It’s beginning to look like Detroit’s bankruptcy will come with a pretty hefty price tag. Despite being effectively broke, the city has already committed $28 million to fees for lawyers and consultants brought on to assist with the process, some of whom are earning nearly $200,000 per month. And this is only the beginning—the city filed for bankruptcy only a few months ago, and many expect the full proceedings to last more than a year, if not longer. Emergency Manager Kevyn Orr believes the final cost could run as high as $100 million. The WSJ reports:
“I’m sure that is so, but we’re talking about public money,” said U.S. Bankruptcy Judge Steven Rhodes, who on Monday approved a contract for the city to pay the investment bank, Lazard Ltd. LAZ +0.49% , to advise a committee representing the city’s 23,500 retired workers on financial and restructuring issues. A Lazard managing director said the fee is appropriate given the firm’s expertise in restructuring work.Detroit’s restructuring bills since its July bankruptcy filing already exceed post-filing fees paid by Alabama’s Jefferson County, which has spent $25.7 million in the two years since filing for bankruptcy, according to local officials. That one of the poorest big cities in the U.S. is becoming lucrative business for some professionals is rubbing some Detroiters the wrong way.
Unsurprisingly, the expenditures have been controversial. Pensioners, in particular, are angry that the city has found money to pay expensive consultants and lawyers while simultaneously arguing that it doesn’t have the money to keep its promises to retirees. The city, on the other hand, argues that it needs to spend this much to navigate the process smoothly and ensure that it will emerge as healthy as possible. It’s not immediately obvious who’s right, but one lesson is clear: Bankruptcy is expensive. It may be an effective way for desperate cities to get out of unsustainable obligations, but it’s a painful process. Other struggling cities should take a lesson from Detroit and solve their problems through other means before heading to court.