Detroit Bankruptcy Trial Begins Wednesday

The city of Detroit for months has disclosed the awful condition of its finances. Now it’s up to a judge to determine if the largest public bankruptcy in U.S. history really can go forward.

An unusual trial starts Wednesday, pitting Detroit’s emergency manager and his legal team against unions and pension funds that claim the city isn’t qualified to scrub its books clean under Chapter 9 bankruptcy.

A city isn’t eligible for a bankruptcy makeover unless it shows that key steps were met, especially good-faith talks with creditors earlier this year. It’s a critical decision for Judge Steven Rhodes: If Detroit clears the hurdle, the case then would quickly turn to how to solve at least $18 billion in debt and get city government off the ropes.

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Jim Spiotto, a bankruptcy expert in Chicago, said it’s “virtually impossible” to argue that Detroit is solvent.

“They’re not paying their debts,” he said. “Look at their blighted areas. Look at their services.”

Nonetheless, unions and pension funds are challenging Detroit on the eligibility question. They claim emergency manager Kevyn 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.

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The trial in front of Rhodes is expected to last several days, with testimony from Orr, Police Chief James Craig, financial consultants and, possibly, the governor. It will be an autopsy on what Snyder has called decades of ruinous financial decisions in 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 city’s restructuring must provide a foundation for the city to begin to provide basic, essential services to its residents in a reliable fashion,” Orr said in July when he took Detroit into bankruptcy. “Without this, the city’s death spiral … will continue.”

Orr’s team estimates that 65 percent of Detroit’s annual revenue would be eaten up in debt payments by 2017 without an overhaul in bankruptcy court. Miles away from court, countless streets are bleak: 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. 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.

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