By Ryan C. Wood

The City of Detroit filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code on July 18, 2013, Bankruptcy Case No. 13-53846. Detroit lists its major creditors as General Retirement System of the City of Detroit is owed a little over $2 billion, Police and Fire Retirement System $1.4 billion, U.S. Bank N.A. $801 million in pension related certificates of participation, U.S. Bank N.A. certificate of participation $516 million, U.S. Bank N.A. certificate of participation $153 million, U.S. Bank N.A. $78 million in tax general obligation bonds, U.S. Bank N.A. $60 million in general obligation capital improvement bonds, U.S. Bank N.A. tax general obligation bonds of $183 million and more.

As you can see the vast majority of Detroit’s debts are pension related unfunded benefits for retirees. Detroit’s bankruptcy attorneys will have to seek reduction of retirees’ future benefits to pull Detroit out of the whole. It is estimated that Detroit has at least 20,000 retirees as of the date of the bankruptcy filing.

One of the issues in every municipal bankruptcy case is eligibility. Unlike other chapters under the bankruptcy code a municipality must prove it is eligible to be a debtor pursuant to Section 109(c) of the Bankruptcy Code. Detroit must prove that it is a municipality, specifically authorized to be a debtor under Michigan state law, is insolvent, desires to affect a plan to adjust its debts and has negotiated in good faith with creditors holding a majority in amount of claims. This will be the first major battle in the case. Creditors such as the Public Finance Guarantee Corporation will argue that Detroit is not eligible under section 109(c)to be a debtor. Public Finance Guarantee Corporation is involved in almost each and every municipal bankruptcy case. They have insured the bond cities issue to pay for capital improvements and recently budget and retirement benefit shortfalls. If Detroit is allowed to reduce the amount of their bond debt the guarantor Public Finance Guarantee Corporation will have to pay the difference. Given that Public Finance Guarantee Corporation is very active in municipal bankruptcy cases.

The insolvency prong is what is screaming out right now. The City of Detroit is facing a $115.5 million cash flow shortfall for fiscal 2012. In the past Detroit issued long term and short term debt. In 2008 Detroit issued $75 million, 2010 $250 million and then again in 2012 $129.5 million. Detroit has been getting along by wage cuts, layoffs, employee furloughs, cash pooling and borrowing from city funds. Detroit also deferred payments for pension contributions for 2012 and 2013 totaling $216 million. Detroit’s bankruptcy lawyer filings project the cash shortfall for fiscal year 2014 will be $198.5 million without restructuring. More than half of Detroit’s budget goes to service its debts and not to provide services to the public. The amount of the budget that must be used to pay debts will only increase in Detroit’s future if they do not successfully reorganize under Chapter 9.