The city of Detroit filed for chapter 9 bankruptcy on July 18, 2013 — the largest U.S. Municipal bankruptcy in history. Detroit cannot fulfill debts to retirees and bondholders. The city’s decline also strains guarantees of public services and safety..
In the 1950’s Detroit’s population peaked at 1.8 million. Today, Detroit’s population is less than half of that — 700,000 citizens. Emigration after the 1967 riots and 50 years of mismanagement, scandal, and corruption left Detroit with too much debt, too much land, too much blight, too much neglect, too much crime, and too little resources to recover a half-century spiral.
Emergency Manager Kevyn Orr, appointed by Michigan Governor Snyder, filed a 120-page bankruptcy adjustment plan Friday, February 21, 2014. Addressed to U.S. Bankruptcy Judge Steven Rhodes, the plan details Detroit’s $18 billion debt adjustment and 10 year recovery and investment plan. Judge Steven Rhodes will, ultimately, approve if he believes it restores Detroit’s heritage as a productive, vibrant city.
The city owes $18 billion in debt. Detroit’s Department of Water and Sewage is owed $6 billion. This department serves 40% of Michigan’s population and requires hundreds of millions in upgrades. Another $2 billion are owed in general bond obligations. The largest debt is the $9.2 billion owed to the city’s healthcare and retiree pension funds.
Essential services, including street lights, police, and fire departments, are underfunded, overworked, and using obsolete equipment. Citizens do not have reliable or appropriate access to police safety. Detroit neighborhoods have the highest justifiable homicide rate in the nation. There will be no federal bailout — Chapter 9 bankruptcy is Detroit’s chance to recover.
The bankruptcy plan proposes leasing the Detroit Department of Water and Sewage to Detroit’s suburbs for 40 years at $40 million a year. A regional water and sewage authority would be created in Metro-Detroit, and will control the Detroit Water and Sewage Department — a department serving 40% of Michigan, owed $6 Billion in debt and desperately in need of upgrades. Wayne County Executive Robert Ficano expressed support, while Oakland County Executive L. Brooks Patterson considered alternatives: digging new wells or creating the county’s own service. Many compare this proposal to the 2009 regionalization of Cobo center.
Selling the Detroit Institute of Arts (D.I.A.) is considered an option to satisfying part of the $18 billion debt. Valued between $450 and $870 million, this proposal faces strong public opposition.
A private fund, called the “Grand Bargain,” offers $465 million to Detroit’s pension and healthcare fund. The D.I.A. promises to raise approximately $100 million. Governor Snyder offers $350 million, over ten years, in state funds. The money comes from tobacco settlement funds (compensation by tobacco industries to the State for related health care costs) and must be approved by the state legislature.
This “Grand Bargain” totals about $800 million dollars. If Detroit accepts, the funds will safeguard pensioners falling below poverty lines. These funds will only be accepted on the condition that the D.I.A. is not sold to satisfy debts.
The bondholders and 23,500 retirees will see reductions. The current language proposes retirees seeing 70 to 90% of their existing pensions under these conditions:
- •10% reduction in police and fire pensions. Detroit police and fire retirees receive an average of $30,500 and do not get Social Security benefits.
- •30% reduction in general city retiree pensions. The average Detroit municipal retiree receives about $19,000 a year.
- •80% reduction in bondholder returns. Bondholders are considered non-retiree and unsecured creditors.
Various bond-rating agencies criticize the pension friendly plan, calling it “unfair to bondholders.” Michigan Attorney General filed a motion to the U.S. 6th Circuit court to review whether the state constitution protects pensions while the city is bankrupt.
Finally, the plan redirects $1.5 billion, over 10 years, to improve city services and infrastructure. The plan allocates $500 million of the $1.5 billion to demolishing blight. These funds will repair Detroit’s streetlights, demolish crime-attracting vacant buildings, and improve the city’s police and fire services.
Forming a regional water and sewage authority and accepting control of the department is the suburb’s best option. The Detroit suburbs owe their existence and success to Detroit, and should invest in the city departments that serve the metropolitan area. Suburban communities are cautiously considering the proposal, and are waiting to see updated financial details. The alternative of digging new wells or separate authority is costly and bureaucratic. Suburban communities need to fix the aging, failing water and sewage system that currently serves the metropolitan area — should the system fail, both the city and the metropolitan area are in deep trouble.
The Detroit Institute of Arts is a defining institution of Detroit. Detroit’s root issue is its small tax base. The city needs population growth: to do so, the city needs ownership of the D.I.A. Keeping the D.I.A. provides far more capital and revenue in the long run than it does selling it now. The bankruptcy should accept the “Grand Bargain,” and ensure the $350 million is approved in the state legislature. The $800 million bargain will soften pension cuts and safeguard those in danger of falling into poverty, all the while keeping an important, city defining institution under city control.
The pension cut balance should continue to favor retirees. This is a strong political move that voters will appreciate. Retirees need pension funds to subsist — some are already in danger of poverty. Some bondholders have insurance, and may see compensation by increased city tax revenue if their cases are ruled in favor.
Redirecting money towards infrastructure and services is important. Detroit cannot perform basic city services. The blight causes crime and arson. Detroit’s fire departments are overworked because arson is cheaper than a movie ticket. The streetlights don’t work. Allocating money towards downsizing the city and providing adequate service for the current inhabitants is a top priority. We have, however, seen money allocated for service and infrastructure improvements siphoned away due to corruption in the past. Federal oversight should be installed to ensure funding finds its target.
Post-bankrupt Detroit should focus on improving city services and infrastructure. The city needs to re-populate and prove to citizens that Detroit is a productive, safe, and vibrant city to live in. Detroit will need to invest in and attract skilled labor, office, and high tech employers. This particular bankruptcy has been fast, and will spare the city many complications.
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