Jan. 16 (Bloomberg) -- The Detroit federal judge overseeing mediation of the city’s $18 billion bankruptcy met with Michigan’s top two Republican lawmakers to gauge their willingness to help resolve the largest municipal insolvency in U.S. history.
The leaders of the state legislature met with U.S. District Judge Gerald Rosen in December, their representatives said this week. The bankruptcy is politically sensitive in Michigan’s Republican-controlled House and Senate, where lawmakers have proposed using a $971 million surplus to cut taxes. Talks with lawmakers are continuing, a person familiar with the matter said.
Any aid from the state legislature would mark a change in the Republican party’s treatment of the heavily Democratic city, Michigan’s largest. Republican Governor Rick Snyder, who faced lawsuits for authorizing the bankruptcy, has said he opposes a state bailout that only focuses on debt.
“There simply has not been the willingness shown by the Republican legislature to want to help Detroit out financially during the entire proceeding of the bankruptcy,” said Larry Dubin, a professor at the University of Detroit Mercy School of Law.
A group of charitable foundations pledged this week to give $330 million to help Detroit avoid pension cuts and protect its art collection. That’s a strong argument for reluctant lawmakers to bring some money to the table, Dubin said in an interview.
Randy Richardville, the Senate majority leader, met with Rosen in December to discuss the possibility of state assistance for Detroit, said Amber McCann, a spokeswoman for the senate Republicans. She said they haven’t met since. Republicans would be open to discussing state assistance to Detroit in light of the gift, McCann said.
“None of them have made up their mind about any specifics, and they haven’t been presented with any specific request with regard to the state helping in any way,” she said. “There wasn’t a discussion about a specific deal.”
Jase Bolger, the Republican House speaker, met with Rosen in December, according to his spokesman, Ari Adler. Bolger isn’t involved in any mediation efforts, Adler said.
Contact between mediators and lawmakers has continued, said the person familiar with the mediation, who asked not to be identified because the talks are confidential.
On Jan. 18, Detroit Institute of Arts officials will give lawmakers a tour of the museum. DIA supporters, including the Ford Foundation, the Kresge Foundation, the John S. and James L. Knight Foundation and the Community Foundation for Southeast Michigan, said they would contribute money to help Detroit’s worker pension system, which may be underfunded by as much as $3.5 billion.
The offer is conditioned on protecting the art collection, some of which was bought with taxpayer money, from being sold. The foundations also said the proposal is meant to be part of a larger plan to adjust the city’s debt. U.S. Bankruptcy Judge Steven Rhodes has said he would like the city to file that plan in March.
Foundation officials and others involved in the mediation declined to say whether they are negotiating with lawmakers, citing confidentially rules governing the process.
Detroit filed for bankruptcy in July, claiming it cannot pay about $18 billion in debt while providing essential services to the city’s 700,000 residents. Creditors have pressed city officials to consider selling some art, or finding some other way to use the DIA to raise money.
Republican lawmaker John Walsh, who represents a Detroit suburb, said he’s open to aiding the city as an investment that will help Michigan. He said the $330 million gift from foundations may make it easier to persuade the state to pitch in financially as well.
“If there’s a global settlement, it may be dollar-for-dollar better for the state to make a resolution, participate now, than to kind of take a wait-and-see stance or to allow the bankruptcy to proceed without any involvement,” Walsh said in an interview yesterday at the North American International Auto Show in Detroit.
Last month, New York-based Christie’s Inc. said DIA art bought directly by the city was worth as much as $867 million.
The museum has opposed any sale, citing a legal opinion from Michigan’s attorney general in June that the art is held in a charitable trust and can’t be part of any auction to satisfy the city’s debts.
Overcoming creditor objections to the $330 million proposal would be easier than the legal fight that would be triggered by trying to force an art sale, Jim Spiotto, a bankruptcy attorney with Chapman Strategic Advisors LLC, said in an interview.
Tapping charitable organizations is the kind of creative approach Detroit needs, said Doug Bernstein, a lawyer at Bloomfield Hills, Michigan-based Plunkett Cooney PC who represents the Ford Foundation in the mediation.
The city’s case, he said, “doesn’t fit the cookie-cutter bankruptcy.”
Kevyn Orr, the city’s emergency financial manager, told the Associated Press last month that he would like to see private donors raise about $500 million. The shortfall between that goal and what has been pledged could be made up by the state or someone else, Bernstein said.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).