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Detroit bankruptcy: Governor authorizes filing, declaring 'no viable alternative' (+video)

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Snyder described the city’s $18 billion in debt and unfunded liabilities as “unsustainable,” saying that 38 cents of every dollar of city income is going toward debt repayment, legacy costs, and other obligations.

The slow march leading to this decision started in March when Snyder named Kevyn Orr, a restructuring specialist and University of Michigan graduate who represented Chrysler during its 2009 bankruptcy, as the Motor City’s emergency financial manager. Snyder said he received Mr. Orr’s recommendation to file for Chapter 9 bankruptcy on Tuesday.

Over the last few months, Orr negotiated with Detroit’s creditors to try and reduce the city’s debt, $5.7 billion of which is related to health-care costs for retirees. To date, he was only able to win commitments from two parties, Bank of America Corp. and UBS AG. Both banks agreed to accept 75 cents on the dollar, according to a report in the Detroit News.

While Snyder says he expects the restructuring to take place in a year, bankruptcy experts say it will take much longer due to the unprecedented and complex nature of the case.

“Chapter 9 broadly defines municipalities, but you have very few instances where you have had a true city file, which makes proceeding under this chapter somewhat unpredictable. There’s not much in the way of case law that gives guidance. So [the state] must not jump in blindly,” Mr. Bernstein says.

The Chapter 9 filing sets the stage for a legal showdown between the state and the 43 public sector unions operating in the city that say their pensions are protected under the state constitution, even though a federal bankruptcy judge has the authority to slash those benefits and invalidate union contracts.

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