The city of Detroit today officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after U.S. Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors.
The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime.
“It is indeed a momentous day,” Rhodes said at the end of a 90-minute summary of his ruling. “We have here a judicial finding that this once proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity.”
Rhodes — in a surprise decision this morning — also said he’ll allow pension cuts in Detroit’s bankruptcy. Rhodes emphasized that he won’t necessarily agree to pension cuts in the city’s final reorganization plan unless the entire plan is fair and equitable.
This is a very big deal, because it had been argued that the Michigan state constitution forbids such pension cuts. His decision promptly earned the judge at least one death threat. The objective of the ruling, according to court observers, is to reduce the pressure on city management and creditors to reach a hasty agreement. According to the Free-Press, unions and retiree groups wanted the bankruptcy case thrown out entirely, and will likely appeal Judge Rhodes’ ruling today, although appeals courts rarely overturn such decisions:
Major creditors objecting to the bankruptcy included AFSCME, the UAW, Detroit’s two pension funds, the city’s public safety unions, retiree associations and a committee created to officially represent retirees during the bankruptcy.
Unions and retirees argued that [emergency manager Kevyn] Orr conducted no substantive negotiations with creditors and argued the city fell short of its duty to conduct “good faith” negotiations before filing for bankruptcy. No financial creditors objected to the filing.
By July 18, the day Detroit filed for bankruptcy, the city was being bombarded by lawsuits, facing dwindling cash flow and failing to deliver vital services — adding credence to Jones Day bankruptcy attorney Bruce Bennett’s argument that reaching a deal with more than 100,000 creditors would have taken too long.
“It was clear to Judge Rhodes that negotiations were not going to go anywhere,” Laura Beth Bartell, a Wayne State University law professor, said in a recent interview.
Well, that’s what happens when decrepit one-party rule allows a debt crisis to fester for generations. Eventually the day comes when nothing can bend any further, so something has to break. Yesterday’s promises by big spenders that fiscal Armageddon will never come are forgotten. Everyone stumbles through bitter court proceedings in a daze, refusing to accept that all the good options are long gone. The whole country will get there soon enough, and while the day of reckoning will be delayed much longer, it will be even more terrible when it arrives. Detroit provides a useful look into our future.
The Chicago Tribune has more details about the city’s financial crisis, in addition to the familiar dreary details about how 40 percent of the streetlights don’t work, and there are 78,000 abandoned buildings in the city:
In June, Orr put forward an initial proposal on how Detroit should deal with its $18.5 billion in debt and liabilities that offered unsecured creditors only pennies on the dollar to settle their claims. Orr raised eyebrows by declaring that holders of most of Detroit’s general obligation bonds would be treated as unsecured creditors who would be part of a group that would receive pro-rata shares of $2 billion in notes to settle their $11.5 billion in claims.
Detroit says about half its liabilities stem from retiree benefits, with $5.7 billion in liabilities relating to retiree healthcare and another $3.5 billion from pensions.
$2 billion to settle $11.5 billion in debt? That’s the kind of “haircut” enjoyed by the holders of Greek debt.
High hopes are pinned to the sale of assets from the Detroit Institute of the Arts, whose holdings include “paintings by Vincent van Gogh and Henri Matisse, an original cast of Auguste Rodin’s “The Thinker,” and a fresco mural by Mexican artist Diego Rivera,” but not even the humiliating sale of that treasure trove is going to put much of a dent in that mountain of debt. That’s one of the Detroit lessons to keep in mind as we watch public employee union liabilities, and the almighty existential threat of national Social Security and Medicare liability, cast long shadows across our future. People just don’t seem to understand how huge those liabilities are. There are so many zeroes after the number that it becomes abstract, almost meaningless… but it’s not. Incomprehensible fiscal threats are still quite substantial. ”There isn’t enough money in the world to pay that off!” doesn’t make the creditors go away, even though it’s literally true in the case of federal entitlement liability, which exceeds the gross domestic product of the entire planet. So you might rake in a nice pile of cabbage from selling off your van Gogh and Matisse paintings… but it doesn’t even fill a quarter of the hole dug by decades of unsustainable benefit commitments.
USA Today, where bullet points go to die, offers some more fun facts to illustrate the magnitude of the Detroit crisis:
1. Detroit’s revenue, in inflation-adjusted dollars, fell 40% from 1962 to 2012.
2. The city currently has just 9,700 workers, yet has 21,000 retirees drawing benefits.
3. Detroit’s population has declined 63% since 1950, including a 26% decline since 2000. As of December 2012, its population was 684,799 – down from 1,849,600 in 1950.
4. Unemployment has tripled since 2000. As of June 2012, it’s 18.3%, which is more than double the national average.
5. The number of employed residents has dropped more than 53% since 1970.
6. Property tax revenues have decreased by approximately 19.7% over the past five years.
7. The per capita tax burden on Detroiters is the highest in Michigan, despite relatively low levels of income for city residents.
8. The total assessed value of property in Detroit declined by 77% over the past 50 years in inflation-adjusted dollars.
There’s more at the link above, but those first eight points make it clear that Detroit no longer has anywhere near the assets or revenue necessary to pay its debts, and every strategy for squeezing more revenue out of the city will only render it weaker and more desolate. There is no way for fewer than 10,000 workers to carry the burden of 21,000 retirees. The tax burden is as high as it can go. Flight from the nightmare city leaves its property devalued, and its workforce crippled. The goose that lays the golden eggs was found dead in a back alley years ago; even the chalk outline drawn by policy around his scrawny body has faded away.
What’s most frightening about all this is how it demonstrates the final collapse of a government system that was inevitably destined to fail. The point of no return for Detroit actually passed a long time ago. Contrary to emerging liberal mythology, the crisis was not solely a result of the automotive industry’s travails, although that certainly didn’t help. Take it as another grim warning: unsustainable government hollows out the resources of a society until an external crisis triggers inescapable collapse. The auto industry is doing better these days, but not even close to the level that would revive the city. It’s hard to imagine Big Auto will ever be capable of doing that again, and it shouldn’t be up to a single industry in any city to revive flagging municipal fortunes.
It will be the people of Detroit who do that, in concert with competent city government. But they can’t do it while a crushing burden of debt lies across their shoulders. Investors are wary of launching new enterprises at the bottom of a pit.