Bankruptcy itself won't save Detroit

City can shed its debt, but it also needs to bring back residents, raise revenue
Associated Press
Jul 20, 2013

Four years ago, America's Big Three automakers mortgaged all they owned or went into bankruptcy court to keep from going broke.

Since then, General Motors, Chrysler and Ford have all returned to full financial health, unlike Detroit itself, which filed for bankruptcy Thursday after years of painful decline.

So why can't the Motor City use bankruptcy to transform itself in the same way? Unfortunately for Detroit, it's not that simple. Automakers were able to shed most of their problems in bankruptcy court and come out leaner and more competitive. The city can get rid of its gargantuan debt, but a bankruptcy judge can't bring back residents or raise its dwindling revenue.

"In General Motors, at least you could have this dream about there being increased revenues in the future," said Douglas Baird, a bankruptcy law professor at the University of Chicago. "It's much harder to do that in the case of a city like Detroit because it doesn't sell a product."

Detroit, which filed the largest municipal bankruptcy case in American history, owes as much as $20 billion to banks, bondholders and pension funds. It has revenue of about $1.1 billion per year, a number that drops by about $100 million annually. And it's burdened with a running deficit of $327 million.

The city had to borrow $80 million from Bank of America last year just to keep the lights on.

City taxes are already at limits set by the state, so the only way Detroit can raise revenue is to attract more workers and residents so they pay taxes. But with high crime, poor services and decrepit neighborhoods, people are moving out rather than in. The population has fallen to around 700,000, less than half as many people as during the heyday of the 1950s.

Much of the city's debt to banks and bondholders is secured by tax revenue, and just how much the creditors get will have to be hashed out in court. A big chunk is owed to employee pension plans and for the health care costs of more than 18,000 retirees. So the city is caught in a time warp of sorts. It has obligations leftover from the boom days, with today's much smaller revenue base.

"Even if they were completely successful in wiping out all of the debt, it doesn't solve all of the problems," said Steve Miller, board chairman at insurance giant AIG who has turned around a number of struggling companies. "The retirement obligation and health care obligation of a workforce that used to support a 2 million population cannot be supported with the diminished population of 700,000."

Detroit's problem, he said, is similar to what he faced at Bethlehem Steel, which had 12,000 active workers contributing to pension plans that served 130,000 retirees.

"There was no way to make that math work," Miller said. Retirees had to take reduced benefits after pensions were turned over to the federal government.

Like those at Bethlehem Steel, Detroit's pensioners are also likely to see benefit cuts. And because they're lower in the pecking order of creditors, they may bear the brunt of the city's ills, Baird said.

And many will have trouble taking the hit, especially those hurt in the line of duty.

"Some of them were shot. Some of them had buildings fall on them," said Don Taylor, president of the Retired Detroit Police & Fire Fighters Association. "And they've been injured for life. They can't get other jobs."

Michigan Gov. Rick Snyder is sympathetic but says the city is in dire straits.

"We really want to empathize with their situation," he said. "A lot of people worked hard for the city for a lot of years. They're on a fixed income. We all need to appreciate that can be a difficult situation. This is a very difficult situation overall, though."

Snyder wouldn't say if pension or health benefits would be cut, but he said the city has to deal with its unfunded pension liabilities. The pensions have "somewhere north of 50 percent" of the assets needed to pay all benefits, he said.

The state, Miller said, will likely have to come up with cash to help Detroit through the bankruptcy until its tax base grows, just like the federal government helped GM and Chrysler. But Snyder said that shouldn't be expected.

Any savings from cutting pensions could be used to provide better services, said John Pottow, a University of Michigan professor specializing in bankruptcy and corporate law. "It's also going to help people who want to have the police show up or their garbage collected."

And with a little luck, smaller debt after bankruptcy could lead to a renaissance for Detroit, just like it did for General Motors and Chrysler, which also went through bankruptcy protection.

Former GM Vice Chairman Bob Lutz said Detroit's bankruptcy shouldn't be much of an obstacle to the rebirth of GM and the rest of the U.S. auto industry. The resurgence of the Big Three may help lift Detroit out of trouble as auto sales continue to increase, he said.

"It can and must be a new beginning, with a clean slate," Lutz said. "Life will go on."

 

Comments

Contango

Re: "It's much harder to do that in the case of a city like Detroit because it doesn't sell a product."

Yes it does – it’s drowning in incompetently provided SERVICES.

It’s simple supply & demand. The resident and businesses have been voting with their feet.

Turn Detroit over the entrepreneurs and business owners; make it a free trade, free tax zone.

Detroit has the potential of becoming America's own emerging market.

Just let it become an experiment in laissez-faire economics and get the (bleeping) politicians and bureaucrats outatheway.

OMG.LOL.WT_

"Turn Detroit over the entrepreneurs and business owners; make it a free trade, free tax zone. Who pays for Services (Police, Fire, etc.) then? BLACK MAGIC? Typical Repuglican Mantra

grumpy

What is your suggestion? Kick the can down the road and hope someone else will miraculously fix it? Or do you want the federal gov't to come in and pay off the debt for the poor folks in Detroit?

Darwin's choice

Democratic led! Right into the ground! Chicago next?

shucks

Wrong.

Darwin's choice

Once again, blind Obama clingon, you're incorrect! Detroit has been under democratic lead for decades! Just because you say it, doesn't make it true!

shucks

Prove and cite evidence of how the Democrats hurt Detroit.

You think that the Republicans are the answer to everything , don't you?

registerer

I believe you may be right. Let's take a closer look shall we. Detroit, Chicago and multiple cities in Cali, as well as the whole state of Cali, have either filed or are on the verge of filing for bankruptcy. Common denominator = democrat leadership! (yes Cali had a Republican Governor but the state legislature is democrat)

The Big Dog's back

Gov. Jerry Brown took office two years ago promising that he had the know-how and the fiscal prudence to guide the state out of its financial crisis, and on Thursday he delivered a budget without a deficit.

It's the first time since 2007 that leaders at the Capitol haven't had a deficit to contend with and the first time since the late 1990s that the outlook over future years shows surpluses instead of deficits.

"This is new. This is a breakthrough," Brown told reporters at a news conference where he presented his spending plan for the 2013-14 year that begins July 1.

Jerry Brown is a Democrat.

Fromthe419

While I applaud Jerry Brown in balancing the state's budget, do you know what the mayors and educators are saying about his balanced budget. He is gutting funding sent to cities and schools. When one balances their budget there are things that are cut and that is money sent to cities. These cities are having to raise sales taxes, property taxes to keep the status quo. Pushing more onto the cities is causing them to go bankrupt. The original problems of giving more than they can afford is not being addressed, the funding is just shifting from one part of the government to the other.

shucks

Prove something, show something, cite evidence .

Fromthe419

Here is the first one I found
http://www.sacbee.com/2013/06/12...
I found about 30 others that were from both conservative and liberal rags around the country.
We have to have an honest conversation about the unfunded liabilities we are going to face, we are 17T in debt with over 100T in unfunded liabilities, would you really want to have a child that will one day have to face this debt crisis?

grumpy

And this is why the underfunded pensions will be cut, thanks to those politicians (Democrats all, in this case) who under funded the pensions decade after decade.

"Detroit's problem, he said, is similar to what he faced at Bethlehem Steel, which had 12,000 active workers contributing to pension plans that served 130,000 retirees.

"There was no way to make that math work," Miller said. Retirees had to take reduced benefits after pensions were turned over to the federal government.

Like those at Bethlehem Steel, Detroit's pensioners are also likely to see benefit cuts. And because they're lower in the pecking order of creditors, they may bear the brunt of the city's ills, Baird said.

And many will have trouble taking the hit, especially those hurt in the line of duty.

"Some of them were shot. Some of them had buildings fall on them," said Don Taylor, president of the Retired Detroit Police & Fire Fighters Association. "And they've been injured for life. They can't get other jobs."

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Thems what the facts is, and what the bankruptcy court has to deal with. Who wants to bet that the politicians who screwed the city workers get away scot free, with their kickbacks still in their pockets?

The Big Dog's back

What about the private companies dumping their pensions on the Gov poohball?

grumpy

Other than attempting to deflect the discussion from what is happening in Detroit and the democrat politicians hand in screwing the people of that city, how does that affect the city of Detroit?

Take your time and make sure you cover all the ways it impacts the city of Detroit. We will be waiting to hear your words of wisdom with baited breath. (sarcasm if you don't recognize it)

The Big Dog's back

The "screwing" of Detroit came at the Repubs hand. In raygun's effort to destroy unions, he destroyed cities as well. Quit trying to rewrite history.

grumpy

During Reagan's term of office the auto unions in Detroit got raises in both wages and benefits exceeding the rate of inflation. The city workers also got increases exceeding inflation. That pretty well answers your obvious mis-statement of fact. Try again, next time try some truth.

CAST THE FIRST STONE

I know a guy who is racist. And he voted for Obama because he thinks he will keep his union pension and benefits coming. So sad that people keep thinking government will keep giving without taking. Watch the health care the unions end up with..Ignorance

shucks

"I know a guy who is racist. And he voted for Obama because he thinks he will keep his union pension and benefits coming."
...........He's a smart racist (oxymoron). He knew that he would lose under Romney's government -- where the rich would get richer.

CAST THE FIRST STONE

when is the last time a poor person wrote a payroll check. So lets make everyone unable to build a business that can hire people. Ignorance at its finest

shucks

Big business doesn't want to pay a decent wage.
They want to hoard it ALL.
Ultimate ignorance.

CAST THE FIRST STONE

so get rid of big business so i loose my job. I work for a big business that has paid me for 27 years. I own a home and have raised my kids and sent 2 to college. When i get of work i go home and work is over until tomorrow. Business owners are never off work. I chose this way. But if i chose to build a business and work 24/7 you would want to take more of my money. You must not blame people that are better off than you. Be happy with yourself and dont be angry at people that work their a** off

shucks

You aren't making any sense.

CAST THE FIRST STONE

i knew you wouldnt understand. you said romney would of helped big business and that would be bad. how hard is that to understand

shucks

I understand that you are just ranting and raving.

shucks

PS
"you said romney would of helped big business and that would be bad."
.............He would help THEM get richer at the expense of the middle class and below.
Are you new to this planet?

grumpy

And your solution to the problem is?

The Big Dog's back

What's your solution poohball?

grumpy

And your solution to the problem is?

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