If Detroit can’t win concessions from its unions, or the state’s new emergency manager law is repealed, it may have to declare bankruptcy, which could cause more financial problems than it would solve.
Under a law passed in March, an emergency manager has the power to throw out union contracts, sell assets like the Detroit Water and Sewerage Department, and can take other actions to solve the city’s problems, reports The Detroit News
. The law has met significant opposition.
Bankruptcy would also allow the union contracts to be cancelled, but it could take from two to five years and cost millions of dollars in legal fees.
Attorney General Bill Schuette said he does not know if opponents to the new emergency manager law will be able to get the repeal on next year’s ballot. But without an emergency manager, the city could be forced into bankruptcy, Brad Coulter, who specializes in municipal turnaround and bankruptcy services, told the newspaper.
"That’s where the opponents . . . maybe don’t quite understand the consequences. If [the law is] repealed, and Detroit has no choice but to file for bankruptcy I think it’s going to be an expensive, time-consuming potential disaster," said Coulter. "It’s uncharted territory as to how long a city the size of Detroit will take to wind its way through bankruptcy. I'll guarantee you this: It’s not going to be a quick in-and-out of bankruptcy that we saw with GM and Chrysler. That’s not going to happen."
Detroit would be the largest city to file for bankruptcy. In the late 1970s, Cleveland defaulted on bank loans, but never filed. However, just last month, Jefferson County, Ala., home to the state’s largest city, Birmingham, filed for bankruptcy protection because it owed more than $4 billion.
Other municipal bankruptcies have also been filed this year, including in Harrisburg, Pa.; Central Falls, R.I.; and Boise County, Idaho, with judges in the Harrisburg and Idaho cases rejecting the filings.
Detroit Mayor Dave Bing — who is negotiating with the city's 48 unions — State Treasurer Andy Dillon, and Michigan Gov. Rick Snyder are all refusing to discuss the possibility of bankruptcy.
According to the Michigan Department of Treasury's preliminary report on Detroit's finances, the city has long-term liabilities of $12 billion and could also lose hundreds of millions if its credit rating is downgraded because of a bankruptcy filing.
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