Will federal court approve Detroit's bankruptcy?

[Locke09]

First of all, I do not have to be able to feed you in order to tell you that you shouldn't eat poison berries. I don't even have to know what you should eat instead. Fact is, the poison berries will kill you whether I have an alternative for you or not. One thing has nothing to do with the other.

Nevertheless, other people have proposed alternatives. Even some people outside Michigan have proposed alternatives recently. We just don't want to hear anything else.

Detroit is under great financial stress, but Detroit is not broke. You cannot claim to be broke with the kind of assets that Detroit still has. It is just unpalatable for us to do anything different with those assets.

Detroit does not need to get rid of 18 billion in debt in order to be able to comfortably handle its bills and have some money left over to improve services. It just needs to get it down to something more manageable.

Let's take the DWSD debt off the table because it is backed by DWSD revenue. There is no danger in that debt not being able to be paid and I don't think anyone is claiming that. That leaves about 12 billion in debt related to the General Fund.

Detroit can:

1. Pay off all of the remaining POB debt [[about 350 million?) with the money it plans to use to help build a Red Wings stadium. I don't want to hear that this is DDA money and can't be used for anything else. We know now that you can pass laws to do whatever you want to do. In fact, stop diverting tax money to the DDA and others. Those businesses they help use police, fire, roads, employees who need to be educated in DPS, etc.

2. Reduce future retiree healthcare obligations - notice I said obligations, because this isn't really debt and can be wiped out any time the City wants to without bankruptcy. That's about 6 billion and can be greatly reduced by increasing retiree contribution, giving the stipend they plan on giving or setting up the kinds of programs that would be run by the pension fund or union as other organizations have done. There are many opportunities there that have nothing to do with bankruptcy. They can easily wipe out half of that 6 billion without totally taking away healthcare from the retirees.

3. There are things that can be done with the Water Department to allow it to yield annual profit for Detroit. Orr already knows what those things are and they have been discussed for over a decade.

4. Lansing can restore some of the revenue sharing to the cities and schools, instead of running up surpluses while too many of its cities and school systems are suffering.

5. Continue on the path of identifying and implementing all those little efficiencies that add up to real dollars.

Detroit can pay it's bills right now. Detroit wants money to do some new things and improve services. Detroit doesn't need to eliminate 18 billion dollars to accomplish that.

[Gistok]

Locke09...

80% of the city is a war zone... and yet you say that Detroit can pay its' bills right now?? What about when another 100,000 residents leave?

And that $350 million that you talk about for paying off POB debt... that money slated for Ilitch is property tax money at the rate of $12 million per year... how is money from 30 years down the road going to help Detroit TODAY? Maybe we could float some bonds... as if anyone will lend the city any more money?

"continue identifying and implementing all those little inefficiencies"... hearing the words makes it sound so easy doesn't it... However, the devil is in the details...

[mwilbert]

First of all, I do not have to be able to feed you in order to tell you that you shouldn't eat poison berries. I don't even have to know what you should eat instead. Fact is, the poison berries will kill you whether I have an alternative for you or not. One thing has nothing to do with the other.

Nevertheless, other people have proposed alternatives. Even some people outside Michigan have proposed alternatives recently. We just don't want to hear anything else.

Detroit is under great financial stress, but Detroit is not broke. You cannot claim to be broke with the kind of assets that Detroit still has. It is just unpalatable for us to do anything different with those assets.

Detroit does not need to get rid of 18 billion in debt in order to be able to comfortably handle its bills and have some money left over to improve services. It just needs to get it down to something more manageable.

Let's take the DWSD debt off the table because it is backed by DWSD revenue. There is no danger in that debt not being able to be paid and I don't think anyone is claiming that. That leaves about 12 billion in debt related to the General Fund.

Detroit can:

1. Pay off all of the remaining POB debt [[about 350 million?) with the money it plans to use to help build a Red Wings stadium. I don't want to hear that this is DDA money and can't be used for anything else. We know now that you can pass laws to do whatever you want to do. In fact, stop diverting tax money to the DDA and others. Those businesses they help use police, fire, roads, employees who need to be educated in DPS, etc.

2. Reduce future retiree healthcare obligations - notice I said obligations, because this isn't really debt and can be wiped out any time the City wants to without bankruptcy. That's about 6 billion and can be greatly reduced by increasing retiree contribution, giving the stipend they plan on giving or setting up the kinds of programs that would be run by the pension fund or union as other organizations have done. There are many opportunities there that have nothing to do with bankruptcy. They can easily wipe out half of that 6 billion without totally taking away healthcare from the retirees.

3. There are things that can be done with the Water Department to allow it to yield annual profit for Detroit. Orr already knows what those things are and they have been discussed for over a decade.

4. Lansing can restore some of the revenue sharing to the cities and schools, instead of running up surpluses while too many of its cities and school systems are suffering.

5. Continue on the path of identifying and implementing all those little efficiencies that add up to real dollars.

Detroit can pay it's bills right now. Detroit wants money to do some new things and improve services. Detroit doesn't need to eliminate 18 billion dollars to accomplish that.

It isn't clear Detroit can pay its bills right now. It hasn't been paying them for years, except by adding to indebtedness. You seem to be saying that if Detroit did a bunch of things other than what it is doing now, it would then be able to pay its bills. Possibly that is true, although not all the changes you list are within Detroit's power to implement. But Detroit not only isn't paying it's bills now, it is deferring capital expenditures and underspending on actual service delivery. If it started spending what it should spend, the gap between income and outgo would be even greater, and I see no reason that the gap could be made up. Frankly, I'm not sure it will be able to be made up even after whatever reductions are able to be achieved in bankruptcy.

And, as Gistok says, it isn't as if the population of the city were not still shrinking and revenues were stable.

[313WX]

First of all, I do not have to be able to feed you in order to tell you that you shouldn't eat poison berries. I don't even have to know what you should eat instead. Fact is, the poison berries will kill you whether I have an alternative for you or not. One thing has nothing to do with the other.

Nevertheless, other people have proposed alternatives. Even some people outside Michigan have proposed alternatives recently. We just don't want to hear anything else.

Detroit is under great financial stress, but Detroit is not broke. You cannot claim to be broke with the kind of assets that Detroit still has. It is just unpalatable for us to do anything different with those assets.

Detroit does not need to get rid of 18 billion in debt in order to be able to comfortably handle its bills and have some money left over to improve services. It just needs to get it down to something more manageable.

Let's take the DWSD debt off the table because it is backed by DWSD revenue. There is no danger in that debt not being able to be paid and I don't think anyone is claiming that. That leaves about 12 billion in debt related to the General Fund.

Detroit can:

1. Pay off all of the remaining POB debt [[about 350 million?) with the money it plans to use to help build a Red Wings stadium. I don't want to hear that this is DDA money and can't be used for anything else. We know now that you can pass laws to do whatever you want to do. In fact, stop diverting tax money to the DDA and others. Those businesses they help use police, fire, roads, employees who need to be educated in DPS, etc.

2. Reduce future retiree healthcare obligations - notice I said obligations, because this isn't really debt and can be wiped out any time the City wants to without bankruptcy. That's about 6 billion and can be greatly reduced by increasing retiree contribution, giving the stipend they plan on giving or setting up the kinds of programs that would be run by the pension fund or union as other organizations have done. There are many opportunities there that have nothing to do with bankruptcy. They can easily wipe out half of that 6 billion without totally taking away healthcare from the retirees.

3. There are things that can be done with the Water Department to allow it to yield annual profit for Detroit. Orr already knows what those things are and they have been discussed for over a decade.

4. Lansing can restore some of the revenue sharing to the cities and schools, instead of running up surpluses while too many of its cities and school systems are suffering.

5. Continue on the path of identifying and implementing all those little efficiencies that add up to real dollars.

Detroit can pay it's bills right now. Detroit wants money to do some new things and improve services. Detroit doesn't need to eliminate 18 billion dollars to accomplish that.

Can I have some of what you're smoking?

[corktownyuppie]

Possibly that is true, although not all the changes you list are within Detroit's power to implement.

I'd say that this is the most salient point in the statement above, and it speaks directly to why we are in this situation.

Is it unfair that the State pulled their revenue sharing? Yes. But Detroit cannot unilaterally reverse that.

Can we find a way to generate revenue from the DWSD? Yes. But doing so would require either privatization or regionalization, both of which require cooperation and outside parties and -- most importantly -- political will from the city to accomplish it.

Identifying and correcting inefficiencies and incompetencies that are wasteful? Sounds good. But the City can't unilaterally make those changes without the consent of the unions. Plus it would take upfront capital to implement those changes. Spend $10 now to save $5 per year forever? Sounds great....if you have $10 to spend. We don't.

Lastly, even if we could get all of the above, we still need to make our annual operating budget and increase services to stop the plunging population count....but we need to float bond money to do it, and we don't have the credit to borrow.

In other words, the City lacks political will, legislative authority, and economic power to make the changes that would be necessary. I'd be surprised if you could create a solution -- other than bankruptcy -- that would solve even one of the above, let alone all three.

[Huggybear]

Roughly a snowball's chance in hell of the bankruptcy not going forward.

HB

[BankruptcyGuy]

Let's clarify something--there are two types of "bankrupt":

1. First is a situation where your liabilities exceed your assets.
2. Second is a situation where your expenses exceed your income.

Is Detroit #1, #2 or both? I don't know about #1, because some of the assets [[artwork, Belle Isle, DWSD) are hard to value. But #2 is pretty clear.

Many, many times, companies file for bankruptcy for #2, not just #1. What the bankruptcy code provides for, in those cases, is an ORDERLY liquidation. That is, expenses are reduced until income and expenses match, without a creditor being able to run into court and prevent that from happening. That can happen many ways [[in a bankruptcy):

A. Assets can be sold and given to creditors to satisfy an ongoing expense. [[the UAW VEBA is a great example)
B. Executory [[not fully performed) contracts can be cancelled. [[union contracts, retiree health, retiree pensions[[?!?!))
C. Contracts can be negotiated with a court blessing, without creating what's called a "preferential transfer."

Chapter 9 is different in that creditors cannot force A. In all other types of bankruptcy, the creditors can propose such a plan to the court.

My guess is that the EM will apply a little bit of A, B and C. Mostly C.

[Wesley Mouch]

...Chapter 9 is different in that creditors cannot force A. In all other types of bankruptcy, the creditors can propose such a plan to the court...

As always, thanks for your input. It really is helpful to have some non-conspiratorial, informed information. A valuable part of this forum.

Do I understand correctly then that in spite of all the hype about 'selling the DIA art', that the only path to that sale is for Orr to recommend, and the bankruptcy judge to agree?

[BankruptcyGuy]

Do I understand correctly then that in spite of all the hype about 'selling the DIA art', that the only path to that sale is for Orr to recommend, and the bankruptcy judge to agree?

Absolutely correct. The same is true for Belle Isle, DWSD, and any other asset of the City. It has long been held that federalism principles do not extend so far as to allow a federal judge to force the sale of assets of a state [[of which the city is a subset).

[Locke09]

Mostly some interesting arguments against some specific and generic ideas that I just threw out there, that didn't necessarily originate in my own mind. There are other ideas that have been proposed and I'm just kind of tired of people claiming that the "critics" don't have any other ideas and just like whining.

But back to the arguments. They confuse me a little. Mostly they say, not that the idea isn't good, but it will never work here for a variety of reasons. I cannot accept that because I have seen our very helpful legislature come up with all kinds of new laws to help us do what couldn't be done before. Plus, we have an EM who can do almost anything he wants. Therefore we don't have to worry about no stinkin' unions. He has power to break union contracts outside of bankruptcy and has already done so.

I've looked at the math in the reports and I know that Detroit has been having cash flow problems and has been going over budget by something less than 100 million per year. The 25% savings the City has already negotiated on the POB debt saves the City about 10 million per month right now. That's over 100 million per year. The retiree healthcare changes already proposed, which do not require bankruptcy, saves about 135 million per year.

So with just those two things, you have taken care of the annual shortage and gotten 135 million per year or more to invest in service improvements to help keep people from moving. Two very low-hanging fruit and we really haven't done anything hard yet. Nothing needing union or regional support or requiring the hard work of restructuring. Those things can be icing on the cake and used to help long term stability.

BTW, we have been paying some restructuring consultants a lot of money for almost a year now [[some longer than that). I would think we are expecting to see some benefits from that soon. If not, we need to let them go.

Take away the DWSD debt, and 75% of the remaining "debt" is related to retirees. That is what I think this bankruptcy is about.

[Locke09]

As far as the constitutionality issue, I think the judge will rule that the time for that argument is when Detroit presents its plan

And that is close to what the judge has decided for the questions regarding the pensions' constitutional protection and whether that renders Detroit ineligible. Since no plan has been submitted to reduce pensions, the time for that discussion is when the plan is being developed/submitted and it doesn't affect Detroit's overall eligibility to file. What I can't tell is whether he will address it after a plan is proposed or before the plan is proposed.

Also, it seems to me that now, if the judge were to later rule that "federal law trumps state law" as people have seemed to think he will, then he would be guilty of having placed the retirees in a Catch-22 situation.

But I don't think he will because I've never believed it's a federal law vs. state law issue. I believe it will be a matter of interpretation of the state constitution and whether it intended to protect pensions even when municipalities have financial stress. Which is why I believe the state courts were the better interpreters of that. But here we are.

Retirees shouldn't negotiate away anything [[except maybe healthcare) until the question is answered.

[BankruptcyGuy]

The judge won't address an issue until it's presented to him. Right now, the only thing in front of him is objections by those who say that the mere filing of a bankruptcy, because it MAY impact pensions, is outside of the power of the municipality. This is almost unquestionably incorrect.

The judge won't have the pension issue before him until a plan is proposed. And the judge won't provide an "advisory opinion" on the issue. He will address the issue only if a) a plan is proposed reducing pensions, and b) someone objects to that plan. That means that if the pensioners committee approves of the arrangement, or if the plan does not reduce pensioners' benefits, the issue will not be before the judge.

Federal judges may only decide what is called "cases and controversies." They do not address hypotheticals.

[Locke09]

Thanks BankruptcyGuy. That makes sense.