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Old burdens overwhelm smaller Detroit

The bankrupt city cannot balance its books without first luring more revenue

By Tom Krisher

Associated Press

POSTED:


DETROIT >> 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 left over 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.

Michigan Gov. Rick Snyder is sympathetic but says the city is in dire straits.

“A lot of people worked hard for the city for a lot of years,” he said. “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.”






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iwanaknow wrote:
Send all of our Hawaii's homeless there?
on July 20,2013 | 02:25AM
palani wrote:
Actually, opening up some of the abandoned neighborhoods to new urban homesteaders is an idea worth pursuing. As recently as 1988, "free" land was awarded under The Homestead Act to Alaskan settlers. For those not so independently motivated, the average price of an existing home in Detroit is currently around $7,000.

Respected CNBC economist Larry Kudlow has suggested that the entire city of Detroit become an tax-free Enterprise Zone, which would attract businesses large and small.

I lived and worked in Detroit for about 12 years, encompassing all of the 80's. Many of my fellow employees were either direct or indirect victims of crimes ranging from robbery to rape to murder. Despite these hardships, they were all hard-working and loving people, and they deserved better. Detroit can and will rise from the ashes.


on July 20,2013 | 05:52AM
serious wrote:
They could not fund their retirement and health care obligations for their retirees. Well, it's a Democratic thing---give in to the unions and let the next administration handle it--just like Hawaii.
on July 20,2013 | 03:15AM
realist3463 wrote:
City and County of Honolulu will be in bankruptcy court in less than ten years. The city council is now looking at changes to property taxes because they do not have enough money to pay for the promises and obligations already in place. Wait until the Feds start the push on Island wide waste water management and the cost to run the ill advised and financially untenable rail to no where and see where we are.
on July 20,2013 | 07:14AM
droid wrote:
You need look no further than the ORI Anuenue Hale debacle for proof that this is already happening. The feds demanded a refund of the $7.9 million the city wasted on this mostly vacant facility. The most Mayor Caldwell and gang could muster up was $1.88 million. And he expects the city to keep Camp Pineapple 808. If this is the city’s financial situation now, I shudder to think just how far in dire straits Honolulu will be after we re-budget for the astronomical HPD pay raises (mandatory arbitration means mandatory) and the coming rail transit shortfall.
on July 22,2013 | 03:54AM
Maneki_Neko wrote:
Hawaii's unfunded liabilities also about $20 billion. We've got more people and a bigger economy but our debt is a great danger to our solvency.
on July 20,2013 | 07:59AM
palani wrote:
Scary. And we don't have that many more people, especially when compared to the Detroit of 30 years ago, when the poor policy decisions were first made.
on July 20,2013 | 10:26AM
AhiPoke wrote:
Actually, the number is closer to $27B, $13B for pensions and $14B for healthcare benefits, so our ratio is not that different. As already stated by the governor, it will take $500M/year for 30 years to be able to meet the debt. We don't have that amount of money and our elected officials have chosen to ignore the problem. They'd rather kick the can down the road while they work on more important issues, like same sex marriage and smoking in public parks.
on July 22,2013 | 10:35AM
HD36 wrote:
While Detroit has 20 billion in unfunded liabilities, the Federal Government has $124,900,787,462,504 which is almost $125 trillion dollars! Revenue for Detroit is $1.1 billion with a decline of $327 million. The US tax revenue is around $2.7 trillion with spending of $3.5 trillion. This is at a time when interest rates are being pegged at close to historic lows. The US trade deficit is about $700 billion. Detroit had to borrow $80 million. The US Government will, at the end of this year have borrowed close to $4 trillion from the Federal Reserve and maybe more. No matter what political party, mathematically we are going to have an economic collapse.
on July 20,2013 | 08:02AM
WooWoo wrote:
“It’s much harder to do that in the case of a city like Detroit because it doesn’t sell a product.” - Yes it does. Cities are in the business of selling a safe place to live, a good place to have a family, and a fair place to run a business. The quality of the city of Detroit's product is so bad that no one is buying. So bankruptcy.
on July 22,2013 | 06:56AM
newsjunky1 wrote:
The Democrats have run that city for over 50 years. They ran it into the ground. Good going.
on July 22,2013 | 11:32AM
AhiPoke wrote:
Actually it's a very simple formula that politicians on both sides have been using for decades. Give things away and people will vote for you. This is not a party specific idea although I'd have to admit that the democrats are better at doing this than the republicans. Like all other Ponzi schemes it eventually comes to an end when new money is not introduced. In this city's case, and soon to be others, the weight of the unfunded debt chased away the people with money. Sooner or later virtually all cities, states and maybe even the federal governments will run out of money to pay for the unsustainable benefits they have granted to public employees. It's too bad for those retired employees as they had little to do with it. Virtually all of the blame should go to politicians.
on July 22,2013 | 02:14PM
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