Canadian Manufacturing

Governor, emergency manager to testify in Detroit bankruptcy trial

Officials estimate 65 per cent of Detroit's annual revenue would be eaten up in debt payments by 2017 without an overhaul in bankruptcy court.



DETROIT—Michigan’s governor is scheduled to testify in an extraordinary trial to determine if Detroit’s bankruptcy case, the largest public filing in U.S. history, will go forward.

Republican Gov. Rick Snyder is scheduled to take the stand Monday afternoon. Snyder hired emergency manager Kevyn Orr, who filed for bankruptcy in July. Orr is expected to resume testimony he started on Friday.

The trial is an autopsy on what the governor has called decades of ruinous financial decisions in the once-booming industrial hub of Detroit, combined with an exodus of people—the population has dropped to 700,000 from 1.8 million—and other social and economic factors.

The trial began Wednesday and could end this week, but a decision on Detroit’s eligibility appears to be weeks away. The judge has set a Nov. 13 deadline for lawyers to file legal briefs on certain issues.

Detroit, with $18 billion in debt, filed for bankruptcy protection in July, but it’s not automatic. Judge Steven Rhodes has set aside several days to hear evidence and decide whether the city met many key steps before taking drastic action three months ago.

A key question is whether the city held “good-faith” talks with creditors before the filing. Unions and pension funds, who stand to lose much in a bankruptcy filing, say no.

Detroit’s fiscal situation has deteriorated dramatically in recent years. By last spring, at least 16,700 structures were inspected and classified as dangerous. Thousands of streetlights are dark.

Private donors are replacing ambulances that limp around with more than 200,000 miles (320,000 kilometres) logged. The fire department has just one mechanic for every 39 fire vehicles. The number of Detroit parks has dropped to about 60 in recent years from more than 300, due to a lack of money.

Unions and pension funds are challenging Detroit on the eligibility question. They claim Orr, who acquired nearly unfettered control over city finances following his appointment by Michigan Gov. Rick Snyder, was not genuinely interested in negotiating when they met with his team in June and July. Orr insists pension funds are short $3.5 billion and health coverage also needs to be overhauled.

Unions say the city has cut wages and changed health care benefits without across-the-table talks.

In response, however, attorneys for the city said sessions with creditors were well-intended but fruitless.

The judge will have much discretion to determine whether the city has met its “good-faith” burden, experts say.

Orr’s team estimates that 65 per cent of Detroit’s annual revenue would be eaten up in debt payments by 2017 without an overhaul in bankruptcy court.

Analysts say unions and pension funds are aggressively challenging the city because they will lose leverage if the judge finds the bankruptcy filing was done legally. Detroit would take the lead in coming up with a plan to bring the city out of bankruptcy, putting pensions at risk along with billions owed to other creditors.

© 2013 The Canadian Press

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