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Detroit Offering Creditors 10 Cents on the Dollar

Posted By Daniel Greenfield On June 16, 2013 @ 12:10 pm In The Point | 13 Comments

Al Qaeda is alive and Detroit is bankrupt. But the creditors, which include the unions which helped drain Detroit, should probably take the offer. It’s not like a city with a declining population and a small government subsidized corporate tax revenue base has a bright future down the road.

A team led by a state-appointed emergency manager said Friday that Detroit is defaulting on about $2.5 billion in unsecured debt and is asking creditors to take about 10 cents on the dollar of what the city owes them.

Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.

Underfunded pension claims likely would get less than the 10 cents on the dollar.

Orr is playing chicken with Detroit’s bankruptcy. It’s a plausible strategy because Detroit is fairly close to the line. But the problem is in the details.

At most risk is the $11 billion in unsecured debt. That includes almost $6 billion primarily in health benefits for retired city workers; more than $3 billion for retirees’ pensions; and about $530 million in general-obligation bonds. Retirees are set to get less than 10% of what is owed them under the plan.

Mr. Orr’s proposal also calls for using the savings from the cuts to invest $1.25 billion in public safety and blight removal to revive a city beset by a dwindling tax base, entrenched crime and population loss.

This is the kind of thing that got Detroit into trouble in the first place. Orr is treating Detroit like a company that needs reinvestment. It doesn’t. It needs to cut as much of the bleeding as possible and learn to operate on a lower budget.

Shorting retirees while investing in some plan to revive an unrevivable city that its own residents are fleeing is not going to work.

Tamara Lowin, director of research at Belle Haven Investments, whose firm owns some of the city’s debt insured by Assured Guaranty, said she was surprised at Mr. Orr’s treatment of some “unlimited tax general-obligation bonds” as unsecured debt. She said these types of bonds are viewed as one of the safest investments in the municipal-bond market, because by law, there is a dedicated stream of tax revenues attached to them, with the pledge that the local government must raise revenues as much as necessary to repay the debt.

Matt Fabian, managing director of research firm Municipal Market Advisors, said the borrowing costs of other local governments in Michigan could rise as a result of the treatment of these bonds as unsecured.

So predictably the damage will be passed down the line with shortcuts now. And the blue states will only get bluer.

Orr said there are  about 10,000 current city workers, roughly 20,000 city retirees, and 700,000 Detroit residents.

“We have to strike a balance between our legacy obligations to our creditors, our employees and our retirees, and the duty we have as a city to 700,000 residents to give them lights, police, fire, emergency management, clean streets,” Orr said.

How exactly is Detroit going to attract any talent to do those things if the city has a proven record of defaulting on its obligations to retirees? That’s like saying you have a responsibility to hire someone to get your car running as an excuse for not paying the last guy who did it.

But the unions aren’t likely to learn a lesson that loading unrealistic benefits is a pyramid scheme that will fail and trash benefits for those who are left standing when the sweet debt music stops.

Orr’s only fundraising plan is to lease its water to the burbs. And dump some of the city’s parking. That’s probably a smart move.

Detroit intends to market its parking operations through a sale, long-term lease or concession arrangement while closing departments that manage or operate nine garages, two lots and 3,404 parking-meter spaces, the report said. The city also wants to lease the 982-acre Belle Isle Municipal Park to the state to save $6 million a year, Orr said.

How is Detroit doing as an investment?

After the meeting, Standard & Poor’s lowered the rating on the city’s general-obligation debt to CC from CCC- minus with a negative outlook. That’s 10 steps below investment grade.

 


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