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Detroit Files Chapter 9: What Lies Ahead?

Posted by Larry Doyle on July 19, 2013 12:23 PM |

With no surprise to absolutely anybody, the City of Detroit filed bankruptcy yesterday via Chapter 9.

How does an entity such as Detroit get to the point of being 18 billion in debt? Well, I addressed that point a month ago in writing, Detroit: D is for Disaster.

There will be years worth of likely challenging negotiations and contested legal battles among Detroit’s creditors (primarily the pensioners and bondholders). Those within the municipal bond market and beyond will be watching this play out with bated breath.

Although I could take a gratuitous shot at our President and others within his administration for their oft-stated lines about saving Detroit during the 2012 campaign, I will allow others to swing that cudgel. For an insider’s view as to what lies ahead for the Motor city, let’s navigate and review a brief clip provided by the WSJ

Make no mistake about it, this situation in Detroit is exceptionally sad and will impact many people in a very meaningful way. Heck, it already has.

Will this disaster be brought by some effected — those pensioners — back to the doors of 1600 Pennsylvania Avenue in the hope of some sort of backdoor federal bailout or other form of convoluted payoff?

Beyond that, though,will we learn the necessary lessons that come along with Detroit’s filing Chapter 9 in terms of prudent fiscal management and political accountability?

Only time will tell.

Navigate accordingly.

Larry Doyle

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery you can access the video clip here. Please visit the blog and comment on this piece of ‘sense on cents.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

 

  • http://www.fiscalliberal.me fiscalliberal

    I live in Troy MI, a northern suburb of Detroit. For some reason the people of Detroit elected corrupt officials and they extracted money from the city. In a way it is a lot like the corruption in Washington and Wall Street. They have a problem with police, emergency and firemen not responding. Not really a good omen for people wanting to visit the city.

    • LD

      Welcome back, welcome back, welcome back,

      I have thought of you more than a few times over the last few years as your comments on my blog in the very early days after my initially launching this effort back in January 2009 gave me real sustenance and fortitude to continue to blaze the trail and navigate accordingly.

      Congratulations on the launch of your own blog. Assuming you do not mind, I will add your blog to my Blogroll.

      In regard to Detroit and the corruption elsewhere in our nation, why is it that appropriate legal actions and other related means do not receive any meaningful consideration.

      We are rotting from within.

      Thanks again for your comment.

      I hope you are well.

  • LD

    Heartland Institute Experts React to
    Detroit Filing for Bankruptcy

    The city of Detroit filed the largest municipal bankruptcy case in U.S. history Thursday afternoon. Gov. Rick Snyder (R) filed the 16-page Chapter 9 petition in U.S. Bankruptcy Court in Detroit.

    The following statements from budget and tax experts at The Heartland Institute – a free-market think tank – may be used for attribution. For more comments, refer to the contact information below. To book a Heartland guest on your program, please contact Director of Communications Jim Lakely at jlakely@heartland.org and 312/377-4000 or (cell) 312/731-9364.

    “Intransigent police, firefighter, and teacher unions delivered the final death blow to the city of Detroit. But other major cities have been able to deal with such intransigence without having to resort to bankruptcy. What ultimately killed Detroit was its culture of dependence and victimization – the same culture that elected and re-elected our president and threatens to destroy the entire nation. The city always and invariably blames its shortcomings on everyone but itself – on inadequate federal and state subsidies and on the ‘racism’ of those who identify, quite correctly, those policies as the cause, rather than the solution for the city’s downward spiral.

    “Going forward, Detroit should follow the example of Wisconsin’s Scott Walker, who first as Milwaukee County Executive and then as the state’s governor took on the unions, promoting privatization and extending school choice that was instituted by former governor Tommy Thompson. But that will not be enough. Detroit must embrace the wisdom of the immortal Pogo: ‘We have met the enemy and he is us.’ Individual responsibility and self-reliance must become the motto and watchword of every politician and citizen. When it does, the sky will be the limit for Detroit.”

    Thomas Walton, Ph.D.
    Director, Economic Policy Analysis
    General Motors (retired)
    media@heartland.org
    312/377-4000

    Thomas Walton worked in Detroit for 33 years as an economist at General Motors.

    “Detroit is the largest city to declare bankruptcy, but it won’t be the last. Cities like Detroit have relied on property taxes to support bloated spending for too long. Instead of making promises to employees and building projects they cannot afford, cities should make long-term plans that embrace a competitive tax structure that functions reliably in good times and bad. One solution that should not be considered is a federal bailout. Throwing taxpayer dollars pulled from around the country to prop up a thoroughly broken and mismanaged system is not only irresponsible, but a complete waste of money.

    “The primary issue Detroit faces, unaffordable public pensions, is a serious problem, but solutions do exist. In the short term, per-year pension payouts should be capped at a sensible level, the retirement age should be raised, double-dipping should be eliminated, pension rate of return assumptions should be changed, and workers should be required to make higher contributions. In the long term, sustainability will require governments to follow the private-sector’s lead and switch workers from defined-benefit pension systems to defined-contribution systems.”

    Matthew Glans
    Senior Policy Analyst
    The Heartland Institute
    mglans@heartland.org
    312/377-4000

    “A city, a county, a state, or a nation doesn’t go bankrupt by accident. A series of failing policies has to be put in place and left in place without regard to consequences. Detroit sends a message that will be ignored by many as we march towards the cliff whistling a merry tune.”

    Christopher Garbacz
    Director of Economics and Planning Division
    Mississippi Public Utilities Staff
    c.garbacz@psc.state.ms.us
    601/961-5413

    “Every mayor of Detroit for the last half-century has been a Democrat. And the city’s most famous industry, giving it the moniker The Motor City, has been, for the same time period, utterly dominated by unions.

    “Democrats and unions work in concert to bleed taxpayers to create a vicious cycle of payments (and commitments for future payments) to unions – part of which get donated to Democratic campaign coffers – with the elected Democrats then raising taxes, sending more money to unions, etc. This is not unique to Detroit, though the utter dominance of the fiscally unholy marriage reached its pinnacle in the city that has lost a quarter of its population in the last decade – the quarter that was paying taxes, apparently – and nearly 60 percent since its peak nearly 60 years ago. Detroit was the only one of the nation’s top 25 cities to lose residents in 2012.

    “There is no model of government likely to more quickly reach Margaret Thatcher’s warning that ‘the problem with socialism is that eventually you run out of other people’s money.’ While Detroit’s system may not have been precisely socialist, its fundamental premises, especially the idea that laborers are noble and the holders of capital are evil exploiters suitable only for financial bleeding, were the same.

    “So what is most surprising is not that Detroit has filed for bankruptcy but that it took so long, and that there were enough suckers available over the last few years who bought Detroit bonds despite a future that should have been absolutely obvious. Unfortunately, there’s a whole other pool of suckers: American taxpayers who had billions of dollars wasted by the Obama administration bailing out uncompetitive car companies and, as always, their unions. Indeed, if the auto industry had not had an infusion of life blood stolen from the economic arteries of America, Detroit itself would have sooner reached its inevitable fate.”

    Ross Kaminsky
    Senior Fellow, Finance
    The Heartland Institute
    rossputin@aol.com
    312/377-4000

    “It’s going to get very rough because a bankruptcy judge would have the authority to abrogate government employee union pension deals. If that happens, cities and even states around the country would be smart to consider declaring bankruptcy. Could Illinois be next? Oh, wait, I said smart.”

    S.T. Karnick
    Director of Research
    The Heartland Institute
    skarnick@heartland.org
    312/377-4000

    “Detroit’s bankruptcy filing is the epitaph on decades of failed city government policies that brought a great metropolis to its knees. Over the coming weeks and months much of the media attention will be on the bankruptcy proceedings themselves as the courts and responsible parties determine how to reorganize the city’s debt liabilities among the claimants.

    “What will be far more important in terms of Detroit’s long-run future will be the public policies that become the basis for the city’s revitalization and reconstruction. In a new national and global commercial environment, Detroit must make itself attractive and competitive to draw in industry and trade – and the accompanying job opportunities – back into what can no longer be considered the exclusively ‘Motor city.’”

    Dr. Richard Ebeling
    Professor of Economics
    Northwood University
    ebelingr@northwood.edu
    914/ 564-7030

    “Those of us who work more closely on state and local economic and reform issues know that Detroit is the first of many. Nearly all reform controversies come down to taxpayers versus unions – especially public-sector unions. In my areas of engagement, educational reform and tax reform, all of the well-funded opposition to reform comes from various public-sector employees’ unions.

    “We are relatively successful in keeping the train on the rails in Georgia and attract population and companies from states and cities who are failing in the taxpayer/unions battle. But, the ultimate question is whether states are really free to be laboratories of democracies. Will the failing cities and states be deemed ‘too big to fail’? I’ll be watching in the next weeks and months for federal government backdoor-bailouts of Detroit. Will the teachers, state government employees, and taxpayers of Georgia and other disciplined and frugal states eventually pay for the less-disciplined in Detroit … and those that follow?

    “The White House response? Not promising. ‘While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities,’ said Amy Brundage, a White House spokeswoman. This means Georgians pay.”

    Christine P. Ries
    Professor of Economics
    Georgia Institute of Technology
    christine.ries@econ.gatech.edu
    404/894-9541

    “It’s a shame to see a proud city such as Detroit fall into bad times. In its heyday, Detroit was the center of the automobile industry and helped a population of almost 2 million thrive. But that was over 50 years ago. Today, Detroit is down to a population of around 700,000 and owes its creditors $18.5 billion. That adds up to over $26,000 for each man, woman, and child in the city. With an unemployment rate close to 20 percent and per-capita income just above $15,000 annually, no wonder Detroit is bankrupt.”

    John Skorburg
    Lecturer in Economics
    University of Illinois at Chicago
    Associate Editor, Budget & Tax News
    The Heartland Institute
    jskorburg@heartland.org
    312/377-4000

  • http://www.deadlyclear.com DeadlyClear

    Unfortunately this is just one of many cities that got rooked into buying bad MBS securities. What is extremely sad is that it appears the loans were never timely assigned to the trusts and it appears the FDIC was covering it up. If the pension funds had made claims that the loans did not get transferred to the trusts pursuant to the PSA, they might have been able to win against the banks with their Complaints. somebody may have owed taxes because the REMICs failed – but they might have had better leverage against the banks. See http://deadlyclear.wordpress.com/2013/06/02/fdic-hide-sneak-and-seal/

    Sometimes I think that the investors were aware that the loans would fail because they were told these certificates would be liquid – likely between default insurance and foreclosure – just nobody thought it would happen all at once – no sense of consequence.

    In any event, knew or should have known is what is hurting the investors – and where was there due diligence? Nobody looked inside the vaults? Where’s the loans?

  • Van

    LARRY

    NOT ONLY WILL TIME TELL……TIME HAS ALREADY TOLD THE STORY

    OUR COUNTRY WAS DOOMED FROM THE START, OR VERY NEAR THE START.

    THE TRUTH OF THE MATTER WAS APPARENT TO SOME, BUT EVEN NOW, FEW WILL ADMIT TO THE OBVIOUS.

    WHEN EVERY ONE IS ALLOWED TO VOTE, SUCH AS THE WOMEN, THE NON PRODUCERS, THE ALIEN IMMIGRANTS FROM DESTITUTE AREAS OF THE WORLD, AND THE “DO GOODERS” WHO CONVINCE YOU OF HOW HUMANE ALL THIS IS, ( THEY KNOW BETTER, BUT IT GETS THEM VOTES) THE RESULT IS ALWAYS THE SAME

    AT BEST, SUCH A COUNTRY WILL LAST ABOUT 200 YEARS.

    ANYONE COULD SEE IT COMING, FIRST IT WAS DEMONSTRATED BY CITIES LIKE DETROIT, LIKE LA, LIKE CHICAGO, AND MOST ASSUREDLY NOW LIKE THE UNITED STATES ITSELF.

    TO NAVIGATE ACCORDINGLY, GET THE HECK OUT.

    ANY INVESTMENT THAT PAYS IN DOLLARS SHOULD BE SHORT AND QUICKLY CONVERTED TO PRODUCTIVE LAND, GOLD, OR SILVER, ALL OF WHICH IS THE KIND YOU CAN HOLD IN YOU HAND OR WALK UPON. GET IT ALL OUT OF REACH OF THIS GOVERNMENT. THEY WILL STEAL IT FROM YOU, AS THEY HAVE IN THE PAST AND ARE NOW CONTINUING TO DO, BOTH FROM INFLATING THE DOLLAR AND EVERY METHOD KNOWN TO THE CRIMINAL BANKERS.

    BECOME SELF SUSTAINING, THAT IN ITSELF WOULD DESTROY THESE GREEDY CRIMINALS.AND THIS SYSTEM OF WORTHLESS MONEY GOING AROUND AND AROUND TO FEED THE RAVENOUS BEAST AND THEIR WARS.

  • JA

    The pension system throughout the country is a joke at the local and federal level that is bankrupting everyone. It’s easy to vote for increased pensions when it can get you votes, but easier still when you don’t think of a system to pay for it all.

    It’s admittedly tough to vote against increased benefits for police, firefighters, and military, but the system of working for 20 and then getting out with as much as 75% pay is not sustainable (My evidence about disability pay, retiring on the job, etc., is more anecdotal than anything else but I have plenty of them from my uncle in the FDNY, my brother in the NYPD, and me just having left the Army).

    As a brief aside I’ll give Italy credit, they have to put in 40 years before their military can retire with pension (the career military men I was with when they told us that picked their jaws up from the floor at the mere thought). Of course their other lines of work don’t have to do that much time but I would never expect fairness in Europe.

    Regardless, the majority of people receiving benefits are not in these more dangerous lines of work and are getting a whole lot of money. When friends say they are going non-profit, they know they will not be making much money but rather are doing it for the benefit of others.

    I’ve always found that civil servants, however, sit on their laurels for providing a needed service to the people, but believe that because of their selfless service they deserve more in pay/benefits. Blessedly, we are all living longer, that means we should be working way longer.

    Start cutting pensions for people in early or mid-career to give them time to adjust their finances accordingly for retirement. Or we can just kick the can up I-75 and see how that works.

  • LD

    From one who lives and works there this review of living in Detroit was in the WSJ the other day,

    DETROIT — I KNOW an old woman who hasn’t opened her windows in a decade, afraid that what’s outside will climb inside. Inside, there is the stale odor of dead air.
    I know another woman who called me about a corpse lying outside her window for six and a half hours. This was because of cutbacks at the morgue. No dignity in death here. They do it better in Baghdad.

    The latest trend? When a person is murdered, he is thrown into an abandoned house, and it is set on fire. There are tens of thousands to choose from.

    I know of an 11-year-old boy who was shot, the bullet going clean through his arm. The cops stuffed him in the back of a squad car and rushed him to the hospital. That’s how we do it. There was no ambulance available. About two-thirds of the city’s fleet is broken on an average day.

    I know a cop who drives around in a squad car with holes in the floorboards. There is no computer, no air-conditioning, the odometer reading 147,000 miles. His bulletproof vest has expired. His pay has been cut 10 percent.

    I knew a firefighter who died in a fire, but not from the fire. He died when the roof of an abandoned house collapsed on him and his brethren could not find him because his homing alarm was broken and did not sound. He suffocated.

    In our town, the 911 dispatch system recently went down for 15 hours, and no one seemed to give a damn. When the system is running, the average wait is 58 minutes. Firefighters can’t use hydraulic ladders on fire trucks to do their jobs unless there is an “immediate threat to life.” In a fire — imagine that. The ladders haven’t been inspected in years.

    If this were New York, these stories would have ricocheted around the world. But this is Detroit and, of course, nobody gives a damn. Even here people have been conditioned to accept these things as normal, a nuisance, the buzz of a fly.

    This numbness, in a peculiar way, is a sign of strength. People here manage to get along somehow.

    So we went broke, bust, bankrupt. We’ve known that in Detroit for years. Only now it is official with a Chapter 9 filing last week. The biggest municipal default in United States history — at least $18 billion. Suddenly, America gives a rip.

    How did it get this way, I’m asked? After all, it was just 99 years ago that Henry Fordoffered the workingman $5 a day and profit-sharing. How, in less than a century, did it come to this?

    The short answers: municipal mismanagement, race riots, white flight, black flight, dead flight (people routinely disinter their deceased and relocate them to the suburbs). There were the overreaching unions and management that couldn’t balance a ball. Proof? The multibillion-dollar bailout of the auto industry. Thank you, American taxpayers!

    Then there is our spectacular civic corruption: A former mayor, Kwame M. Kilpatrick, waits for a bed in federal prison, convicted of extortion, racketeering and bribery. He looted the city of millions of dollars and stole the future of thousands of children. They can send him to hell for all I care. I don’t want to pay for his upkeep. But thank you, taxpayers! You will pay for it. And the ex-mayor’s team of super lawyers will also be paidwith the public dime.

    So Detroit files for bankruptcy. What does this mean? Pay close attention because it may be coming to you soon, Los Angeles, Baltimore, Chicago, Philadelphia. In 2011, Moody’scalculated the unfunded liabilities for Illinois’s three largest state-run pension plans to be $133 billion. (It is expected to be even larger this year.) That’s the size of six Detroit bankruptcies — give or take a few hundred million.

    Of Detroit’s debt of at least $18 billion, about $7 billion is secured by collateral like casino revenues and utility taxes. That means creditors — read: big banks — will get paid. Of the remaining $11 billion dollars or so in unsecured debt, about $9 billion is owed to retirees and current municipal workers, people like firefighters and police officers. These debts come in the form of promised pension checks and health care benefits, all backed by a false, unsecured promise. These are the people who are likely to lose out.

    In simple math, do we sacrifice 30,000 former and current workers to save a city of700,000 people and their progeny? Most Detroiters will tell you yes. Don’t judge. We feel bad about it. But we’re simply Americans. We are a gaunt dog. We are desperate. And you are watching and studying us.

    Pension checks will be much smaller than planned and health care benefits will get foisted off on Medicaid and Obamacare. Thanks again, taxpayers!

    There is hope up here on the Great Lakes. We have fresh water, profitable auto companies, more than $130 billion a year in trade with Canada crossing through our city, a world-class research university and, eventually, a clean balance sheet. Hey, it helps to be first. What do you have, Atlanta?

    So come visit Detroit, my fellow Americans. Come take a look at your future. Come give the tires a kick. And if you want your money back, come strip copper pipes and wiring from the abandoned buildings — if you can find any copper. Chances are, someone beat you to it.

    Charlie LeDuff, a reporter at the TV station WJBK and a former New York Times correspondent, is the author of “Detroit: An American Autopsy.”






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