cents on the dollar in cash, along with a series of property development rights and leases on other city property.
  • Detroit Institute of Art -- Despite pressure from creditors to sell its vast art collection to settle debts, the institute's holdings will be transferred to a private trust as part of an $816 million deal financed through private donations and $150 million in state aid. That money was raised to offset deeper pension cuts.
  • Reinvestment -- The plan also sets aside $1.4-billion that the city will use to try to jumpstart its economic revival. The effort includes restoring critical services, including increased spending for police and fire departments, tearing down vacant homes in blighted neighborhoods and upgrading the city's ancient computer systems. The city is also projecting additional cost savings, which could boost the reinvestment plan to $1.7 billion. Those investments are intended to reverse years of erosion in city services and deal with a large inventory of abandoned properties. That may help Detroit residents who have been coping with substandard services for years, but it's not clear it will convince businesses and families to return.

The plan offers little relief for the city's financially strapped school system, for example, which has seen its budget cut by more than half in the past decade, as its deficits nearly tripled. That's sparked a huge decline in enrollments as students moved to suburban districts or to charter schools, leaving the district with even less funding.

Fixing Detroit's schools will be just one of the challenges faced by city officials as they begin navigating an uncertain course to arrest the city's decline and begin rebuilding. While the completion of the bankruptcy plan removes a major hurdle, it marks only the beginning of a long-term process that has yet to be fully spelled out.

Until that work gets underway, the city will face an ongoing challenge attracting new business investment and home buyers, said Washburn. "If you have services that are just passing muster and a school system that's dysfunctional, drawing a lot of people in to stay long term, it's not a foregone conclusion that that's going to happen," she said.