Mar 052014

Good description of Certificates of Participation and other terms in the Detroit Bankruptcy.


Curt Guyette, Investigative Reporter, ACLU of Michigan, February 5, 2014

In 2005, the city of Detroit faced a monumental dilemma: It desperately needed to borrow more than $1.4 billion to help shore up its two pension systems, but doing so would far exceed the legal limit on the amount of debt it could amass.

The solution arrived at by the administration of then-Mayor Kwame Kilpatrick was to sidestep the law by turning to something called certificates of participation, or COPs, which are similar to municipal bonds. But instead of borrowing the money directly, Kilpatrick and his crew – following the advice of investment bankers who would reap massive profits from the deal – set up two nonprofit “service corporations,” which in turn created trusts that would sell the COPs to investors. Technically, it was these two nonprofits that were obligated to ensure repayment of the debt. The city then entered into a contract with the nonprofits – both of which were controlled entirely by city officials — agreeing to pay them for services rendered.

In other words, they were mere shells.

“At the time, it was seen as a clever legal circumvention of the debt limit,” says Laura Bartell, a Wayne State University Law School professor who specializes in bankruptcy.

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