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

shucks

"And your solution to the problem is?"
.....Why don't you ask the GOP that question? That's part of their job , right?

Do YOU have a solution?

J Cooper

democrappers have controlled Detroit for the past 60 years.

shucks

It's about the Economy / Globalization.

Repukes have harmed the USA.

grumpy

If that were true then many more cities would be in the same shape. As it is Detroit, and the democrats have been in total control there for 50 years plus and in the state for most of that time, it is unlikely that is the case. When the Repukes have been in the minority by a large margin, for decades, your statement is easily discounted.

The Big Dog's back

Repubs were in charge of the country for the better part of 40 years. Look what that got us.

grumpy

When Clinton ,Carter, and Obama were first elected dims had majorities in both the house and senate. For two years, Carter and Obama each had super majorities Due to what they did during those years they lost those majorities. The repubes had the presidency and majorities when jr bush was pres for 2 years, then he lost that.

Can you show us all when the repubes were in charge for 40 years? This ought to be good for a laugh. I like when he tries to rewrite history to fit his biases.

The Big Dog's back

reagan/bush1- 12 years. nixon/ford- 8 years. bush2- 8 years. 28 out of 40 years. Let's see how you spin this.

grumpy

No spin needed.

Reagan had the House controlled by Democrats all 8 years and dims held the Senate for 2 years. Bush 1 never had either house nor senate controlled by repubes, always dims had the majority. Nixon never had Repubes in control of either house or Senate. Bush jr. Had dems control the house for 4 yeards and dims controlled the senate for 4 years.

http://en.wikipedia.org/wiki/Uni...

The President can't pass laws, nor make budgets, as you yourself have conceded when you say you want the dims to win control of the House. You have shot yourself in the foot many times today, and over the last few days. I advise you to fall back and lick yourself piddle puppy.

The Big Dog's back

I know, I know, when Repubs are in charge it's the Dems fault. Repubs had total control for 6 years under bush. What happened?

grumpy

So we go from 40 years of control to 28 years of control and noow we are down to 6 and no explanation of how that happened? Come on puppy, we deserve to know why you keep moving the goal line.

As far as bush goes I never said he was anything special nor even a good president. he wasn't particularly good at it. In 2000 I voted against Gore. In 04 I voted against both major party candidates as I didn't want to vote for the lessor of two putz's. Same for 08 and 12. It has been a long time since there was a Presidential candidate worth voting FOR. Before 04 I never paid much attention to third party candidates, since then I look hard but haven't found one I like yet. Neither major "party" has had a decent offering for a long time.

JudgeMeNot

A moron called Obama.

shucks

It's about the Economy / Globalization.

grumpy

Didn't figure you or piddle puppy would have any, nor the ability to show why this happened.

arnmcrmn

Big Dog was just made to look like a little frog by grumpy. Well played sir and way to stick to the facts.

grumpy

The GOP is in the majority of what? The US House? The dims are in majority of the Senate and the Presidency. Wouldn't they be the ones to ask since they control more of the gov't? Why didn't the dims change things more when they had majorities in the hose, a supermajority in the senate and the presidency? Nothing could slow them down let alone stop them. They waisted their chance passing the fatally flawed Obamacare. What a waste of an opportunity. Last time a party had that much of a majority was when Carter was President, and we all saw how well that tuned out. Time repeats itself.

The Big Dog's back

They actually started reversing bush's Great Recession, remember?

CAST THE FIRST STONE

you have little man syndrome. Blame other people for your lack of whatever you are blaming them for.

shucks

And you have pointless raving and ranting , ok?

Darwin's choice

"Ultimate ignorance"...ironic statement coming from you.....!

shucks

You're not bright.

The Big Dog's back

The poor man paycheck thing is bullspit. You don't have to be rich to write a paycheck.

The Big Dog's back

I know a guy who's a teabagger and works for a union company. He thinks he works more than anyone else and deserves more. Problem is the rest of the workers know he is lazy and can't do his job. So he cuddles up with the boss and says how lazy everyone else is. If people like this hate unions so much why do they work for a union company?

grumpy

"why do they work for a union company?"

Easy piddle puppy, they are lazy. Depending on the union, if they have seniority and pay their union dues, they can't be fired. Many individual union workers get that way. They feel they deserve the job they have.

The Big Dog's back

So you agree they are teabaggers. Thanks for agreeing.

grumpy

I agree that many in unions are lazy, you need to show that the lazy ones are teabaggers. Most of the lazy union workers I have encountered haven't been. But you sound like you are experienced with teabagging. Or at least you keep bringing up the subject.

The Big Dog's back

I don't need to show spit. Ask the teabaggers where they worked.

grumpy

Good we really don't need to see you teabagging your BFF, or vice versa, anytime soon, or ever really.

YoMamma

All politicians are corrupt to some extent. But when you have a group of like minded corrupt people in power for such a long period of time you have no checks and balances to slow the corruption!

registerer

Here is the biggest fib of the whole story: "Since then, General Motors, Chrysler and Ford have all returned to full financial health..."

If that statement is true then why does both GM and Chrysler still owe the US taxpayers BILLIONS of dollars?

donutshopguy

The domino effect is starting. Cities are filing bankruptcy. Counties will follow, then states and finally the federal government.

The bills are due. Can't kick the can farther down the road. It's pay up time. Hope everyone is ready. I am.

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