Wall Street Journal on Chapter 9 for Detroit

[renf]

http://on.wsj.com/WGCfsg

Editorial writers for the Wall Street Journal recommend
federal bankruptcy court for Detroit. The bond holders
may take a haircut.

[iheartthed]

http://on.wsj.com/WGCfsg

Editorial writers for the Wall Street Journal recommend
federal bankruptcy court for Detroit. The bond holders
may take a haircut.

The link doesn't work.

[Packman41]

The link doesn't work.

Usually you need a WSJ subscription to make the link work, but even my link failed today.

To be fair, the WSJ raised the question of bankruptcy, that is, if the council will not accept a rehab plan from the State, then perhaps bankruptcy is the best option.

The editorial is rather long to post, so I copied the most salient parts below

Motown's Mental Breakdown
As unions and the city council resist reform, bankruptcy looms

Alas, costly labor agreements have driven Motown like GM and Chrysler to disrepair. Perhaps the only fix now is to let Detroit go bankrupt.

Meanwhile, third-party actuaries are pegging the city's retirement liabilities at $11 billion, nearly twice as much as the city has estimated. Detroit will spend $160 million this year and $135 million in 2013 on retiree benefits even after Mr. Bing's labor reforms are phased in.

One option is to allow distressed municipalities to file for Chapter 9 bankruptcy without state authorization, which is currently required. Some Detroit council members are importuning the state to let the city go bankrupt so they can escape the strictures of the consent agreement. But a bankruptcy judge is unlikely to be more lenient than the mayor.

And make no mistake, Detroit is on its deathbed. Its unemployment rate is nearly twice as high as its surrounding metropolitan region. It has the highest violent crime rate of any major city in part because its police force has been stripped to pay for retirement bills while two-thirds of its street lights are broken. Its schools are among America's worst. The city has lost a quarter of its population over the last decade, and its abandoned lots cover more acreage than Paris.

If the council wants to bolt from its state rehab program, the only way to rescue Detroit may be through an orderly bankruptcy [[i.e., not politically negotiated) that restructures its $2.5 billion in general fund-backed debt and $11 billion in retirement obligations. Detroit would be the largest city to date to file for bankruptcy. Its restructuring could drag on for several years, slash pensions for many retirees and impair the city's ability to borrow for decades.

But at the very least, it would provide an instructive lesson for other chronically insolvent cities like Chicago and Los Angeles that have delayed reforms because they believe they're too big to fail.

[JVB]

Meanwhile, third-party actuaries are pegging the city's retirement liabilities at $11 billion

Wow. Just...wow.

[iheartthed]

Usually you need a WSJ subscription to make the link work, but even my link failed today.

Really? For an abbreviated url link? That's odd. I thought it was just a bad link.

[jt1]

Wow. Just...wow.

Yep. While KK was a debacle and City Council has some issues the real killer for the city is legacy costs. Nobody wants to discuss those. The thought is that every penny is being stolen when in reality it is more like for every nickel, 3 cents goes to structural and legacy costs, one penny is stolen and one penny goes to services.

[JVB]

Yep. While KK was a debacle and City Council has some issues the real killer for the city is legacy costs. Nobody wants to discuss those. The thought is that every penny is being stolen when in reality it is more like for every nickel, 3 cents goes to structural and legacy costs, one penny is stolen and one penny goes to services.

So why does everyone get upset when public sector unions are called out? After all, when the Bakers Union got out of control, Hostess shuts down and we just can't buy Twinkies. But when public sector unions are responsible for these kinds of legacy costs, taxpayers are on the hook.

[jt1]

So why does everyone get upset when public sector unions are called out? After all, when the Bakers Union got out of control, Hostess shuts down and we just can't buy Twinkies. But when public sector unions are responsible for these kinds of legacy costs, taxpayers are on the hook.

I think there are two things at play [[and I'll premise this by stating that I am no supporter of unions):

1. Unions [[and politicans) typically are not willing to take away from retirees or committed benefits. These typically are not impacted too much [[possibly higher retiree co-pays, etc).
2. The massive hits are to the people actively working and the hits are pretty extreme.

In essence, it seems like the structure is set to ensure the retirees remain whole while the active employees [[DPD, DFD, etc) are expected to work for peanuts.

Of course, as less money comes in the chance of meeting the future obligations veers closer to 0. That simple concept appears lost on too many that insist the seniors and retirees can't be impacted

As I side note, I certainly don't get upset when public employees get called out but they should be getting called out for the right thing in the context of the entire situation. Even if every CoD employee was paid $0 the city probably still could not meet the future pension and healthcare obligations.

That said, trimming a lot of fat in the current positions would allow the good employees the opportunity to, hopefully, make a decent wage.

[313WX]

Yep. While KK was a debacle and City Council has some issues the real killer for the city is legacy costs. Nobody wants to discuss those. The thought is that every penny is being stolen when in reality it is more like for every nickel, 3 cents goes to structural and legacy costs, one penny is stolen and one penny goes to services.

The thing is, the only way the city will ever get out of that legacy costs is through a bankruptcy, especially if revenues continue to decline.

We should also be figuring out if there's a way to have maybe 1 penny go to debt service and 3 go to municipal service.

[bailey]

Ok wait.. I thought the pensions were fully or close to fully funded?

I thought that was the major conspiracy theory point about an EFM... they will get their hands on the fully funded pensions and blow it out.

[jt1]

Ok wait.. I thought the pensions were fully or close to fully funded?

I thought that was the major conspiracy theory point about an EFM... they will get their hands on the fully funded pensions and blow it out.

You must hang out with a lot of retirees because I haven't heard much rhetoric around the takeover of the pension funds.

[corktownyuppie]

The thing is, the only way the city will ever get out of that legacy costs is through a bankruptcy, especially if revenues continue to decline.

We should also be figuring out if there's a way to have maybe 1 penny go to debt service and 3 go to municipal service.

I think that such an agreement could be mathematically feasible, and even feasible to the bondholders if the bonds were backed by a stronger balance sheet. Part of the reason why the bond interest rates are so high is because of the high credit risk associated with the city.

Basically, you offer... "Instead of paying you 7% with BB-ratings", we'll give you a haircut to change your yield to 3.75% but backed by a AA+ rated entity."

And I think such an agreement could even be political feasible for everyone...IF...the 3 cents going to city services was actually being spent as efficiently as possible. What does that mean? Probably consolidating department, outsourcing to save money, and even shrinking the footprint of the city to focus all of its resources on specific sustainable areas. Basically, it's Detroit Works, which I know is highly controversial because of the politics.

In any case, I think you're onto something...and I do believe your ideas generally make sense. The question is what is the best way to get from Point A to Point B. You say bankruptcy. I still think there's a much faster [[and less expensive) way, which will leave much more money on the table for everyone to split.

But...the politics of all of this might make that impossible. In which case, let's just go with bankruptcy. The sooner we get started, the sooner we get finished.

[bailey]

You must hang out with a lot of retirees because I haven't heard much rhetoric around the takeover of the pension funds.

Have family that are DFD retirees. Whatever grapevine they are tuned into seems to have "raiding the pension fund" up there at the top of the list.

[Packman41]

Ok wait.. I thought the pensions were fully or close to fully funded?

Yes, the pension fund PR guys keep saying they are fully funded.

This is because they are counting on the guarantee by the CofD [[actually all municipalities do this) to keep them fully funded. So when the fund over promises benefits and/or does not make smart investment decisions they simply call up the CofD and tell them to send over some more money and get them “fully funded” again.

The CofD then goes to the taxpayers and raises rates or sells a bond issue and borrows the money [[plus interest) to keep the “fully funded” status. Meanwhile, the taxpayers and the CofD are on the hook for $11 billion – yes, with a B.

If the retirees were really smart, and thought they were “fully funded”, then before the CofD goes bankrupt they should ask to secede from the retirement system and start a 401-K style plan NOW. If they wait too long the bankruptcy Judge will decide how much they really get to keep.

We will soon see how smart the pension fund trustees really are.

[michimoby]

Quick question: are the rules behind Chapter 9 and Chapter 11 the same when it comes to pension handover? In other words, will the PBGC be the responsible entity for oversight on the plan in the instance that BK forces the issue?

[Det_ard]

Retiree liabilities include medical, not just pension. The pension may be fully funded [[for example) but public retiree medical may have to come out of current operating funds. So rec centers, police, fire, schools and the like take the hits in order to pay retiree medical. Not just Detroit, or Michigan. All over.

[rb336]

So why does everyone get upset when public sector unions are called out? After all, when the Bakers Union got out of control, Hostess shuts down and we just can't buy Twinkies. But when public sector unions are responsible for these kinds of legacy costs, taxpayers are on the hook.

yeah, keep drinking that kool-aid. extreme management pay raises, combined with management decisions that lowered the quality killed hostess

[Dexlin]

I'm not sure why no one ever mentions that something like half of the liabilities are attached to the water and sewerage department, which is practically a seperate entity. The City of Detroit, by itself, isn't on the hook for the entire thing, yet it gets reported as if it is. Detroit's debt problems are bad, but they aren't nearly as bad as potrayed when you take into context who some of the liabilities actually belong to.

I, for once, still support a municipal bankruptcy if for no other reason than that a political solution is practically impossible given how far the parties are apart. But, it's absolutely necessary that we get the facts right.

[JVB]

yeah, keep drinking that kool-aid. extreme management pay raises, combined with management decisions that lowered the quality killed hostess

My point wasn't about who killed Hostess [[because I don't know or care), but rather the repercussions for the general public as a result. In the case of Hostess, the only thing we lose is twinkies, whereas with public sector unions we as taxpayers foot the bill.

[corktownyuppie]

I'm not sure why no one ever mentions that something like half of the liabilities are attached to the water and sewerage department, which is practically a separate entity. The City of Detroit, by itself, isn't on the hook for the entire thing, yet it gets reported as if it is. Detroit's debt problems are bad, but they aren't nearly as bad as portrayed when you take into context who some of the liabilities actually belong to.

Key word there is "practically a separate entity". I agree with your assessment; my father is a DWSD pension holder, and I hope that they can find a way to work this out.

At the same time, DWSD is a subsidiary of the City of Detroit. And I'm sure that anyone owed money by the city [[pension holders, non DWSD retirees) are gonna demand that DWSD be used to pay of their debts.

I, for once, still support a municipal bankruptcy if for no other reason than that a political solution is practically impossible given how far the parties are apart. But, it's absolutely necessary that we get the facts right.

Looks like you might get your wish, and I will back it, too. Whatever it takes to get the process moving.