Detroit may be an example of the premise that if anything can go wrong, it will. The city became the largest municipal region to ever file for bankruptcy. Now, a large bond insurer is filing suit against the Motor City. This will set back the bankruptcy plan scheduled for Detroit. It could even completely unravel plans to pay off creditors to the Motor City.
Detroit filed for bankruptcy in July 2013, with a total of $18 billion dollars in debt. In January, the city filed suit against trusts and service corporations, over pension debt which saw heavy growth ten years ago.
The Financial Guaranty Insurance Company claim terms of the agreement allowing the city to leave bankruptcy would unfairly discriminate against one group of creditors. Those are the investors who provided financial backing for worker’s pensions soon after the turn of the century. That initial cost totaled 1.4 billion dollars, paid for by the insurance company, with a partner, Syncora. In exchange, the investors received a type of security called a “certificate of participation.”
When Detroit went bankrupt late last year, the securities were among the first debts on which the city defaulted. Now, the city is claiming the agreement was illegitimate, calling it a “sham transaction.” They have offered investors the lowest return rate available through the bankruptcy deal.
“The city’s opportunism and revisionist history have broad repercussions, not the least of which being the impact on the funded status of the city’s retirement systems,” Financial Guaranty wrote in court documents filed with the suit.
Retirees and those with pensions due from the city began a campaign, sending hand-written letters to U.S. Bankruptcy Judge Steven Rose, asking him to save their pensions from cuts.
Bankruptcy can be hard, even under the best of conditions, but Detroit is providing a historical lesson in how challenging it can be when a city is in need of protection.
