The city of Detroit, Michigan, filed for Chapter 9 bankruptcy on July 18, 2013. It was the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18–20 billion, exceeding Jefferson County, Alabama’s $4-billion filing in 2011.
Detroit is also the largest city by population in the U.S. history to file for Chapter 9 bankruptcy, more than twice as large as Stockton, California, which filed in 2012. While Detroit’s population had declined from a peak of 1.8 million in 1950, its July 2013 population was reported by The New York Times as a city of “700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.”
Detroit’s bankruptcy filing followed a declaration of financial emergency in March 2013 that resulted in Kevyn Orr being appointed as “emergency manager” of the city by Michigan Governor Rick Snyder. Orr’s subsequent negotiations sought to get creditors to willingly “take a haircut” on Detroit’s debt, and were ultimately unsuccessful.
One of the biggest issues facing litigators of Detroit’s bankruptcy was which assets belong to the city outright and those that were available to creditors in order to satisfy liabilities. Nowhere did this question loom larger than the fate of the Detroit Institute of Arts. The DIA holds 66,000 valuable pieces; however, only five percent of this collection was bought with city money. Judge Rhodes had to decide if the other 95% of this collection could be monetized in order to satisfy the claims of the bankruptcy creditors. In particular interest, was whether the art collection would be needed to satisfy the pension claims of its retirees.
Chief Judge for the Eastern District Michigan Gerald Rosen, who had taken on the role of chief mediator, and Rhodes sought a quick end to the bankruptcy fearing a process that could take years to resolve. On November 5, 2013 Rosen convened a meeting at the federal courthouse in Detroit with the leaders of some of the largest foundations in the country. Among those in attendance were the Ford, Knight and Mott Foundations. It was here that Rosen laid out his plan that would become known as the Grand Bargain. Rosen’s plan sought commitments for over $800 million over the next 20 years from foundations, private donors, the DIA, and the state that would be used to shore up underfunded pensions. This would save the DIA from selling its art; the DIA would then become a private organization, releasing it from city ownership and protecting its collection forever.
When asked why they donated, Darren Walker, president of the Ford Foundation said “If you don’t have great cities, you won’t have great nations,” he said. “Detroit is a metaphor for America, for America’s challenges and America’s opportunities. It is a hothouse for new innovation, for ingenuity and risk taking. That doesn’t happen in a lot of American cities. We need to be in Detroit because of that.” In total foundations would commit $366 million over 20 years to the Foundation for Detroit’s Future, the non-profit set up to act as the fiduciary for the funds.
On December 22 Rosen rejected a $230 million settlement negotiated between the city and Bank of America Merrill Lynch and UBS. The city owed the banks $290 million due to the investment by former mayor Kwame Kilpatrick. The city and banks would settle, on the 24th, for $185 million in the Rosen-negotiated deal. Rhodes would later stun those following the proceedings, in what would be known as the Christmas Eve Massacre, when he rejected the settlement three weeks later, saying that it was “just too high a price to pay”. After Orr threatened to sue the two banks, they eventually settled for $85 million. By January 2014, the city would reach a deal with some of its toughest opponents (three bond insurers) to whom they owed $388 million on the city’s general obligation bonds by agreeing to pay 74%.
The DIA initially offered $50 million toward the Grand Bargain; the city, governor and others pushing for the deal viewed that as too low to get the state legislature on board. Ultimately, the DIA would agree to contribute $100 million.
In May 2014, legislation was introduced giving Detroit’s retirement systems a $194.8 million lump sum as part of the state’s $350 million commitment. If pensioners accepted the deal, they would not be able to sue the state over pension reductions; this was seen as a critical step toward getting support from the Republican-majority legislature. Some Republicans, such as Speaker of the House Jase Bolger, wanted unions to make contributions to help in the Detroit settlement. Another condition sought was that of a financial review commission modeled after the New York State Financial Control Board that oversaw New York City’s troubled finances during the 1970s and 80s. After unions agreed to contribute money towards the settlement, the Michigan House passed legislation with major bipartisan support on May 22. Governor Snyder called the legislative package an opportunity to change the direction of Detroit. The state Senate would follow on June 3 and soon after. Upon passage, the Detroit News called the final legislative package a “grand piece of work,” and the Detroit Free Press opined that the deal showed lawmakers “get it.”. In total, Judge Rosen’s plan was able to raise $816 million from the various entities to create the Grand Bargain.
Early in negotiations, the city’s retirees saw themselves threatened with in cuts of 50%. However, with the grand bargain those cuts were reduced to a 4.5% with no cost living increases. Over the spring and summer of 2014 more than two-thirds of Detroit retirees voted in favor of the deal.
On September 10, Detroit reached a deal with three Michigan counties over regional water and sewer services that could eliminate one roadblock to federal court approval of the city’s plan to adjust its debt and exit bankruptcy. The deal with Oakland, Wayne and Macomb counties created the Great Lakes Water Authority, a new regional water and sewer authority, but allowed Detroit to maintain control of its local system. The deal was crucial to adjusting the city’s $18 billion of debt and helping it exit its historically unprecedented municipal bankruptcy.
Detroit would reach deals with more of its creditors throughout the fall. In September it came to terms with bond insurer Syncora on its $400 million claim; Syncora would receive $25 million in cash and bonds, as well as a 20-year lease extension on their operation of the Detroit-Windsor Tunnel and 30-year lease of the underground garage at Grand Circus Park.
On October 16, lawyers for the city and Financial Guaranty Insurance Company (FGIC), a bond insurer with a $1 billion claim, disclosed in court that they had reached a deal to settle the company’s claims. Under the deal, the city and state would pay for the demolition of the city-owned Joe Louis Arena once the Red Wings move into the new arena. After demolition, FGIC would receive the arena site and an adjacent parking lot, giving the company nearly 9 acres (3.6 ha) for redevelopment.
On November 7, 2014 Judge Rhodes accepted the city’s plan of adjustment, 17 months after the city had filed bankruptcy — a far shorter time frame that had been predicted based on other municipal bankruptcies. At the hearing Rhodes remarked, “We have used the phrase ‘the Grand Bargain’ to describe the group of agreements that will fix the city’s pension problem. That description is entirely fitting. In our nation, we join together in the promise and in the ideal of a much grander bargain. It is the bargain by which we interact with each other and with our government, all for the common good. That grander bargain, enshrined in our Constitution, is democracy. It is now time to restore democracy to the people of the City of Detroit”.
On December 10, the ownership of DIA transferred to the non-profit DIA, Inc. The following day Detroit exited bankruptcy protection with finances returned to the control of city, subject to three years of oversight by the Detroit Financial Review Commission.