WASHINGTON — Detroit’s massive debt, its limited resources, state officials’ intent to put the city on a path of sustainability, and the huge costs of bankruptcy and other legal proceedings virtually assure that holders of the city’s debt will likely get cents on the dollar, even those who hold general obligation bonds, muni market participants said Friday.

“If there is ever a situation where bondholders are going to have to take a hit, it would be a situation like this,” said a municipal analyst who wanted to remain anonymous.

While ultimately it will be up to a bankruptcy judge to decide what happens, it probably won’t be possible to shield bondholders at the expense of the rest of the city, given the incredibly steep mountain Detroit faces, the analyst said, adding, “If the situation wasn’t so dire it might be easier.”

Detroit could prove to be a precedent that challenges the conventional thinking that bondholders and pension fund investors are immune in bankruptcy proceedings, he said.

Fitch Ratings said Friday that it “remains concerned that the chances for full and timely payment of unlimited tax general obligation (ULTGO) bonds appear weak despite the city's adherence thus far to its pledge to levy and collect a voter-approved tax specifically for that purpose.”

“Everyone’s going to end up sacrificing some. Some are going to end up sacrificing much more than others,” said Frank Shafroth, director of the Center for State and Local Leadership at George Mason University in Arlington, Va.

Shafroth is uniquely qualified to talk about Detroit because he met with Detroit’s emergency manager Kevyn Orr and Michigan officials last month to discuss the city as one of six severely distressed cities he is studying and plans to report on next year under a contract with the Chicago-based MacArthur Foundation.

“One issue that will distinguish this from other cases is that [emergency manager Kevyn Orr] and the governor are deeply interested in and committed to a sustainable future at the end of this process for Detroit,” he said.  “So the emergency manager and governor are talking about taking a chunk out of this to invest in police, lighting, etc., so the city can go on.”

This is in contrast to other cases like Central Falls, R.I., which filed for bankruptcy primarily to balance its budget, he said.

In addition, Detroit is going have to pay the costs of legal representation, not only in the bankruptcy proceeding, but in all of the resulting litigation, including suits filed in county and state courts.

“Going through this judicial process is going to cost an enormous amount of money,” he said.

Shafroth also foresees an epic battle over federalism -- state vs. federal law -- with pension contracts and bondholders fighting to keep the protections they have under state law and the bankruptcy proceeding and restructuring, if it proceeds, taking place under federal law.

A county judge ruled in favor of the city’s two retirement systems on Friday, saying the bankruptcy filing is unconstitutional and ordering that it be withdrawn.

The American Federation of State, County and Municipal Employees of the AFL-CIO, complained in a statement Thursday that Orr has his team had refused to meet with union officials to discuss retirement issues.

Such challenges could be drawn out on parallel tracks so that they ultimately end up before both the state and U.S. Supreme Courts, Shafroth said.

Meanwhile, Tim Firestine, president of the Government Finance Officers Association and chief administrative officer for Montgomery County, Md., said he has concerns about a government walking away from GO bondholders after it has spent years gaining their trust.

“I don’t like the whole concept of bankruptcy in the public sector,” he said. “It’s disheartening to see a major governmental entity fail so miserably that they have to resort to bankruptcy …. Lots of cities have had troubles in their pasts and they didn’t step out into bankruptcy.”

“It’s kind of horrific to be honest,” agreed Ben Watkins, head of the Government Finance Officers Association’s debt committee and Florida’s bond finance director. “It sends the wrong message to the investor community,” he said. The city is essentially saying it’s not willing to repay its bondholders.

But Watkins doesn’t see investors dumping their general obligations across the country bonds as a result of Detroit’s action. He says investors are astute enough to recognize fiscal distress.

“It’s an isolated issue not a systemic issue,” he said.

The National League of Cities’ executive director Clarence Anthony said the NLC “ is disappointed” that Detroit had to file for bankruptcy, and urged the filing “not be seen as emblematic of cities or as a harbinger of what’s to come.”

“The vast majority of cities continue to make the difficult, yet prudent financial decisions that keep their cities in sound financial shape and in good standing,” Anthony said. “Outside of bankruptcy, they renegotiate contracts, draw on rainy day funds, form public private partnerships, and reduce health care and pension benefits.”

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