Tuesday, July 30, 2013

July 2013: Detroit Files for Bankruptcy

July 19, 2013:  The City of Detroit filed for bankruptcy today.  It is a very sad day.  Many people, including yours truly, could see it coming for years.  I could see it coming for years.  Yet, it is still very sad.
I was really pulling for Mayor Dave Bing.  It seemed like he was a competent leader who might have been able to make a difference if he did not take over a city that was in dire straits (excuse the pun).  He seemed like he genuinely wanted to improve the city and that he wanted to make a difference.  He never got the support he could have used from just about everybody. 
On March 24, 2013, Michigan Governor Rick Snyder appointed an emergency financial manager, Kevyn D. Orr.  The state had revised a law that not only allowed Snyder to make this appointment but provides the emergency financial manager with extraordinary powers over all of the city's finances.  The emergency manager could even recommend that the city file for Chapter 9 Bankruptcy.  Everyone assumed, with this appointment, that bankruptcy was inevitable.  It was not a matter if but rather when.  When happened today July 19, 2013.
I suppose there are those that are reveling in it for a variety of reasons.  Perhaps they are happy to see this happen because it supports some racial prejudice they have from the moment Coleman Young was elected mayor.  Maybe they revel because they are staunch capitalists and believe that bankruptcy is part of mismanagement and giving the city a chance to restructure can and will only be a good thing.
Someone had posted a photo on facebook this week.  It was contrasting Hiroshima in 1945, after the atomic bombing of the city, and in 2012.  Right next to it were images of Detroit for the same years.  In 1945, Hiroshima was rubble and Detroit was a bustling economic power.  In 2012, it was the opposite.  Detroit was in disarray with areas of rubble that look like it has been bombed. 
It is a complete decay of an American city.  I have wrote about my hometown ten months ago September 2012: The City of Detroit. 

facebook Opinions:  There was a recent posting on facebook about the Detroit bankruptcy filing.  It simply said, in white letters on a black square:

finally ran out of
other people's money.

There was no end to the comments.  Some folks blamed the democrats for the entire situation labeling them all as corrupt beginning, as noted above, with Coleman Young.  Others thought that was simply too easy a view to take and that the situation was more complicated than that.  Here are some of the comments:

·   I think you could make the argument that all cities run on "other people's money".
·   Disgraceful politicians.  Starting with Colman Young.
·   My family is very concerned about the Police pensions. Our folks are in their late 80 s and depend entirely upon my fathers pension for living expenses.  My father spent 37 years on the Detroit PD and paid into that plan for retirement. This is simply criminal.  My folks live very modestly and the Detroit city officials have squandered the savings of the people who risked their lives everyday to serve and protect. I am at a loss for words.
·   its all from Democrats they've run Detroit into the ground for 70 yrs.
·   We are all Monday morning quarterbacks. How many of us still live in metro Detroit or have contributed to the tax base? Our hometown has survived on the scraps from those who remained for decades
·   It is everyone's problem even though it might not be everyone's fault.

As this discussion (if you can call such things discussions) unfolded, it was clear people were trying to sum up the demise of Detroit in a short one reason sentence.  To me is way more complex than just blaming democrats, blacks, white flight, or the auto industry.  It is partially all of those and more. 

Pensions:  The worst thing about a company going bankrupt is that people could easily lose their pensions.  People work twenty, twenty-five, and thirty plus years.  They were under the implicit contract that they would get a pension.  City wages are good but, certainly at the worker bee level, not enough to save the funds needed to support a couple in their retirement.  People counted on their pensions.  What they counted on could be gone.
Does the same apply to a city?  Cities do not go bankrupt that often.  Detroit is the largest American city to ever file for Chapter 9 Bankruptcy.  They have about 30,000 retirees and the pension obligation is about $9.2 Billion. 
The State of Michigan Constitution has a provision that the unions believe guarantees the pensions and that the pensions not be cut.  The constitution states that "the accrued financial benefits of each pension plan and retirement system in the state and its political subdivisions shall be a contractual obligation which shall not be diminished or impaired thereby."
The "contractual obligation... shall not be diminished or impaired" sounds like pensions cannot be eliminated or reduced.  But, the State Constitution is a document enacted by humans that can be changed.  It is not clear nor predictable what a judge might say or do.  Ultimately, it is a question of what needs to be done to create a workable budget for the City of Detroit.  The amount of revenue, i.e. taxes, is fixed and clearly expenses need to be cut and they have to be cut from somewhere. 
It is a sad state of affairs.  It will no doubt hurt citizens of the city, current employees, and most certainly retirees.  Detroit employees and retirees could be in the same position their counterparts from Enron or Bethlehem Steel.
I currently live in Illinois.  We have per a Bloomberg Article from earlier this year "$97 Billion in unfunded liabilities." 
That is an astounding number which is ten times that of the City of Detroit assuming I am indeed comparing apples to apples.  There are rumblings, perhaps tremors, that Illinois will be next.

The state’s pension deficit increases by $17 million a day, including obligations to current and future retirees, such as judges, university workers and legislators. Illinois has the lowest-graded credit of any U.S. state by Moody’s Investors Service and Standard & Poor’s partly because of the unfunded retirement plans. Moody’s, S&P and Fitch Ratings all have a negative outlook for the state
Illinois is paying for years of financial mismanagement and political gridlock, resulting in the worst-funded state pension system in U.S., with 39 percent of assets needed to cover projected obligations for five major groups of employees, according to the Civic Federation, a Chicago-based nonprofit research group that tracks government finances.

It sounds like Illinois could end up as the first state to declare bankruptcy if the state government is not able to better manage this moving forward. 
I was tough watching what the Greek people went through the last couple of years because of the financial mess their country is in.  It seems like, in both Detroit and Illinois, we are are experiencing the same.

Obama's Pledge:  In 2012, President Obama pledged that he would not let Detroit go bankrupt.  What happened to that pledge?  The State of Michigan easily went his way in both elections so much so that the Republicans decided not even to campaign there in the last election. 
I have seen a lot of diatribes and vitriol against Obama.  Most of them are simply more excessive than I believe they should be.  In this case, I am surprised more people are not complaining very loudly.  I cannot see providing any foreign aid, with the exception or famine and natural disasters, when we have a major city in such a predicament.  I would add Obama's home state of Illinois to that list. 
I will throw President Bush into the mix as well.  He started the wars in reaction to 9-11.  President Obama has tried to get us out but it has not been very successful nor very quick about it.
While talking about Syria rather than the Iraq and Afghanistan Wars, the message is the same.
How much could we have done here if we did fund and fight the wars in Afghanistan and Iraq?  Per a Harvard study, those wars have cost us between $4 and $6 Trillion.  That is a staggering sum and the results are nowhere near what it has cost in both dollars and human life.  There is a website, costofwar.com that has one of those continuous update windows that adds approximately $100,000 a second to the cost of the wars.  costofwar.com has the total cost of the wars at 1.46 Trillion.  The cost might be justified if we had actually accomplished anything.  My opinion is we have not.
While not referencing the wars in Iraq and
Afghanistan, the message is directionally correct

No matter which estimate we might use, too much was spent on war and not enough on our own country.  Not enough was spent on fixing what is wrong in this country and that includes fixing places like Detroit.  We could have avoided adding to the deficit with half of what has been spend.  We would have still had plenty of money to use on fixing what is broken at home e.g. in Detroit, in education, and in job creation.
I am definitely full of... naiveté.  But, it is what I believe.

July 22:  It is a few days after the announcement of the filing.  What has changed in Detroit?  I am not sure as I no longer live there.  My suspicion is that there is not much difference in the lives of people in all of Metro Detroit today as compared to the day before the announcement.  People are just going about their business.  They have simply added worrying about what will happen to their daily routine.
I left Detroit in March of 1990.  I had lived in the city from the age of 2 though the age of 15.  Then I lived in the suburbs until I was 36.  I was part of the white flight from the city that decimated its middle class.  I was part of the migration of people out of Detroit and Michigan following the flow of jobs to other parts of the country.  i moved to take a job in New York City and lived in Connecticut. 
I did not stay.  I did not stay and contribute to the economy.  I did not stay and get involved in politics.
The city was not in very good shape when I left.  The worst was yet to come. 
Like many that left, and many that stayed, we lament the demise of our city that was once the gritty tough paragon of industrial towns.  Like many that left, I wish that I could do something, anything, to help revitalize the city.  Perhaps that is why I am in the Greater Waukegan Development Coalition which is dedicated to re-establishing a viable industrial and business base in the city of Waukegan, IL.  Waukegan is not nearly in the condition that Detroit is, but it can use all the assistance it can get.

Solution:  Enough whining already.  Most certainly, there is enough finger pointing and blame to go around.  No matter what caused the current state of Detroit.  It is the current state.  What should be done?  Hopefully, this inevitable filing for bankruptcy will allow for a plan that moves the city forward again. 
Here are my thoughts of what I would like to see come out of this.
Jobs and business:
First and foremost, there has to be a serious and seriously incentivized business development plan to bring jobs to the city.  A frank and stark reality is, if the plan includes unions, only start-ups will be attracted.  The trend is away from unions and the great union friendly city and state need to face that reality.  The city needs industry and jobs.  It needs the taxes that both will bring.  Seriously incentivized means modest taxes for businesses to relocate in Detroit.
Crime free
Second and almost equally foremost, the city needs to be a safe place.  There can be no room for crime or criminals.  This is heavily tied to the first point in that the lack of jobs make for an increase in crime, organized or otherwise.  Crime can often be the only choice for anyone enterprising.  It makes victims out of everyone who has not or cannot move out.  The police force needs to be bolstered.  Abandoned houses and businesses need to be torn down.  Mayor Bing had a plan of consolidating residents to begin recreating communities.  That idea needs to be explored.
Maybe you centralized everyone around downtown and raze everything else.  It sounds crazy and it is probably too expensive to execute.  But, it is time to think outside the box.
The Detroit Public Schools need a complete overhaul.  They need to stay public.  I used to be for vouchers, charter schools, and academies.  I have changed my mind.  A major strength of this country was the middle class and solid public education.  We have lost our way in both regards. 
How to fund the above
I have no clue how this will be funded.  This could be the real ugly part of this bankruptcy.  I am not for cutting pensions.  I am for Federal Aid.  Treat Detroit like a foreign war zone.  In a way it is.  Divert money from military and foreign aid.  We should not even think about helping anyone else if our own house is not in order.  I will even go so far as to suggest putting stipulations on the city government requiring a balanced budget and a payback of the aid.  The debt and other obligations have to be addressed and dealt with.  The debt has to be negotiated down.  Bankruptcy is a multi-edged sword that will hurt the city, the citizens, the retirees, and the creditors.  There is no way around this.
No one wants to sell whatever assets there are still in the city.  An article in the New York Times on the day bankruptcy was filed pondered the art in the Detroit Institute of Arts being sold off to pay for things.  That would be a sad thing to happen but Detroit is no longer an ars gratia artis kind of place.  Maybe it will be again one day.  Detroit is a place that has hit rock bottom and needs to recreate itself from the ashes of the industrial power it once was.  Detroit has lost many cultural and architectural icons already to either the wrecking ball or neglect.  Sell the art.  It is important but the well being of the people is more important.

Closing:  It is my great hope that the powers that be in Detroit, the State of Michigan, and the Federal Government help create a pathway out of bankruptcy that is as reasonable, fair and equitable as possible for all citizens, retirees, and creditors. 

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