27 February 2013

More Detroit Bankruptcy News

I've posted here and here about the possibility that the city of Detroit might file Chapter 9 bankruptcy. Michigan's Treasurer is quoted here as saying that a powerful state-appointed city manager would be better than Chapter 9. He's certainly correct if the city manager can get folks to agree by knocking heads together. Chapter 9 is painfully expensive and should be avoided at all costs.

However, Treasurer Dillon also reportedly said that “What can be done in a Chapter 9 can be done outside of a Chapter 9 ..." That's not true. No state or city manager appointed by the state can compel parties to contracts to renegotiate their terms; the states cannot "impair" contracts.That would be unconstitutional. Only Congress has that power under the bankruptcy clause of Article I of the Constitution. (See here.)

It could be that Dillon is blowing a little smoke to put some fear into retirees whose unfunded pension and retiree health benefits loom large in Detroit's financial distress. Will continue to keep my eye on this.

One more thing: Check here for another, more encouraging post about Detroit.


  1. Why couldn't Detroit unload itself of debt by simply becoming nonexistent? If the city or state were to cancel/revoke the city's charter, would not that debt be absorbed by the State directly and the load of it distributed among all Michigan residents? Could the state not then allow a new city charter to a debt free entity? I'm not arguing liklihood here, just theoretical possibility.

  2. Interesting question. The answer depends on the details of Michigan's local government law, and I know nothing about them. But Michigan would never permit this if the state would find itself on the hook in the event of the dissolution of Detroit. An indirect state "bailout" would be no more palatable to state taxpayers than a direct one.