10 April 2014

Checking Under Detroit's Seat Cushions

Go here and here to read two accounts of Detroit's latest offer to bondholders that puzzles me. Just where did Detroit find the extra hundreds of millions of dollars it now proposes to pay on account of its "UTGO" ("unlimited tax general-obligation") bonds? It can't be from selling the city's art collection for more money because, oddly, the city wants to take less than the latest offers on the table for the assets of the Detroit Institute of Art. (The second article linked above also addresses the art-sale issue.)

Unlike businesses in Chapter 11 that can promise more money to their creditors by proposing to operate more profitably or entering new product lines, cities are pretty much stuck with what they have on the income side: property taxes and user fees. Where did Detroit suddenly "find" the wherewithal to pay huge bucks today that it couldn't pay last week?

None of this is to suggest that Detroit shouldn't pay more to its bondholders. It's only to express the obvious concern that even current city management is making it up as it goes along. Which begs the question: Should anyone believe what Detroit is saying?

(For more municipal bankruptcy thoughts go here to download an early draft of an article that will soon be coming out in the American Bankruptcy Law Journal.)

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