Honest answers to your bankruptcy questions

[Novine]

"General Obligation bonds, on the other hand, are a totally different animal. Yes, these have generally been considered very safe as a class because they are backed by the taxing ability of the municipality. But, if you need to raise your income tax rate to 18% just to be able to maintain operating expenses + debt expenses, you're going to have a bigger problem: people will leave the city. And then no matter how much you raise taxes, you just end up raising the percentage on an ever-shrinking number of people."

This is in the kind of disinformation we've gotten from Orr and Snyder. Yuppie - How many times in the past 20 years has the CoD failed to make GO bond payments?

[mwilbert]

In what way was that disinformation? It looked like a hypothetical to me, trying to explain why a city like Detroit can not actually raise tax revenues to any desired level, regardless of its power to set tax rates.

[Lowell]

Welcome to DetroitYES BankruptcyGuy and thank you for your informed answers.

I posed this question on another thread before I saw yours, so I ask it here too.

I was digging around on the web wondering if the PBGC [The federal government Pension Benefit Guaranty Corporation that protects pensioners of collapsed pension funds] comes into play here. Does this apply to governmental bodies too? Could that be dumped onto them who would then hand out the haircuts?

BTW, I discovered that the PBGC has its own ponzi bubble with a $23 billion deficit on $103 billion in obligations.

[BankruptcyGuy]

Welcome to DetroitYES BankruptcyGuy and thank you for your informed answers.

I posed this question on another thread before I saw yours, so I ask it here too.

I was digging around on the web wondering if the PBGC [The federal government Pension Benefit Guaranty Corporation that protects pensioners of collapsed pension funds] comes into play here. Does this apply to governmental bodies too? Could that be dumped onto them who would then hand out the haircuts?

BTW, I discovered that the PBGC has its own ponzi bubble with a $23 billion deficit on $103 billion in obligations.

Lowell, thank you for running this forum all these years.

To answer your question, no, the PBGC only insures private pension plans. [[It's an insurance company, ostensibly funded by the insured's premiums, but as you note, it's underwater as well.) Even the PBGC has limitations, including a cap of about $57,000 per year and a that insurance is limited to plan benefits earned before the company enters bankruptcy, if the plan is terminated in bankruptcy.

I think, conceptually, the insurer of public pension plans is the sovereign [[the State). That's certainly what the pensioners will argue. The state constitution mandates that pensions be fully funded, which clearly wasn't the case. Should the state have some responsibility for lack of oversight? If they are responsible, should they be taking over the plan [[administering the assets) and setting the benefits limits? That issue might go all the way to the U.S. Supreme Court.

[corktownyuppie]

"General Obligation bonds, on the other hand, are a totally different animal. Yes, these have generally been considered very safe as a class because they are backed by the taxing ability of the municipality. But, if you need to raise your income tax rate to 18% just to be able to maintain operating expenses + debt expenses, you're going to have a bigger problem: people will leave the city. And then no matter how much you raise taxes, you just end up raising the percentage on an ever-shrinking number of people."

This is in the kind of disinformation we've gotten from Orr and Snyder. Yuppie - How many times in the past 20 years has the CoD failed to make GO bond payments?

Until we filed for Chapter 9, the City of Detroit has not once ever failed to make General Obligation bond payments.

Last year I paid between $4000-$5000 in taxes to the city. If they raised property and income tax to the point where I pay $6,000-$7000, it would pinch, but I would stick it out if I knew that we were working toward greater stability. I don't know where my "bottom line" point is, but I can tell you this...if you raise my taxes to $10,000 per year, then I'm moving out of the city.

That's not disinformation, that's my actual math and my actual experience. I can't speak for 700,000 Detroiters and several thousand businesses small and large, but for them I also believe that if you continue to raise taxes, eventually more and more people will leave as has happened the last decade.

==================

If we lose half our population and half our businesses, we will also collect only half the taxes. There are a few theoretical ways to deal with this problem.

[[1) Keep tax rates the same, but have all of your population make twice as much money. You'll double the amount of taxes you collect and recoup the loss.

[[2) Keep income the same but double the tax rates. As long as your residents stay in the city, you'll double the amount of taxes you collect and recoup the loss.

[[3) Keep taxes and income the same, but cut your expenses by cutting services until your expense budget is cut in half. As long as your residents stay in the city, your expenses will have cut in line with your tax revenue, and you can remain solvent.

The problem is Detroit has been doing a combination of 2 and 3 for years. And at some magical point...it might be different for everyone...the combination of increased taxes and worsening services makes it impossible to justify staying in the city. So next year you have the same problem, but even worse. You can raise taxes some more and cut services some more. But then that will just drive more people/companies out of the city.

Where is that magical point? I don't know. It may a big part of the question in bankruptcy negotiations.

But even though you can't violate the laws of the state or the country, you also can't suspend the laws of economics forever, either.

We could do an experiment and wait for the population to go from 700,000 down to 350,000. Then we could vote for politicians who will double our taxes and see what happens next. Certainly would be an interesting study.

[Locke09]

BankruptcyGuy,

Every time someone mentions the State Constitution protecting pensions, someone else responds with absolute authority that "federal law trumps state law" as though they expect this to be a slam dunk for Orr.

Can you verify that federal bankruptcy code actually seeks to preserve states rights and has provisions in it to ensure this. And, what do you make of the provision that a bankruptcy plan cannot be confirmed if it requires the debtor to do something that they are prohibited by law from doing. It doesn't say prohibited by federal law.

[BankruptcyGuy]

BankruptcyGuy,

Every time someone mentions the State Constitution protecting pensions, someone else responds with absolute authority that "federal law trumps state law" as though they expect this to be a slam dunk for Orr.

Can you verify that federal bankruptcy code actually seeks to preserve states rights and has provisions in it to ensure this. And, what do you make of the provision that a bankruptcy plan cannot be confirmed if it requires the debtor to do something that they are prohibited by law from doing. It doesn't say prohibited by federal law.

When Kevin Orr references federal law's superiority, he knows darn well that the issue is up in the air. I think what he is attempting to do is soften the position of the other side. If the pensioners take the issue before the court, they may not like what the ruling is [[if the court rules that bankruptcy rules about plan confirmation don't require pension protection). So I think it's aspirational and a negotiating tactic, not a "slam dunk" by any stretch.

The provision that you mention is probably narrow than you're supposing. By law, all debtors are to pay all their bills, but clearly bankruptcy law allows for a plan where that is not the case.

One side will claim that Chapter 9 allows them to pay less than 100% of accrued pension benefits. The other side will claim that the state constitution requires that they pay 100%. Who wins? Anyone who tells you they're sure is lying.

[Ray1936]

Good insight, Bankruptcy Guy. Thanks for your input.

[Novine]

"Until we filed for Chapter 9, the City of Detroit has not once ever failed to make General Obligation bond payments."


Exactly. The point is that the city's never missed a GO bond payment because there's a defined revenue stream to make those payments. The same is true of water and sewer bond payments. Those payments are made by users inside and outside the city who use the water and sewer systems. The fact that the city has "no money" has no impact on those bond payments.


Orr and Snyder have followed a strategy of disinformation to conflate all of the outstanding liabilities into "$18 billion in debt" knowing that few people are going to bother to unwind the various parts of that to understand the differences between the various liabilities. Why lead people to believe that city taxpayers are on the hook for billions in water and sewer debt when we know that's not the case? Why present pension benefits that may not be due for 20 or 30 years as obligations due today?


Having watched this unfold, this appears to be a deliberate strategy by Orr and Snyder and I think I know why. If you look at the list of liabilities, it's clear who are going to be the biggest losers from bankruptcy. It's going to be the current and retired city employees. When you break out the billions in listed liabilities, the majority those accrue to current and retired city employees. But Orr and Snyder want to convince the public that everyone is going to share the pain. That's why they are making such a big deal of the fact that they are going after the GO bond holders. They've even promised that pension benefits won't be touched for 6 months. But in the end, if allowed to proceed forward, bankruptcy is going to result in massive cuts to the benefits for current and retired city employees.


Quoting Ezra Klein - "The two main groups of creditors arguing they’re entitled to that money are public employees and retirees, and bond holders. The investors are likely to make out better, since more of that debt is secured; the city will continue to pay water and sewer bondholders. Most of the pension debt has no similar backstop."


The first cut will be retiree health care benefits. Those aren't constitutionally protected and will get axed quickly. Presumably, the promise of pension benefits for current employees will be gutted too. But the real goal for Orr and Snyder will be the pension benefits for current retirees. Those are the biggest target but Orr and Snyder realize that this will be the hardest sell. People are likely going to be sympathetic to the plight of retirees seeing their pensions cut after losing health care coverage. That's why Orr and Snyder need to get the general public believing that the pensioners are collateral damage in an effort to take on the bond holders and big banks. By the time it becomes clear that the bondholders and big banks aren't going to take a big hit, and why would they with dedicated revenue to pay off their bonds, only then will people realize that its the employees, current and retired, who are the real targets and the ones who will lose the most in bankruptcy.

[corktownyuppie]

If you look at the list of liabilities, it's clear who are going to be the biggest losers from bankruptcy.

Your analysis is pretty sound. My only difference is that I believe that you've left off one implicit class of creditor, the one that doesn't get to go to court -- the Detroit resident.

The only reason we have been able to make the payments on all of these liabilities is because they came at the expense of the Detroit resident. There are fewer than 10,000 retirees, right? There are fewer than 10,000 city employees, right? [[Someone check my math on this, I may be incorrect.)

Even if every retiree and employee lived in the city, that would still leave 680,000 Detroit residents who are not receiving the level of services we need to stay competitive as a city.

Forget about staying competitive...how about just to stop population loss.

Why present pension benefits that may not be due for 20 or 30 years as obligations due today?

These pension benefits need to be funded today so that they are there for tomorrow. First, laws protect pensioners by making sure that the pension fund is at least 80% funded. But even if that were not law...would you really want a future pension solely based on the fact that the city has funds to pay it in 2043? I wouldn't.

Look, I care about the employees and retirees in the system, too. There needs to be a symbiotic relationship between taking care of residents, employees, and retirees by cooperating and working together.

The problem is that the balance has been tilted toward everyone else at the expense of the residents. And, you're right, legally, we could just keep continuing doing this because General Obligation bonds will just get paid from the taxes. But eventually there won't be taxes to collect.

==========

This is why no set of creditors is actually contesting Orr's main thesis: That the City is Insolvent and Cannot Continue Paying Its Bills. No analyst, no bond insurer, no investment firm, and no one that knows anything about math has said that Detroit is on a sustainable track for the next 5, 10, 20 years.

That's because it's not.

All of the legal wrangling now -- and I am morally in favor of protecting retirees over banks [misspoke here...I meant bondholders/investors, not banks..thanks bankruptcy guy], btw -- is simply about who is first in line. And with the pension funds, as our in-house attorney mentions above, that issue is likely to go all the way to the state supreme court...and perhaps the US Supreme Court might need to rule about whether the federal bankruptcy law supersedes the state constitution on this issue.

I have no idea.

But all of this litigation to protect retirees is not necessarily about asking or compelling Detroit to foot the bill. You know why? Because pensioners don't care where the funds come from. Which means this whole showdown could be about forcing the State to act as guarantor of the pension funds.

And hell, I don't know what is in the hearts and minds of Orr or Snyder. But I do know that even if they DID want to protect the pensioners, there's no way the political climate would possibly allow that to happen short of a court order from the Michigan Supreme Court.

Your post is about the retirees and employees. Bankruptcy is about the citizens. Yes, you're right that we could continue going on like this and still pay our creditors.

But there's no way it would last very long. And I'd argue that it shouldn't have even gone as long as it has.

[Novine]

My beef is with how Orr and Snyder are selling this. They are telling residents of Detroit and the state that this is the only way to unload the debts that are drowning Detroit and if it means sticking it to the bondholders and the banks, they'll do it! But the reality is going to be something else. Most of the bondholders are going to get their due while the employees and the retirees are going to get blown out of the water. Meanwhile, Orr's gameplaying with the GO bonds is only accomplishing one thing - making it more expensive for every other municipality in the state that needs to sell bonds to finance public projects.

[professorscott]

The City cannot raise tax revenues arbitrarily for exactly the same reason that a pizza parlor cannot make arbitrarily high revenues. If I sell a large pizza for five hundred dollars, nobody will buy it.

Look at the true situation on the ground already. Detroit has ruinously high property tax rates, so what has happened? Millions have left, and hundreds of thousands who remain as property owners simply don't pay the tax.

[professorscott]

Should the state have some responsibility for lack of oversight?

Good heavens, look at the record. Every time the state made any attempt to exercise any oversight, the activists came out of the woodwork to protest the unconstitutional taking of the sovereign power of elected officials. What in the name of God could the state have done over what it has actually done?

The City has been taking payday loans to pay [[some of) its bills for the better part of a decade. Time to pay the piper. And oh, my, if the State becomes the guarantor? Then kiss home rule goodbye throughout Michigan, which may in the end be the best outcome of all this. Outstate voters may have to bend over once but they won't ever do it again.

[professorscott]

My beef is with how Orr and Snyder are selling this. They are telling residents of Detroit and the state that this is the only way to unload the debts that are drowning Detroit and if it means sticking it to the bondholders and the banks, they'll do it! But the reality is going to be something else. Most of the bondholders are going to get their due while the employees and the retirees are going to get blown out of the water. Meanwhile, Orr's gameplaying with the GO bonds is only accomplishing one thing - making it more expensive for every other municipality in the state that needs to sell bonds to finance public projects.

I don't agree with your prediction. I think the unsecured creditors, including many of the bondholders, are going to take it in the shorts. I think the pensioners will be given some deference by the court in view of the state constitution, though it creates a protected class of unsecured creditors not allowed by bankruptcy law. [[I suspect such a half-measure compromise will be employed just to keep this from becoming a Supreme Court supremacy clause issue that doesn't get decided for four or five years.)

All this could be wrong, just a prediction from a nonexpert. I'd be pleased to hear BankruptcyGuy's view of this off-the-cuff prediction.

[mwilbert]

It might be worth pointing out that we don't know how big a hit the pensioners could potentially take because we don't know how underfunded the pension plans are. Orr says they are underfunded by $3.5 billion. My impression based upon the composition of the assets and their assumed rate of return is that they are substantially underfunded, but there are certainly people, including the pension fund trustees, who claim otherwise.

I don't think there is much chance the health care benefits survive though.

[BankruptcyGuy]

Good heavens, look at the record. Every time the state made any attempt to exercise any oversight, the activists came out of the woodwork to protest the unconstitutional taking of the sovereign power of elected officials. What in the name of God could the state have done over what it has actually done?

The City has been taking payday loans to pay [[some of) its bills for the better part of a decade. Time to pay the piper. And oh, my, if the State becomes the guarantor? Then kiss home rule goodbye throughout Michigan, which may in the end be the best outcome of all this. Outstate voters may have to bend over once but they won't ever do it again.

I think that's exactly right: if the state is found to have effectively guaranteed the City's debts [[pension, that is), then what remains of home rule will disappear shortly thereafter.

[BankruptcyGuy]

I don't agree with your prediction. I think the unsecured creditors, including many of the bondholders, are going to take it in the shorts. I think the pensioners will be given some deference by the court in view of the state constitution, though it creates a protected class of unsecured creditors not allowed by bankruptcy law. [[I suspect such a half-measure compromise will be employed just to keep this from becoming a Supreme Court supremacy clause issue that doesn't get decided for four or five years.)

All this could be wrong, just a prediction from a nonexpert. I'd be pleased to hear BankruptcyGuy's view of this off-the-cuff prediction.

Well, a Chapter 9 plan of adjustment proceeding will defer greatly to the EM, because of the issues I mentioned before. So, the pension's positions on the issue will depend on how they are treated. Is the half-measure enough? Will the pensioners accept 10-15 cents more on the dollar than they are currently funded? Do they want to fight, knowing that they could get less?

My guess is similar to yours--I think the pensioners are going to negotiate the best deal they can, but in the end, take it.

[BankruptcyGuy]

Oh, and one more thing: any references to supporting pensioners over "banks" is inaccurate. Banks don't hold the bonds, investors do. Anyone who holds a muni bond mutual fund might own the impacted bonds. Banks don't.

[Hermod]

Oh, and one more thing: any references to supporting pensioners over "banks" is inaccurate. Banks don't hold the bonds, investors do. Anyone who holds a muni bond mutual fund might own the impacted bonds. Banks don't.

The guys ultimately on the hook are the insurance companies that specialize in insuring muni bonds. Most muni bond issues are insured.,

[Danny]

BankruptcyGuy,

Explain to me why did the Detroit City Government borrow too much money and can't it back? Can you trace their loans as far as 1950s from Detroit Mayor Mariani to the Kilpatrick Era? Explain in detail the complete history about Detroit City Government's borrowing habits? Did they borrow money and pay it back long ago up to this day? Or the did borrow money and squander in into their pockets?

[Hermod]

BankruptcyGuy,

Explain to me why did the Detroit City Government borrow too much money and can't it back? Can you trace their loans as far as 1950s from Detroit Mayor Mariani to the Kilpatrick Era? Explain in detail the complete history about Detroit City Government's borrowing habits? Did they borrow money and pay it back long ago up to this day? Or the did borrow money and squander in into their pockets?

Most muni bonds have a maximum of 30 years to maturity.
The oldest Detroit bonds would then date back to 1983.

[BankruptcyGuy]

BankruptcyGuy,

Explain to me why did the Detroit City Government borrow too much money and can't it back? Can you trace their loans as far as 1950s from Detroit Mayor Mariani to the Kilpatrick Era? Explain in detail the complete history about Detroit City Government's borrowing habits? Did they borrow money and pay it back long ago up to this day? Or the did borrow money and squander in into their pockets?

Well, let me answer it this way: the two issues are the city's deficit [[they are run inefficiently, spending more than they bring in) and the city's debt [[instead of solving the deficit problem, they just borrowed more and more). The former is exacerbated by poor management, and the latter is exacerbated by the structural problems [[declining tax base, a pension system which is too expensive) inherent in the city.

I don't think there's any evidence that the current group of politicians have been crooked, but that's outside of my expertise.

[Wesley Mouch]

...I don't think there's any evidence that the current group of politicians have been crooked, but that's outside of my expertise.

Corruption is difficult to see until its exposed. Doesn't matter whether the leaders are corrupt or crooked -- you can bet that corruption is to be found throughout the organization. It takes a while for a new culture to take hold. Bing and Archer are probably clean -- but CAY and K**2 no doubt showed a lot of people 'how its done'.

[professorscott]

I don't think there's any evidence that the current group of politicians have been crooked, but that's outside of my expertise.

Also, in the current situation, whether the current leadership is crooked or not [[I believe it is not, but share BankruptcyGuy's nonexpertise) doesn't make all that much of a difference. I owe you $1000 and I only have access to $300; how we got there only matters a little tiny bit. If at all.

[Wesley Mouch]

BankruptcyGuy,
Explain to me why did the Detroit City Government borrow too much money and can't it back? Can you trace their loans as far as 1950s from Detroit Mayor Mariani to the Kilpatrick Era? Explain in detail the complete history about Detroit City Government's borrowing habits? Did they borrow money and pay it back long ago up to this day? Or the did borrow money and squander in into their pockets?

Not really answering your question, but certainly consider that promises of future pensions is really just a way of borrowing from your children. Past administrations have done a fine job of borrowing against today's revenues via pensions.