Detroit Bankruptcy Filing Totally Irresponsible

by Matthew D. Jessup on July 24, 2013

Editor’s Note:  The following was written by Edward J. McManimon, a partner and founder of McManimon, Scotland & Baumann, LLC.  Ed wrote the following after repeated requests for his views from various State organizations and media outlets. 

On July 18, 2013, the City of Detroit, Michigan filed for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. This is, by far, the largest municipal bankruptcy in U.S. history.

After years of blindly spending itself into insolvency while the State of Michigan stood by with little or no oversight and after trying to cram down settlements with bondholders and other “unsecured” creditors, Detroit determined that it was a “responsible act” to file for bankruptcy, rather than work out, with the help of the State, a way to recast the City’s obligations so that City creditors and retirees would be paid.

Some have characterized the bankruptcy filing as the best of all worlds. Michigan’s Governor seemed to think that filing for bankruptcy was a well thought out strategy, after he installed an aggressive interim administrator at the City to basically set the stage for bankruptcy rather than explore other more responsible actions with the State’s resources and the State’s energy to reorganize the obligations of the City.

It is very hard to accept the actions of the City and the State of Michigan, when so many more responsible options were available to the State over the past several years. For the State to pat itself on the back for pushing bankruptcy is foolish and certainly irresponsible.

This action should significantly and adversely affect not only the credit of the City, but also the State of Michigan, as the State failed miserably to guard the financial condition of the municipal governments like the City that provide the services to the residents of the State. The City certainly seemed willing and the State seemed comfortable with the City borrowing and spending money for projects and services that it obviously couldn’t afford; only now to have the costs of those projects and services borne by creditors rather than the City or State themselves.

To suggest, as Michigan’s Governor seems to be doing, that bondholders bought the credit of the City and not the credit of the State of Michigan ignores the very basic responsibility that the State has to ensure that local governments that the State creates to provide services to its residents do so in a responsible manner. Unless this action has a consequence to Detroit and to Michigan, it could spiral down and affect the credits of all general obligations bonds, including the State of New Jersey and its municipal issuers.

This result would be entirely unjust considering the very strong and continued oversight at the State level in New Jersey and the equally strong statements made by our Governor and the Director of the Local Finance Board that there would be no bankruptcies of any local governments of New Jersey under their watch. The actions and oversight of New Jersey’s Governor, the Director and the State back that up.

I can’t image the State of New Jersey doing what Michigan did or allowing it to be done. The State certainly would have stepped in a long time ago to analyze the problem and craft a solution that would completely avoid a filing for bankruptcy and respect the obligations any New Jersey municipality incurred.

So, while it may be viewed in some circles as a well thought out strategy by Detroit and the State of Michigan, that does not make it right or a financially responsible move.

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