The Examiners: Perry Mandarino on Municipal Distress

As Detroit nears a crucial point in its restructuring, what lessons does the city’s historic bankruptcy offer troubled municipalities?

In many ways, municipalities are analogous to major corporations, with different stakeholders, various levels of debt exposure and numerous obligations to customers, business partners and employees. However, when pursuing corporate restructurings, there is often ample room to eliminate select operating expenses (or entire divisions), reduce headcount and pursue the sale of non-core assets, among other options. Unfortunately, municipalities—particularly those under extreme duress—have much less flexibility. They have to provide necessary services to citizens, fulfill pension obligations, enforce laws and maintain infrastructure. These and other municipal budgetary considerations naturally require significant funding. Liquidity is paramount to keeping local governments running.

Given the distressed state and sheer size of Detroit, the restructuring process is particularly burdensome. Consider that the city has more than 100,000 creditors staking claims in the plan, which addresses over $18 billion in long-term obligations. At the same time, Detroit suffers from tremendous urban blight, severely limiting the options for cutting back on personnel and services. As a result, creditors face substantial constraints in the negotiations process, despite their contractual rights. Tough decisions will certainly have to be made, and there will be sacrifices, but there is a human component that can’t be ignored.

Municipalities represent communities and have direct responsibilities to residents and the municipal employees who serve and protect them. There is a significant moral obligation involved in the process. There is a saying that if your neighbor’s house is burning, you can’t argue about the price of the fire hose. In these kinds of municipal restructurings, ample room has to be made for local governments to benefit, in addition to securing a realistic level of relief for lenders. There has to be an appropriate level of balance. All alternatives have to ensure that the real needs of the community will be addressed. Failing to do so would only create more distress, compounding the issues for everyone. For the creditors, this would elevate risk and lead to further erosion in the value of their investments.

Perry Mandarino is the U.S. Business Recovery Services leader for PricewaterhouseCoopers, based in New York. Follow him on Twitter at @Perrymandarino.