Four months after being hired to help the city of Detroit find a way out from under its mountain of debt, Jones Day is now taking the lead advisory role on what is poised to become the largest municipal bankruptcy in U.S. history.
And though the Thursday filing in the U.S. Bankruptcy Court for the Eastern District of Michigan comes well ahead of the end of the $3.35 million, six-month contract under which Jones Day is serving as the city's restructuring counsel, Governor Rick Snyder said in a statement approving the voluntary Chapter 9 petition [PDF] that it was decades in the making. (The governor is required to approve any municipal bankruptcy filing under Michigan law.)
"I knew from the outset that it would be difficult to reverse 60 years of decline in which promises were made that did not reflect the reality of the ability to deliver on those promises," said Snyder, who cited a long-term debt load of $18 billion and the continuing deterioration of city services as factors in his decision. "We must face the fact that the city cannot and is not paying its debts as they become due, and is insolvent."
The blunt talk continued at an evening press conference held by city emergency financial manager Kevyn Orr, a former Jones Day partner installed in the job by Snyder. "Detroit has been working its way to a level of insolvency for decades," Orr said. "Even the casual observer has had to understand for some period of time now, Detroit was simply not on sustainable footing."
Snyder said in his statement that Orr had asked him to approve the Chapter 9 filing in a letter sent Tuesday. After reviewing the letter, as well as Orr's financial and operating plans and his report to the city's creditors, the governor said he determined "that the financial emergency in Detroit cannot be successfully addressed outside such a filing, and it is the only reasonable alternative that is available." Given the scope of its financial problems, the city is relying on a rarely used provision of bankruptcy law to enter what amounts to uncharted territory, according to lawyers who specialize in the field.
