1 NOTES Investing in Detroit: Automobiles, Bankruptcy, and the Future of Municipal Bonds ANNA M. RICE* TABLE OF CONTENTS INTRODUCTION I. THE HISTORY OF DETROIT A. AUTOMOBILES B. MUNICIPAL BONDS C. BANKRUPTCY II. MUNICIPAL BOND REGULATION A. DEVELOPMENT OF MUNICIPAL BOND REGULATIONS B. THE DODD FRANK ACT AND MUNICIPAL BONDS III. THE FUTURE OF MUNICIPAL BONDS A. WHY REGULATE MUNICIPAL BONDS? B. BANKRUPTCY LAWS C. PROPOSED SEC DISCLOSURE REQUIREMENTS Calls to Action Modifying Initial Disclosure Guidance Modifying the Rule for Continued Disclosure Price Transparency CONCLUSION * Georgetown Law, J.D. 2015; Harvard University, A.B , Anna M. Rice. I would like to thank Professor Heidi Li Feldman for getting me started, Professor Eloise Pasachoff for encouraging me to keep working, and Professor Guy Neal and his colleague Peter Canzano for their invaluable advice. Thank you also to my family for their constant support. Finally, thank you to The Georgetown Law Journal editors and staff for their help and hard work. All errors are my own. 1335
2 1336 THE GEORGETOWN LAW JOURNAL [Vol. 103:1335 INTRODUCTION The Michigan constitution does not single out the obligations of municipal bonds for protection in the same way it protects pension rights. Bond obligations can no longer be the only first-budget municipal obligations. Bankruptcy Judge Steven Rhodes 1 On July 18, 2013, Detroit, Michigan became the largest municipality in United States history to file for bankruptcy. 2 Since the days of Henry Ford, Americans have been investing in Detroit by buying its most famous product automobiles. 3 They have also been investing directly in Detroit itself, buying a financial product called municipal bonds. Detroit, along with many other cities, sells municipal bonds to raise money for city projects. 4 Holders of those municipal bonds were major creditors in the city s bankruptcy case. Many municipal bonds are held by retail investors because bonds have long been considered a relatively safe investment on the theory that cities are not likely to default or go bankrupt. 5 The bankruptcy of a city as large as Detroit, coming on the heels of other Chapter 9 municipal bankruptcies, has made investors question the bonds stability. Although Detroit s bankruptcy has not undermined bonds overall safety, the treatment of municipal bond debt in Detroit could affect the future of the $3.7 trillion municipal bond market 6 and the savings of many people outside the Motor City. The ability of cities to finance their projects could also be affected the riskier municipal bonds are seen to be, the more difficult it will be for cities to sell them at high prices, leaving them stuck in a cycle of municipal poverty. 7 One mission of the Securities and Exchange Commission (SEC) is to protect investors; 8 municipal securities have historically escaped stringent regulations because they are stable investments. As worries about bond defaults and munici- 1. Oral Opinion on the Record at 42, In re City of Detroit, Mich., 504 B.R. 191 (Bankr. E.D. Mich. Nov. 7, 2014) (No ), available at Opinion_on_Detroit_Plan_Confirmation_Judge_Rhodes_FINAL_for_Release.pdf. 2. See, e.g., Nathan Bomey et al., Judge Rules Detroit Eligible for Historic Chapter 9 Bankruptcy, Says Pensions Can be Cut,DETROIT FREE PRESS (Dec. 3, 2013, 2:22 PM), /NEWS01/ /Detroit-bankruptcy-eligibility-Steven-Rhodes-Chapter-9-Kevyn-Orr. 3. See Our History, FORD, https://corporate.ford.com/company/history.html (last visited Mar. 16, 2015). 4. See, e.g., U.S. SEC. & EXCH. COMM N, REPORT ON THE MUNICIPAL SECURITIES MARKET i ii (2012), available at https://www.sec.gov/news/studies/2012/munireport pdf [hereinafter SEC REPORT]. 5. Id. at See, e.g., Louis Basenese, Why Detroit s Bankruptcy Could Detonate a $3.7-Trillion Muni Bond Bomb, WALL ST. DAILY (July 24, 2013), 7. Objection of Ambac Assurance Corp. at 5, In re City of Detroit, Mich., 504 B.R. 191 (Bankr. E.D. Mich. May 12, 2014) (No ), 2014 WL The Investor s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, SEC. & EXCH. COMM N, (last visited Mar. 16, 2015).
3 2015] INVESTING IN DETROIT 1337 pal bankruptcies surfaced during the Great Recession, the federal government started to reassess the regulation of municipal securities. Although a complete overhaul of municipal securities regulation may take decades, this Note suggests two proposals to implement in the short term. The proposals address growing concern about the rights of municipal bondholders in Chapter 9 bankruptcy: first, the SEC should issue interpretive guidance detailing the bankruptcy law and risk information to be disclosed in the initial bond-offering documents; second, the SEC should modify Securities Exchange Act Rule 15c2-12 to ensure ongoing review of municipal bankruptcy laws and risks throughout the term of the bond. 9 SEC Commissioners from both sides of the aisle have expressed concern about how the opacity of pricing in the bond market makes it difficult for individual investors to access accurate price information. 10 This Note s proposal to clarify complex municipal bankruptcy law in online filings accessible to all investors would help individual investors participate in the market without prohibitive research costs. In addition, the proposed federal guidance and disclosure rules do not interfere with the rights of states to regulate their own economies and pass their own municipal bankruptcy authorization laws. Transparently incorporating the risk of bankruptcy into bond prices will be a crucial first step in making the bond market safe for all investors while leaving the federal state balance intact. Municipal bondholders, who are primarily retail investors, should be protected by the SEC and provided with easily accessible information on municipal bankruptcy law and precedent. This Note proposes specific bankruptcy-related disclosure requirements to enable these investors to properly price in the risk of bankruptcy. Part I of this Note traces the history of Detroit, with a focus on its municipal bond issuances and descent into bankruptcy. Part II describes the history and current state of municipal bond regulation. Finally, Part III proposes two important initial regulatory steps that will improve disclosure of bankruptcy risks and potential outcomes for bondholders in bankruptcy. I. THE HISTORY OF DETROIT The history of Detroit is a history of its major industry automobiles. The economy of the city rises and falls with the industry. Throughout its history, Detroit has been issuing municipal bonds to finance auto plants, transportation, and more. In July 2013, with Detroit s major industry struggling and the massive debt owed to city workers pension funds and municipal bondholders stifling economic growth, Detroit was forced to file Chapter 9 bankruptcy. A 9. See infra sections III.C SEC REPORT, supra note 4, at (report overseen by former Democratic Commissioner Elisse B. Walter); Bob Pisani, SEC s Gallagher: Market Regulation Overhaul Needed, CNBC (Oct. 1, 2014, 4:51 PM), (interview with Republican Commissioner Daniel M. Gallagher).
4 1338 THE GEORGETOWN LAW JOURNAL [Vol. 103:1335 federal judge approved Detroit s plan to exit bankruptcy in November The disparate treatment of unsecured creditors in Detroit s plan, which elevated pensioners rights above bondholders rights, should concern bondholders in future municipal bankruptcies. A. AUTOMOBILES During World War II, George W. Romney headed the Automotive Council for War Production, encouraging the industry to produce military equipment. 11 Romney, who later became Michigan s governor, had a vested interest in the auto industry as the chief executive of American Motors. 12 In a state that already idolized Henry Ford and the big auto companies, the increased wartime production only cemented the industry as Michigan s primary source of revenue. In the first two years of the war, half a million people moved to Detroit, the Arsenal of Democracy, to work. 13 The auto factories shaped Detroit s culture and population. 14 Ford Motor Company was the first company to start advertising assembly-line jobs in By 1925, there were thirty-seven car factories in Detroit. 15 The African- American population of Detroit increased more than twenty-fold between 1910 and 1930 as new autoworkers flooded into the city to fill the jobs. 16 Racial tensions after this migration added to Detroit s financial problems. White city-dwellers started moving en masse to the suburbs in the 1950s and 11. See RAPHA HOLDING,GOVERNORS OF THE UNITED STATES:POWERS AND LIMITATIONS 86 (2010). 12. See David E. Rosenbaum, George Romney Dies at 88; A Leading G.O.P. Figure, N.Y. TIMES (July 27, 1995), 13. Nathan Bomey & John Gallagher, How Detroit Went Broke: The Answers May Surprise You And Don t Blame Coleman Young, DETROIT FREE PRESS (Sept. 15, 2013, 2:10 AM), com/interactive/article/ /news01/ /detroit-bankruptcy-history-1950-debt-pensionrevenue; see also FRED KAPLAN, 1959: THE YEAR EVERYTHING CHANGED (2009). The Arsenal of Democracy phrase is used by multiple sources. See, e.g., Nick Carey, Detroit Files for Bankruptcy, Stage Set for Court Fight, REUTERS (July 18, 2013, 7:55 PM), 18/us-usa-detroit-bankruptcy-idUSBRE96H16O Even in tiny Portland, over a hundred miles from Detroit, the automobile industry was the lifeblood of the community. There were no college prep classes at the local high school, and only about a tenth of students in the mid-1970s went on to higher education. However, the high school included a state-of-the art automotive shop half as large as the classroom building. As Portland native Julie Rice remembered: Higher education wasn t necessary for a lifetime of working in the automobile factories. from Julie Rice (née Bauer) to author (Mar. 12, 2014, 10:39 AM) (on file with author). 15. KAPLAN, supra note 13, at 214; see also ELIZABETH ANNE MARTIN, DETROIT AND THE GREAT MIGRATION, , at 4 (1993). 16. KAPLAN, supra note 13, at 214. Influenced by black musical traditions, the Motown Records assembly line produced so many hit records starting in 1959 that Motown short for Motor Town became a genre. See Top 5 Motown Singles: 1963,CURVATURE (July 20, 2012), com/2012/07/20/top-5-motown-singles-1963/. Motown was just one example of a cultural outgrowth of the car industry, specifically of the black migration spurred by the industry s swift rise and seemingly endless demand for labor. KAPLAN, supra note 13, at 213.
5 2015] INVESTING IN DETROIT 1339 especially after race riots in the 1960s, 17 abandoning entire sections of Detroit, eroding the tax base, and leaving behind a segregated city rife with slums and crime. 18 Citizens of all races have been fleeing the city ever since Detroit has lost 60% of its population since As the Detroit Free Press succinctly summarized: People leave, taxes go up, more people leave. 20 In 2012, Detroit had the highest income tax rate and the highest property tax rate in the state, yet income tax revenue had fallen 40% since Michigan continued to rely heavily on automobile production, its economy suffering with each industry setback. Extensive federal auto safety regulations were passed in the 1960s, putting a costly burden on the entire industry. 22 In the 1970s, gas prices rose and compact foreign cars flooded the market; Detroit s automakers struggled to keep up. 23 The politically powerful United Auto Workers (UAW) union kept labor costs high. 24 Although this helped Michigan workers, it further slowed the big American automakers competing with the smaller, cheaper cars built by foreign companies with low-cost labor. 25 American companies started releasing compact cars in response, including the Ford Pinto in 1971; a rash of lawsuits followed when Pintos started exploding in otherwise minor accidents. 26 Coleman Young was elected mayor in To rebuild the city, Young raised taxes and cut spending, encouraged auto companies to build factories in Detroit, and developed downtown. 28 Young started reducing the city s own 17. How Detroit Lost Its Way: White Flight, TIME, article/0,28804, _ _ ,00.html (last visited Mar. 16, 2015). 18. See Bomey & Gallagher, supra note 13. Julie Rice remembers that riding through the slums...looked like black and white television: all the scenery was in shades of gray. Walking into the [Detroit Tigers] ballpark was a remarkable contrast; like entering the Land of Oz, in full color with green grass and blue skies. from Julie Rice (née Bauer) to author (Mar. 12, 2014, 10:39 AM) (on file with author). 19. See Bomey & Gallagher, supra note 13; see also KEVYN D. ORR, CITY OF DETROIT OFFICE OF EMERGENCY MANAGER, FINANCIAL AND OPERATING PLAN 22 (2013) [hereinafter FINANCIAL AND OPERATING PLAN], available at 20Final%20Financial%20&%20Operational%20Plan%20_45%20Day%20Pl.pdf. 20. Bomey & Gallagher, supra note Id.;FINANCIAL AND OPERATING PLAN, supra note 19, at See generally LISA SCHULTZ BRESSMAN ET AL., THE REGULATORY STATE (2d ed. 2013). 23. James Sherk, The Union Difference: A Primer on What Unions Do to the Economy, CAPITAL RES. CTR. (Jan. 3, 2012), https://capitalresearch-zippykid.netdna-ssl.com/wp-content/uploads/2012/01/lw01 12.pdf; see also David Kiley, Small Cars Rising: This Time Detroit Is Prepared, AUTOBLOG (Mar. 22, 2011, 3:00 PM), 24. Sherk, supra note 23, at Id. 26. The 50 Worst Cars of All Time: 1971 Ford Pinto, TIME (Sept. 7, 2007), time/specials/2007/article/0,28804, _ _ ,00.html. 27. Bomey & Gallagher, supra note 13. Young was the first African-American mayor of Detroit. See Coleman A. Young, 79, Mayor of Detroit and Political Symbol for Blacks, Is Dead, N.Y. TIMES (Dec. 1, 1997), 28. Bomey & Gallagher, supra note 13.
6 1340 THE GEORGETOWN LAW JOURNAL [Vol. 103:1335 workforce, aware of the ballooning pension obligations Detroit was incurring. 29 Young improved the city s finances so much, however, that Detroit was able to issue highly rated bonds with abandon, increasing the city s debt by 72% between 1987 and After he left office in 1994, pension obligations skyrocket[ed]. 31 The city was hit hard by the financial crisis in Many Americans no longer had the money to buy new cars, and auto manufacturers stock plummeted. Government bailouts and bankruptcy filings by Chrysler and General Motors two of the Big Three followed. 32 Since 2000, unemployment has tripled in Detroit. 33 And now, the city is bankrupt. 34 B. MUNICIPAL BONDS American municipal bond issuances have been taking place for over two centuries, beginning with a canal-financing bond offering in 1812 in New York City. 35 The SEC explains municipal bonds succinctly: Investors who buy municipal bonds are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or principal. 36 In short, bond buyers give the municipality money to help finance certain operations or projects, in effect buying pieces of the municipality s debt. In exchange for this loan, the municipality pays out set returns to the bondholders, often financed by taxes or other city revenues. Because taxes are seen as a steady revenue stream, investors expect consistent payments. 37 General obligation bonds are paid off with taxes or other general revenues, backed by the full faith and credit of the municipality. In addition, general obligation bonds usually include a promise from the municipality to levy ad 29. Id. 30. Id. 31. Id. 32. Timothy J. Sturgeon & Johannes Van Biesebroeck, Effects of the Crisis on the Automotive Industry in Developing Countries: A Global Value Chain Perspective 7 (World Bank Pol y Research, Working Paper No. 5330, 2010). Chrysler and General Motors (GM) filed for bankruptcy and were bailed out by the federal government. Id.; see also Tim Higgins et al., GM Bailout Ends as U.S. Sells Last of Government Motors, BLOOMBERG (Dec. 10, 2013, 12:01 AM), /gm-bailout-ends-as-u-s-sells-last-of-government-motors-.html. 33. FINANCIAL AND OPERATING PLAN, supra note 19, at See infra section I.C. 35. Basenese, supra note 6. Detroit has also been issuing bonds since the 1800s, including streetcar bonds issued in See Charles Moore, Municipal Ownership of Street Railways in Detroit, 13 Q.J. ECON. 453, 454 (1899). 36. Municipal Bonds, SEC. & EXC. COMM N, (last visited Mar. 16, 2015). 37. Darrell Preston et al., Detroit Case Scrutinized by $900 Billion G.O. Market, BLOOMBERG (July 19, 2013, 11:45 AM),
7 2015] INVESTING IN DETROIT 1341 valorem property taxes in an amount sufficient to repay the bonds. 38 There are both limited tax general obligation (LTGO) bonds, which carry the promise only to raise taxes to a certain point (limited by the state constitution), and unlimited tax general obligation (UTGO) bonds, which do not have that ceiling. 39 Bonds can also be issued to finance specific projects, or on behalf of private entities such as colleges or hospitals ( conduit borrowers ). 40 Many of the bonds at issue in Detroit s bankruptcy are general obligation bonds, including both LTGO and UTGO bonds. 41 The SEC found that [i]ndividuals, or retail investors, directly or indirectly hold more than 75% of the outstanding principal amount of municipal securities. 42 Households are the single largest owner of municipal securities and have been for the past six years. 43 Mutual funds are also heavily invested in these bonds. 44 The bond market was, and despite recent developments still is, viewed as a safe place to invest. 45 Municipalities have defaulted on bonds in the past, and Detroit is not the first to declare bankruptcy. 46 But defaults on investment-grade municipal bonds between 1970 and 2007 comprised only 0.1% of issuances; in comparison, 2.1% of investment-grade corporate bonds defaulted during that time. 47 Municipal bonds are popular investments for risk-averse investors due to consistent income payments, tax breaks, 48 steady tax revenue backing the bonds, 49 and the possibility of state statutory protections General Obligation Bond or Go Bond, MUN. SECS. RULEMAKING BD., definition/general-obligation-bond-or-go-bond.aspx (last visited Mar. 16, 2015). 39. Limited Tax General Obligation Bond, MUN. SECS. RULEMAKING BD., definition/limited-tax-general-obligation-bond.aspx (last visited Mar. 16, 2015); Unlimited Tax Bond, MUN.SECS.RULEMAKING BD., (last visited Mar. 16, 2015). 40. Municipal Bonds, supra note 36 (internal quotation marks omitted). 41. Preston et al., supra note 37; FINANCIAL AND OPERATING PLAN, supra note 19, at SEC REPORT, supra note 4, at v. 43. See id. at (graphing the primary holders of municipal securities). 44. See id. at Conrad de Aenlle, After Setbacks, Municipal Bond Sector Is Looking Up, N.Y. TIMES (Feb. 10, 2014), 46. SEC REPORT, supra note 4, at 23 (noting that 917 bonds defaulted in the 1990s); id. at 23 n.117 (claiming that the actual monetary losses from defaults have been tiny in comparison to the size of the defaults). 47. Jason Saylor, Note, Credit Rating Agencies and Municipal Bonds: How a Misunderstood Industry Has Cost Taxpayers,4GEO.MASON J. INT L COM. L. 259, 264 (2012). 48. See 26 U.S.C. 103(a) (2012). 49. Preston et al., supra note Objection of Ambac Assurance Corp., supra note 7, at 5. ( [M]unicipal finance is constrained by state constitutions and legislation.... Specifically, the statutory restrictions operate to create a structure establishing the seniority of specified obligations that will produce a low risk profile and thereby ensure credit is available at a low cost. ).
8 1342 THE GEORGETOWN LAW JOURNAL [Vol. 103:1335 Mayor Coleman Young s fiscal program gave Wall Street some reassurance. In 1986, twelve years into Young s twenty-year tenure as mayor, the rating for Detroit s bonds was increased to investment-grade, allowing the city to borrow even more from investors at a lower interest rate. 51 Detroit was still putting all its eggs into the auto-industry basket and using bonds to help keep the industry healthy; in 1990, $130 million in general obligation bonds was issued to finance Chrysler s Jefferson North Assembly Plant. 52 Jefferson North was not the first time auto companies had supported the city s accumulation of debt on their behalf. As early as 1929, Ford supported a ballot measure for a bond issuance meant to finance rail transportation so workers could commute more easily to the automaker s River Rouge Plant. 53 The Detroit Free Press concluded that in 2001 the city still could have avoided disaster. Bankruptcy was not inevitable. But under the [Mayor Kwame] Kilpatrick and [Mayor Dave] Bing administrations, the city started borrowing aggressively to cover its operating expenses, enabled by Wall Street s irresponsible lending of the 2000s. 54 In 2005, Kilpatrick received the Bond Buyer s Midwest Regional Deal of the Year award for his $1.44 billion deal involving borrowing to fund pensions. However, the massive borrowing ended up hurting the city in September 2013, that deal accounted for nearly 20% of the city s debt. 55 By issuing bonds to pay for fiscal stabilization and pension obligations, Detroit slid deeper into debt. The Free Press calls the 2000s a decade-long borrowing binge that doubled the city s debt between 2000 and Kilpatrick issued fiscal stabilization bonds in 2002; Bing issued more in 2009, both just to keep the city budget afloat. 57 Corruption further depressed the city s finances. Kilpatrick is now serving a twenty-eight-year sentence in federal prison for racketeering, extortion, and other offenses Bomey & Gallagher, supra note Id. 53. Charles K. Hyde, Planning a Transportation System for Metropolitan Detroit in the Age of the Automobile: The Triumph of the Expressway, 32 MICH. HIST. REV. 59, (2006) (noting that this ballot measure failed in favor of expressways). 54. Bomey & Gallagher, supra note Id. 56. Id. 57. Id. 58. Heather Catallo, Kwame Kilpatrick Leaves Michigan as a Federal Prisoner with a 2037 Release Date, WXYZ DETROIT (Jan. 16, 2014, 7:28 AM), kwame-kilpatrick-leaves-michigan-as-a-federal-prisoner-with-a-2037-release-date. His corruption is estimated to have harmed the city to the tune of $20 million. Tresa Baldas, How Corruption Deepened Detroit s Crisis, USA TODAY (Oct. 6, 2013, 8:03 AM), 10/06/how-corruption-deepened-detroits-crisis/ /.
9 2015] INVESTING IN DETROIT 1343 C. BANKRUPTCY In April 2012, Michigan Governor Rick Snyder subjected Detroit to greater oversight by the state government. 59 A state-appointed review team determined in February 2013 that Detroit was in a state of financial emergency and had no satisfactory plan to remedy it. 60 The findings allowed Snyder to announce the state was taking full control of Detroit s government. Snyder appointed Kevyn Orr as the city s Emergency Manager in March 2013, 61 giving him broad powers such as the ability to rewrite contracts and liquidate city assets, and a mandate to turn the city s finances around. 62 At the time, five smaller cities in Michigan were under the control of Emergency Managers, including Pontiac and Flint both long-time homes of General Motors plants. 63 On July 18, 2013, Detroit became the largest U.S. municipality to file for Chapter 9 bankruptcy, which provide[s] a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. 64 Sitting at the wheel of the city when the filing was made in the Eastern District of Michigan was Emergency Manager Orr. Orr attended the University of Michigan, just forty-five miles from Detroit, graduating with a B.A. in 1979 and a J.D. in Orr s work at Jones Day in Washington, D.C., brought him back to Michigan decades later, right in the middle of the auto industry s decline Orr represented Chrysler during its 2009 bankruptcy proceedings. 66 His broadly acclaimed 67 restructuring of the giant auto manufacturer, which allowed many Michigan workers to retain their jobs, 59. Michigan Gov. Rick Snyder Takes Over Detroit s Finances Amid Financial Emergency, CTV NEWS (Feb. 20, 2013, 6:41 AM), 60. Id. (internal quotation marks omitted). 61. Monica Davey, Bankruptcy Lawyer Is Named to Manage an Ailing Detroit, N.Y. TIMES (Mar. 14, 2013), html. 62. See Emergency Manager, MICH.GOV, Sheet2_347889_7.pdf (last visited Mar. 16, 2015). 63. See id.; see also Michigan Gov. Rick Snyder, supra note 59; Joseph Szczesny, Workers: Pontiac GM Plant Left to Die, OAKLAND PRESS (Feb. 15, 2012, 12:00 AM), general-news/ /workers-pontiac-gm-plant-left-to-die (noting that both Flint currently and Pontiac formerly have been the homes of GM plants). 64. Municipality Bankruptcy, U.S. CTS., BankruptcyBasics/Chapter9.aspx (last visited Mar. 16, 2015). 65. Facts on Kevyn D. Orr, DETROIT FREE PRESS (Mar. 24, 2013), /NEWS01/ /KEVYN-D-ORR. In a twist of fate, the Michigan Innocence Clinic at the University of Michigan Law School earned freedom for Dwayne Provience, wrongfully convicted of murder in He earned a settlement of $5 million from the city, which he now will not receive due to the bankruptcy. Imran J. Syed, Doubly Wronged in Detroit, SLATE (Dec. 12, 2013, 10:01 AM), 5_million_in_compensation_for_a_wrongful_conviction.html. 66. Brian Dickerson et al., New Detroit Emergency Financial Manager Kevyn Orr Takes on Challenge of a Lifetime, DETROIT FREE PRESS (Mar. 24, 2013, 10:21 AM), article/ /news01/ /new-detroit-emergency-financial-manager-kevyn-orr-takes-onchallenge-of-a-lifetime.
10 1344 THE GEORGETOWN LAW JOURNAL [Vol. 103:1335 put him on the short list for the Emergency Manager job in Detroit. 68 Six weeks after his appointment, Orr described just how dire things were in Detroit in a Financial and Operating Plan filed with the State Treasurer on May 12, He wrote, [w]hat is clear...is that continuing along the current path is an ill-advised and unacceptable course of action if the City is to be put on the path to a sustainable future. 70 The first item on his list was the long-term debt issuances bonds used for years to cover shortfalls in the budget. 71 He recognized that issuing municipal bonds had created significant debt, and that borrowing would not save the city this time. Detroit bonds were rated junk status by ratings agencies, and debt limits meant the City [had] effectively exhausted its ability to borrow. 72 In addition to bond obligations, pension obligations to former city employees (including medical benefits) made up most of what was then estimated to be $15 billion in debt. 73 Shortly after his report was issued, Orr stopped making payments on some of Detroit s debts, including pension payments and certain bond payments. He created a comprehensive restructuring proposal to avoid bankruptcy and presented it to bondholders and other creditors, but they did not accept his settlement suggestions, instead offering what Orr called untenable counterproposals. 74 The dispersed nature of the bondholders and the low payments Orr was offering made it difficult to negotiate; Orr noted that in many instances the City is unable to negotiate with a single contact with the authority and willingness to bind its bondholders. 75 On July 17, 2013, city pension funds filed suit in state court to prevent Orr from cutting retiree benefits. 76 Orr would say later that these legal tactics forced him to declare bankruptcy early; he did not want the state courts to preemptively block the bankruptcy before he had a chance to bring his case in federal 67. See, e.g., Micheline Maynard, Chrysler: From Bankrupt to a $6 Billion Company, FORBES (Mar. 28, 2013, 8:41 PM), 68. See Dickerson et al., supra note See FINANCIAL AND OPERATING PLAN, supra note Id. at Id. 72. Id. at Id. The debt was later estimated to be over $18.5 billion. See, e.g., Carey, supra note Letter from Kevyn D. Orr, Detroit Emergency Manager, to Richard D. Snyder, Mich. Governor, Exec. Off. of Governor, and Andrew Dillon, State Treasurer, Mich. Dep t of Treasury, Re: Recommendation Pursuant to Section 18(l) of PA 436, at 9 (July 16, 2013), available at snyder/detroit_em_kevyn_orr_chapter_9_recommendation_427831_7.pdf. 75. Letter from Kevyn D. Orr, supra note 74 ( Certain parties rejected the City s proposals altogether. In other cases, creditors made untenable counterproposals suggesting that they should not be materially impaired or should not be impaired at all. ). 76. Joe Guillen, Detroit s Pension Boards File Suit Against Orr, Snyder to Block Cuts in Workers Benefits, DETROIT FREE PRESS (July 18, 2013, 7:57 AM), NEWS01/ /detroit-pension-board-detroit-lawsuit-kevyn-orr.