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Detroit bankruptcy eligibility case goes to trial

October 23, 2013 at 12:00 AM EDT
The city of Detroit filed for bankruptcy in July, and now it must prove to a judge that the conditions necessitate that protection. But some pension funds, unions and retirees are fighting the filing. Jeffrey Brown gets an update from Matthew Dolan of The Wall Street Journal on Detroit's finances.

HARI SREENIVASAN: Next: a pair of dispatches from Detroit at an important moment, starting with a key trial over the city’s bankruptcy filing.Detroit’s leaders say the city is $18 billion in debt, forcing a move to Chapter 9.But they also must persuade a judge the city has met all of the requirements to do so.And opponents say that’s not the case.

Jeffrey Brown has more.

JEFFREY BROWN: The trial began today in federal court in Detroit.

Matthew Dolan of The Wall Street Journal was there and joins us now to explain what the arguments are about.

Well, Matthew, before we get to the specifics, this trial is really to see if the city is even entitled to go through with the bankruptcy.And who’s bringing the case?

MATTHEW DOLAN, The Wall Street Journal:That’s right.

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Well, what happened was the city filed for bankruptcy protection back in July.But now they’re at the stage of the trial where they actually need to prove to a judge that the conditions were right that they should have bankruptcy protection.

And some of those conditions would include whether or not the city is truly insolvent.It also would include whether or not the city had state authorization when it filed for bankruptcy in July.And it also has to prove whether or not it tried to argue in good faith with its many creditors before they actually filed for bankruptcy.

So all of those issues are coming to a head before Judge Steven Rhodes today in Detroit federal bankruptcy court.

JEFFREY BROWN: And who — and who — and tell us about who is bringing the case, who is making these arguments against the city.

MATTHEW DOLAN: That’s right.

Well, the case is, of course, brought by the city itself.And it’s actually under the control of an emergency manager who was appointed in March by the governor of the state, who had said that the city’s finances were too shaky to be run on its own.Those opposing the city’s eligibility for bankruptcy include municipal unions, pension funds, and a group of retirees represented by a committee appointed through the judge.

JEFFREY BROWN: Now, you mentioned some of the issues at stake here.One is whether the city is, in fact, insolvent.Explain that for us, because we certainly have heard about the debts that it has.

MATTHEW DOLAN: That’s right.

It seems like sort of an unusual test for a city that’s filed for bankruptcy.They have said that they have got some $18 billion in long-term liabilities.But what we heard from arguments today on both sides is that there may be some question about whether or not that number is truly indeed the number.

And so the unions and pension funds are beginning to look at the city’s balance sheet and asking some critical questions.For example, is the hole that appears to be in Detroit’s balance sheet for its pension obligations truly as deep as the city says it is?So both sides will be presenting evidence this week and sort of a back-and-forth about whether or not the city’s finances are really as dire as the city originally said it was.

JEFFREY BROWN: And you have mentioned pensions a few times.Another issue, I gather, is whether these pensions are in fact protected under the state’s constitution.

MATTHEW DOLAN: That’s right going to be a critical question for the judge to decide.And he may not decide it right away.

The unions and the pension funds are saying that the city should have never been eligible to file for bankruptcy because their plans all along were to cut the pensions, which are protected by the state constitution, they say.The city says that once they filed for bankruptcy protection in federal court, it is the federal Constitution that would supersede the protections under a state constitution.

So this is a case that’s being watched not only in Detroit, but nationwide, as many cities and states are struggling with huge pension obligations and wondering can they cut those pension obligations at some point in the future, or are there protections in place that would prevent them from doing so?

JEFFREY BROWN: And then, of course, there’s the issue of the emergency manager, Kevyn Orr.Whether his appoint is constitutional, I gather, is one issue, and then, if so — or once he was in — in power, whether he negotiated in good faith.

MATTHEW DOLAN: Those are both critical issues and will come to light during the next couple days and weeks as this trial continues.

The emergency manager law in Michigan has sort of a tortured history.It originally was on the books as a way for the governor, as sort of a last resort, to appoint a financial overseer over fiscally troubled cities.But voters, actually through a referendum process, decided that they wanted to repeal that law.The state legislature came back and passed another version of that law, which would be protected from any kind of referendum recall.

So that law is now on the books.But unions and others, including some in the civil rights community, have said this law disenfranchises voters in cities and gives the state too much power to decide what should be local issues.So this is certainly going to be discussed throughout this case.

And the emergency manager law is not only something that affects Detroit.It affects several cities and school districts throughout Michigan.

JEFFREY BROWN: And let me ask you briefly, finally, you mentioned the governor.We have just talked about Kevyn Orr.We’re expecting to hear from both of them in this trial, I gather.Right?

MATTHEW DOLAN: That’s right.

It’s very unusual, but both Kevyn Orr and the governor of Michigan are expected to testify.They earlier gave depositions in which they described their roles, which they say were lawful, and that they followed the emergency manager law and the sweeping powers that it has.

The governor has always said that he’s gone into this process reluctantly, that he was hoping that through a series of consent agreements and other measures they had hoped to keep Detroit out of bankruptcy court.But he and his staff now are really pushing full steam ahead and saying that this was the last resort, but it’s certainly a lawful one.

JEFFREY BROWN: All right, Matthew Dolan of The Wall Street Journal, thanks so much.

MATTHEW DOLAN: It’s been my pleasure.