Detroit's Fiscal Future Rests With A Federal Judge

Detroit's future comes down to this: a federal trial over the city's plan to emerge from largest municipal bankruptcy ever in the U.S. As Detroit Public Radio's Quinn Klinefelter reports, city officials argue the plan is the best way to propel Detroit into prosperity — but some major creditors aren't pleased with it.

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MELISSA BLOCK, HOST:

Detroit's historic bankruptcy case has gone into the courtroom. This is where the city's plan to emerge from the nation's largest ever municipal bankruptcy will be dissected. The city wants to cut about $7 billion from the 18 billion it owes to thousands of creditors. As Quinn Klinefelter of member station WDET reports, some creditors are fighting the plan. They accused Detroit of playing favorites and picking whom to pay back.

UNIDENTIFIED MAN: Retirees, others - we got a bunch of signs here.

QUINN KLINEFELTER, BYLINE: About two dozen people gathered today in front of the federal courthouse here, were one judge will decide whether to approve Detroit's roadmap to get out of chapter nine bankruptcy. It's a plan retirees like Belinda Myers-Florence say will hit them hard.

BELINDA MYERS-FLORENCE: I've already lost my health care. You're also going to hit my pension. You're also trying to recoup money that I saved, that the city had nothing to do with except invest for me. You want money back that you never gave me. It's - it's crazy.

KLINEFELTER: But here is Michigan Governor Rick Snyder a year ago, when the city first filed for bankruptcy and began crafting the exit strategy that's now on trial.

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GOVERNOR RICK SNYDER: Now is our opportunity to stop 60 years of decline. How long has this gone on and people have not stopped to say stop kicking the can down the road and do something? We are doing something. This is the place to deal with the debt question. This is the place to put a plan for improved services for the citizens.

KLINEFELTER: The plan includes deals to trim debt and pension payments - deals that the majority of retirees signed off on. It also features a sweeping agreement between the state and some private foundations to keep one of the city's most prized possessions out of the grasp of creditors - the Detroit Institute of Arts.

ANNMARIE ERICKSON: This is a national historic landmark. This is an important place in the American landscape.

KLINEFELTER: Annmarie Erickson is the art museum's Chief Operating Officer, and she's standing in front of huge Diego Rivera murals - among the assets that would be placed in an untouchable trust under a so-called Grand Bargain, in exchange for providing Detroit with $800 million to pay creditors.

ERICKSON: If the Grand Bargain does not go through, we are probably facing years and years of litigation - around this collection, around whether or not it can be sold, around objects that have restrictions that might prevent their sale. This will be tied up in the courts for years and Detroit will not be able to exit bankruptcy gracefully.

KLINEFELTER: But the big creditors are arguing in court that Detroit should not be allowed to emerge from bankruptcy under this plan. They say the city is accepting millions for artwork that could be worth billions if used as collateral for a loan to pay back debts. James Sprayregan is the chief counsel for Syncora - one of two bond insurers who loaded Detroit more than a $ 1 billion about a decade ago to shore up the city's pension funds. He argues that Detroit is unfairly and illegally offering some creditors a return on their claim while others like the Syncora get almost nothing.

JAMES SPRAYREGEN: And the unfortunate thing here is there are some people who have said Syncora, what were you thinking? You knew Detroit was in trouble and they were potentially going bankrupt. Why did you do this transaction in the first place? I think we actually want to encourage financial creditors to be helpful in difficult situations and the way to do that is to have the rule of law apply.

KLINEFELTER: That law differs from typical bankruptcy cases. For one thing, the court cannot order a city to be liquidated to pay back creditors like it could a corporation. And there's never been a municipal bankruptcy this large. There's no jury here. A single judge will preside over more than a month of testimony about whether Detroit is improperly favoring one set of creditors over another. And other cities struggling with deep debt or daunting pension obligations are watching what goes on in this trial very closely. For NPR News, I'm Quinn Klinefelter in Detroit.

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