Detroit Bankruptcy Bargain a Bitter Pill, But City Will Survive

By:  Bob Adelmann
02/25/2014
       
Detroit Bankruptcy Bargain a Bitter Pill, But City Will Survive

The "grand bargain" to solve Detroit's bankruptcy crisis approved by Michigan Governor Rick Snyder, will satisfy no one.

The so-called grand bargain that Detroit’s emergency financial manager rolled out on Friday — all 440 pages of it — was welcomed by Michigan Governor Rick Snyder with words that perfectly encapsulated the nearly year-long effort to settle the city’s bankruptcy:

Kevyn Orr has submitted a thoughtful, comprehensive blueprint directing the city back to solid financial ground ... [but] there will be difficult decisions and challenges for all sides as this process moves forward.

Those difficulties became more and more apparent as Orr tried to squeeze five pounds of sugar out of a two-pound bag. The city owes $18 billion that it cannot pay. Its two pension funds are, depending who is asked, between $3 billion and $5 billion underfunded. The city’s medical benefits plan for its 23,500 retirees is in shambles. There are 78,000 deserted houses that are blighting neighborhoods across the city. Half the ambulances don’t work. The police cruisers need to be replaced. The city’s computer system is so outdated as to be nearly nonfunctioning. Many streetlights don’t work. Owners of real estate are $250 million in arrears in paying their taxes. Crime continues to set the wrong kind of records.

The grand bargain that Orr has cobbled together is incredibly complicated. First, he wants to make every effort to capture the $815 million being offered by the governor, a mixture of state funds redirected from tobacco settlement funds, private foundation grants, and money from supporters of the Detroit Institute of Art to keep its treasures from being liquidated. The plan includes transferring the water district to outside management, who will then make payments back to the city while paying off its water bonds. Orr wants to move management of the city’s two pension plans elsewhere, to avoid the nonsense of the "13th-month” disbursements every year which hastened the financial demise of the city.

Orr thinks everyone should pay up, some more, some less, but almost no one gets off scot-free. Orr tried negotiating with Bank of America, UBS, and Financial Guaranty to bring down what the city owed on the failed interest rate swaps from $300 million. His first two efforts were quashed by the bankruptcy trustee, and a final successful settlement is in the works, to be announced next week. It’s rumored that the holders of those failed swaps — the banks and insurance companies — will lose more than half their money.

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