Honest answers to your bankruptcy questions

[Locke09]

corktownyuppie,

The constitutionality of the proposed pension cut isn't contingent upon how large the cut is. If it's unconstitutional, that to me implies that it is illegal for the governor to approve it being submitted as part of a plan. If the constitution of the state of Michigan doesn't matter, only then the judge can apply the reasonable and fair test.

[DetroitPlanner]

BG, how much of this argument do you buy?
http://www.salon.com/2013/07/23/dont...about_detroit/

Granted its biased as all heck but it does set up an argument on how the City got here in the first place.

[Hermod]

BG, how much of this argument do you buy?
http://www.salon.com/2013/07/23/dont...about_detroit/

Granted its biased as all heck but it does set up an argument on how the City got here in the first place.

Except that is wasn't the "right" handing out those subsidies in Detroit. It wasn't the right failing to pay into the retirement funds for current payroll. It was a series of mayors and clownsils from the fringe left.

[BankruptcyGuy]

BG, how much of this argument do you buy?
http://www.salon.com/2013/07/23/dont...about_detroit/

Granted its biased as all heck but it does set up an argument on how the City got here in the first place.

I'm guessing David Sirota has never even been to Detroit. Monday morning quarterbacking, for sure. [[sigh) Anyway, on to the argument:

1. Anyone who has ever been to Detroit would know that population loss began in the 1950's--way before NAFTA, and before China was on the map. What caused population loss, in my non-expert opinion? Crime, poor schools, lack of jobs [[partially related to poor business conditions), white flight, black middle-class flight... The list is really long. And I'm not sure how relevant it is, to be honest.

2. If NAFTA were the cause of job loss, why were about 18 auto plants built in the last 20 years, none in Detroit or the metro area? Are the southern states somehow exempt from NAFTA? Or was our per unit labor cost in far excess of theirs, driving jobs in their direction?

3. What I dislike is authors who put in links, and then expect that you won't click through on those links to call BS. Michigan has $6B in "corporate welfare" according to the NYT? Really? When you click through to the article, it shows that over $4B of that is the sales tax exemption on services. How is that "corporate welfare?"

4. I don't think that anyone worth listening to is claiming that public employee pensions, on their own, bankrupted our city. He's correct that they are not solely to blame. In fact, how can you really blame someone for negotiating the best deal they could get?

5. I'd bet good money that the pensioners get a higher percentage of their deficiency [[the shortfall in funding) than bondholders get.

How did we get here? I have had some really overweight relatives. Yet when I see them, they don't gorge themselves--it's a series of small, bad habits when added up over time, lead to a big, big problem.

[DetroiterOnTheWestCoast]

Are the city pensions really that generous, or is it more of a case of the city not funding them sufficiently?

[professorscott]

Are the city pensions really that generous, or is it more of a case of the city not funding them sufficiently?

By old-school standards they aren't generous to the point of being absurd. By modern standards, of course, who in hell gets pensions like that anymore, but we're talking about a big group of people including some who retired many years ago.

The real problem is your second supposition. The City [[violating, by the way, the exact same section of the State constitution that everybody has been blathering about) has failed to fully fund the pension system for a good many years. And of course, since the population and workforce are both much smaller than in the past, there's no prayer of funding it completely in the future.

As I've said in the past, a State constitution does not have the force to change the laws of physics or mathematics. If I owe you a thousand dollars, but I can only hope to ever pay you back $300 since that's all I can get my hands on, then it sucks to be you.

[Dexlin]

Okay, I haven't been here in months, so you'll have to forgive me if this has alreaedy been asked, but does the $18 billion figure thrown out for Detroit's debt include the nearly $6 billion in debt from the Detroit Water & Sewerage Department, which is backed by its own revenue stream? Won't this figure quite a lot into the very basic question of whether Detroit can file for bankruptcy or not? Is Detroit still imminently insolvent if the debt apart from DWSD is "only" $12 billion?

Also, how much of the debt is Orr aiming to get cleared in the bankruptcy?

Lastly, it seems to be that underfunded pensions are actually the smallest single chunk of the debt and that the unfunded healthcare obligations are the real killer [[the bond debt seems to be between the two in size). Wasn't Orr literally saying a few weeks ago to the media that a part of the Affordable Care Act could actually keep the city out of bankruptcy? Any idea as to why this isn't getting more of the press?

[corktownyuppie]

Okay, I haven't been here in months, so you'll have to forgive me if this has alreaedy been asked, but does the $18 billion figure thrown out for Detroit's debt include the nearly $6 billion in debt from the Detroit Water & Sewerage Department, which is backed by its own revenue stream? Won't this figure quite a lot into the very basic question of whether Detroit can file for bankruptcy or not? Is Detroit still imminently insolvent if the debt apart from DWSD is "only" $12 billion?

Yes, you are correct. the $18BB figure includes DWSD debt., but I'm not sure that's relevant analysis. The most important number,, IMHO, are the following:

- As of right now, 30-40 cents on the dollar in revenue goes toward debt and legacy costs before any operating expenses are covered.

- If the current de-population trends continue, then by 2019, that number will increase to 60-70 cents on the dollar, which will drive service levels down even further and accelerate de-population even more.

- Lines of credit were already shut off prior to the State getting involved. As early as 2005-2006, the city was already floating bonds to cover its mandated contribution to the pension plan.


Consequently, whether or not we are "totally insolvent" as of this very moment becomes more of an academic debate than anything else. Without access to credit, this means that every reduction in population would require either an increase in taxes or a cut in service levels in order to pay the bills.


I would argue that either one or both will inevitably lead to further de-population and the downward cycle.

Also, how much of the debt is Orr aiming to get cleared in the bankruptcy?

The numbers that are getting thrown around are "10 cents on the dollar" but that only applies to unsecured debts. Of course, the next inevitable argument revolves around which creditors are secured vs. unsecured. To his credit, he has already successfully negotiated one secured creditor to restructure at 75 cents on the dollar.


His end goal is to use approx $1.2BB in recouped savings and use that to further invest into the city, specifically with improved public safety and as a capital investment to re-tool and re-train inefficient and wasteful departments into getting the most bang for our buck, including improved property/income tax collection.

Lastly, it seems to be that underfunded pensions are actually the smallest single chunk of the debt and that the unfunded healthcare obligations are the real killer [[the bond debt seems to be between the two in size). Wasn't Orr literally saying a few weeks ago to the media that a part of the Affordable Care Act could actually keep the city out of bankruptcy? Any idea as to why this isn't getting more of the press?

Healthcare obligations are the real killer, and apparently they will be done away with and be replaced with Medicare for retirees 65-and-over. It's likely that there will be a negotiated settlement to provide employees/retirees with a monthly cash stipend to be used toward Obamacare or Medigap insurance.


But really, the "real killer" isn't even healthcare obligations. It's the tidal wave of de-population. Even if you try to make the argument that we could pay our bills right now if we weren't as wasteful and we went after big corporations who are behind on bills [[all of which is true and necessary), the big challenge is in 5-10 years when we are trying to accomplish the same goals with 100,000-200,00 fewer taxpayers.

In the end, if we do not stabilize the city population and work toward growing our revenue again, all of this debate is just hot air. As someone just posted above, the courts can legislate all they want about who is owed what. None of that will matter if there's no money to pay it. Just because a court rules that the other driver caused the accident doesn't mean that he has any money to actually pay for your medical bills.

Thankfully, the law requires that driver to have car insurance. Oh, wait, he doesn't have that either. And that's why we're in bankruptcy court.

[Eber Brock Ward]

BKGuy or someone else, I was in the shower this morning thinking about this.

The Michigan Constitution -- And Illinois' for that matter, if you are looking for more L.Rev. and other scholarly treatment of a near-identical clause -- treats these pension obligations as "contractual" obligations.

What is to distinguish these "contractual" obligations from other unsecured contractual obligations, such as accounts payable to vendors, or payables to bondholders through the contract formed via/covenants found in the Bond Ordinance?

Surely, one has to acknowledge the existence of the "shall not diminish or impair" clause in the Constitution, but how is that fundamentally distinct from the City's contractual obligation to not diminish or impair payments to vendors and bondholders?

I haven't seen discussion on it, but I don't think it's totally unlikely that Rhodes will find that [[1) yes, the Constitutional provision applies; [[2) yes, pension funding is a contractual obligation of the city; but [[3) it should be treated like any other contractual obligation of the city, which the city has also covenanted not to diminish or impair, even if not verbatim.

I think we, collectively, are engaging in a bit of an either-or fallacy when we discuss the issue solely in terms of whether the constitutional provision applies. Simply put, the provision could apply, but be of little value, as outlined above.

[Dexlin]

But really, the "real killer" isn't even healthcare obligations. It's the tidal wave of de-population. Even if you try to make the argument that we could pay our bills right now if we weren't as wasteful and we went after big corporations who are behind on bills [[all of which is true and necessary), the big challenge is in 5-10 years when we are trying to accomplish the same goals with 100,000-200,00 fewer taxpayers.

In the end, if we do not stabilize the city population and work toward growing our revenue again, all of this debate is just hot air. As someone just posted above, the courts can legislate all they want about who is owed what. None of that will matter if there's no money to pay it. Just because a court rules that the other driver caused the accident doesn't mean that he has any money to actually pay for your medical bills.

Thankfully, the law requires that driver to have car insurance. Oh, wait, he doesn't have that either. And that's why we're in bankruptcy court.

Of course, depopulation is the real issue, here, but that seems like such an impossible task, that all that can really be concentrated on are the measurable financial aspects of the crisis. Quite frankly, with the way people talk about the city, I think you could cut violent crime in half, fix every streetlight in the city and double test scores in the school system, and the folks already here would still be wishing to move out, and the folks already outside would still stay out. It's why for as much of an optimist as I want to be, I also feel a sense of profound hopelessness about repopulation.

We're going to have to rely on out-of-staters without the historical baggage to move in, and even in that scenario there won't be enough of them to really offset the flight from the majority of the neighborhoods. Even in the most rosy scenario where the inner-city pulls a Chicago and adds thousands of new residents, people forget that while greater downtown Chicago saw one of the largest numerical gains of any downtown in the nation over the last Census, it still lost over 200,000 people on net.

Detroit's not going to be able to cut and shed its way to prosperity...unfortunately, that's about the only thing the city has any control over, because the depopulation portion of the crisis is as much a mental crisis as the financial crisis, if not even more of the crisis.

[corktownyuppie]

Detroit's not going to be able to cut and shed its way to prosperity...unfortunately, that's about the only thing the city has any control over, because the depopulation portion of the crisis is as much a mental crisis as the financial crisis, if not even more of the crisis.

I think that's where you an Orr actually agree. An injection of $1.1BB in cash is the exact opposite of "cutting and shedding" the way to prosperity. The question is whether or not Orr can secure the necessary settlements to free up the cash.

While there is [[very legitimate) angst about cuts, settlements, negotiations, etc. We need to keep our eye on the ball here. The point of this is whole exercise to infuse cash INTO the city, not out of it.

[Novine]

Isn't 40% of Orr's budget planned for demolitions? $500 million isn't even going to create value in the city, it's going to tear things down. I'll grant that there may be some nominal benefit from demolitions by reducing calls for fire, police, etc. But it's not creating any real lasting benefit to the city.

[Locke09]

Okay, I haven't been here in months, so you'll have to forgive me if this has alreaedy been asked, but does the $18 billion figure thrown out for Detroit's debt include the nearly $6 billion in debt from the Detroit Water & Sewerage Department, which is backed by its own revenue stream? Won't this figure quite a lot into the very basic question of whether Detroit can file for bankruptcy or not? Is Detroit still imminently insolvent if the debt apart from DWSD is "only" $12 billion?

Also, how much of the debt is Orr aiming to get cleared in the bankruptcy?

Lastly, it seems to be that underfunded pensions are actually the smallest single chunk of the debt and that the unfunded healthcare obligations are the real killer [[the bond debt seems to be between the two in size). Wasn't Orr literally saying a few weeks ago to the media that a part of the Affordable Care Act could actually keep the city out of bankruptcy? Any idea as to why this isn't getting more of the press?

It's not getting press because it does not help them paint the picture they want to paint. Take away 2/3 of the debt [[DWSD and healthcare which isn't even a debt) and you are left with something the City can in fact manage, even if it loses some more population. The 25% he negotiated outside of bankruptcy court [[something is still very odd about that one - would love to see some details) plus his proposed savings for healthcare, together reduce debt and obligation payments by about $250 million per year. There is no justification for claiming you can't sustain your remaining bills after that, and have some money left over for restructuring. Close the pensions to any employees not already vested and don't borrow any new money that adds to the debt again, and the City would be fine.

But stiff your current creditors so you can start over with new debt - dishonorable.