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Questions, answers about Detroit’s bankruptcy

November 24, 2014

DETROIT (AP) — A judge on Nov. 7 signed off on Detroit’s plan to emerge from bankruptcy, but he didn’t specify when that would happen. A specific date is expected to be discussed during a court hearing Monday.

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Q: Why is an exit date important?

A: Detroit is poised to borrow $275 million from Barclays Capital, much of it to pay off other obligations and to start improving services, when it is released from Chapter 9. The debt eventually will be turned into bonds carrying an interest rate of 4.75 percent or less and will be backed by income tax revenue. The city wants to get moving on it, especially because Wall Street slows down during the end-of-year holiday period.

“The city is more credit-worthy than it would have been 18, 19 months ago because the balance sheet is cleaned up for the first time in a great while,” said Doug Bernstein, a bankruptcy expert.

Indeed, emergency manager Kevyn Orr compared the city’s past borrowing to getting fleeced at a “payday loan store.” Detroit is erasing $7 billion of debt in bankruptcy.

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Q: Why wasn’t Detroit immediately released from bankruptcy when the plan was approved?

A: John Pottow, a professor at University of Michigan law school, compared it to buying a house. A buyer and seller reach an agreement but it still takes days or weeks to close the deal. In this case, it involves a series of deals with creditors and other parties.

“The city has won,” he said. “But you don’t get the house until you have the closing.”

Judge Steven Rhodes will have no patience for long pauses. On Nov. 12, he said Detroit can’t afford delays in regaining solvency.

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Q: Pension cuts of 4.5 percent are a big part of the plan. How soon will they take effect?

A: It’s unknown, but it will be influenced by the date that ends the case. Retirees put a real face on Detroit’s bankruptcy. The roughly 12,000 non-public safety retirees are also losing annual cost-of-living payments. The only hit to 9,000 police and fire retirees is a reduction in the cost-of-living payment, not a total elimination.

The cuts would have been harsher if not for an $816 million bailout arranged by the state, foundations and the Detroit Institute of Arts, with help from Detroit’s chief federal judge and other mediators. The state has pledged to give $195 million by the end of December. Other contributors will pay over time.

Detroit also will no longer provide health coverage to retirees.

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Q: Are there any notable threads still hanging?

A: Mayor Mike Duggan, who took office while Detroit was going through bankruptcy, has been irritated by some of the more than $100 million in legal fees and consultant contracts charged to the city. The judge ordered mediation for Dec. 3-4. Rhodes said bankruptcy law requires him to decide if fees are reasonable.

Pottow said the fees are “huge” but relatively small when compared to the size of Detroit’s multibillion-dollar case. Even if the judge disallowed 10 percent, he said, any leftover money wouldn’t affect deals that have been struck between the city and its many creditors.

“Trivial,” the professor said.

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Follow Ed White at http://twitter.com/edwhiteap

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