Detroit Bankruptcy: No Winners

By:  Bob Adelmann
07/19/2013
       
Detroit Bankruptcy: No Winners

There will be no winners once Detroit enters bankruptcy. Those who were promised health and retirement benefits are going to be faced with stark painful reality. Bondholders are going to take a massive haircut. Those residents still living there will have to tighten their belts still further.

When Michigan Governor Rick Snyder announced his approval for Detroit’s emergency manager Kevin Orr to file for a municipal Chapter 9 bankruptcy, he admitted that Detroit’s problems were decades in the making:

The fiscal realities confronting Detroit have been ignored for too long. I’m making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future.

This is a difficult step, but the only viable option to address a problem that has been six decades in the making.

One could go back to April 2012 when Detroit Mayor Dave Bing and his city council asked for a financial bailout from Gov. Snyder. It was granted with conditions. When those conditions weren't met, Snyder appointed Orr, a bankruptcy attorney and high-profile “turnaround” expert, in February this year to see if Detroit could be saved without declaring bankruptcy. After looking at the city’s books, Orr proposed huge cuts to the city’s pension plans and unions — haircuts of up to 90 percent to the plans’ beneficiaries and union’s retirees — which would have saved Detroit. Instead, the unions and pension plans filed suit to block Orr from declaring bankruptcy, triggering Orr’s request to Gov. Snyder.

Now it’s Orr’s job to convince a bankruptcy judge that Detroit qualifies for Chapter 9. It shouldn't be hard to do: The city has a cash shortfall of $162 million and is running a deficit this year alone of $368 million. It has already defaulted on a pension plan payment and has slashed services drastically. It takes police 58 minutes to respond to 9-1-1 calls, half the streetlights don’t work, trash often isn't picked up for days, the homicide rate is the highest in the country according to the FBI, unemployment is approaching one out of every five, and the population continues to shrink. At present nearly 40 cents of every dollar of revenue goes toward debt service and “legacy” costs (i.e., health and retirement benefits), and, if nothing is done, they will reach 65 cents in less than four years.

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