Detroit Files Chapter 9 Bankruptcy; Oakland, LA, Others on Deck

In an inevitable, anticlimactic decision today, Detroit files for bankruptcy.

 Detroit became the largest US city to ever file for bankruptcy on Thursday, seeking protection from its creditors as it restructures more than $18bn in debt.

Richard Snyder, Michigan’s Republican governor, said in a letter included in the filing.

“Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing.

Kevyn Orr, who Mr Snyder appointed in March to serve as Detroit’s emergency manager, has stirred controversy by putting the claims of holders of general obligation bonds – which are backed by taxes – on the same footing as those of pension funds and retirees.

Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority.

“To treat holders of general obligation bonds backed by the full faith and credit of a sovereign entity as unsecured and impaired has implications for the municipal market,” said Peter Hayes, head of municipal bonds at BlackRock, which owns $25m of Detroit’s debt.

Mr Orr said the city’s total debt was at least $18bn and could be as much as $20bn – $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar.

Welcome to Chapter 9, Detroit

FT Alphaville says Welcome to Chapter 9, Detroit

 Beyond the list of derelict buildings and brownfield sites owned by the city — you’ll want to read the approval letter by Michigan Governor Rick Snyder, in Exhibit A.


Here is a link to Detroit’s Bankruptcy Filing

Amusing Flashback of the Day

The amusing flashback of the day with a hat tip to ZeroHedge goes to a CBS news headline from  October 13, 2012 Obama: I “refused to let Detroit go bankrupt”.

Gut Kick

Bloomberg says Detroit ‘Gut Kick’ Poses New Test for Long Suffering City

 The move was inevitable, said Steven Rattner, a New York financier who headed President Barack Obama’s auto-industry task force in 2009 that put the predecessors of General Motors Co. and Chrysler Group LLC into bankruptcy reorganizations.

“This will be much messier than the auto companies,” he said. “This will go on for a long time.”

“You’re going to have much bigger haircuts for the workers and that’s going to mean much more pain than the workers for the auto companies were asked to bear,” Rattner said.

Michel Soucisse, manager of Mudgie’s Deli on Porter Street, shares her concern.

“I really fear that Detroit will be cut apart by its creditors and some of our assets will start to be sold off willy-nilly,” he said in an interview. “I really hope it means that we get to keep our assets and get help at the same time.”

10 Pages of Bankruptcy References on This Blog 

I have 10 pages of Detroit Bankruptcy References on this blog. The earliest is in regards to GM and is from 2005.

Here are a few examples:

Clearly this is not a surprise. Nor did the stock market treat it like a surprise.

What’s going to be a surprise (but not to Mish readers) is when Oakland, LA, Houston, Baltimore, and numerous other cities declare bankruptcy to escape untenable pension and health-care promises.

The Bright Side 

Taxpayers should be fed up with ever-escalating property taxes, sales taxes, and fees to pay ridiculous retirement plans for unappreciative public union employees, especially police, fire, and teachers’ unions.

So, look on the bright side.

The Detroit bankruptcy is a good thing, and it will be even better when numerous other cities, bankrupted by public union greed, do exactly the same thing.

If you are desperate for yield and holding questionable municipal bonds, especially long-term municipal bonds, you may wish to reconsider.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

12 replies
  1. Avatar
    Howard Beale says:

    As an attorney who for more than a third of a century has specialized in public sector labor and employment law representing first public sector unions then for the past 20 years public agencies, I have observed first hand that the true villains of this whole public pension/public employee compensation mess are not the public employee unions nor even the publicly elected governing bodies, but the public sector administrative ruling class. These are the city managers, chief county executives, special district general managers, superintendents and college chancellors and their heads of finance/business services and human resources who recommended to the mostly volunteer governing bodies that in order to have labor peace (and therefore make life easier for themselves) that the governing body should yield to the demands of the unions. The public sector administrative class even had the temerity to inform their clients, the governing body, that enhancing pensions retroactively could be done without it costing their public agency anything extra (obviously lies).

    And why did the public sector administrative ruling class do this? Because they would be getting the same retroactive pension enhancements themselves. You might call the public sector employment system a rigged system loaded with numerous conflicts of interests. Who was looking after the financial well-being of the city, county, water/sewer/park special district? Noone.

    Read this article about the City of Mountain View and get a birds eye view of that cities’ administrative ruling class looking out for themselves. Mountain View situation is not unique but representative of what happened from one end of the erstwhile great state of California to the other.

    Google: Mountain View Online: City retirees collect pensions, return to work.

    The biggest excuse for all of this madness, “To stay competitive with other cities” the folks over at Mountain View claimed. This was the assertion made time and time again by the public sector administrative ruling class all around the state.

    My point is this, yes talk about the excessive demands by the public sector unions and the dumb, dumb decisions of the publicly elected bodies to yield to those demands, but do not forget the ultimate culprit of this mess, the members of the PUBLIC SECTOR ADMINISTRATIVE RULING CLASS who were making all these recommendations to their governing bodies in order to ultimately greatly enrich themselves.

    And don’t forget the ZERO deductible low co-pay health insurance plans that the public sector administrative ruling class continues to maintain for the unionized employees in order that they themselves can continue to participate in Rolls Royce, platinum plated health plans that ceased to exist many, many years ago in the private sector.

    If I sound mad, you are absolutely correct, I’M AS MAD AS HELL AND I’M NOT GOING TO TAKE IT ANYMORE, and neither should you.

  2. Avatar
    Tough Love says:

    Sorry Howard, but the buck stopped with the elected officials. Sure the administrators’ recommendations were with fought with self-interest, but the elected officials knew (or certainly should have known) how those doing the recommending would benefit, and factored that into their decisions.

    And please, elected officials have ONLY one real goal … to get re-elected, and “buying” the block votes of the Union workers by granting the excessive pensions & benefits they demand is a sure way to get those votes.

    The mugging of the Taxpayers by ALL of them (the Unions, the workers, the elected officials, the administrators, etc.) has to end, and if bankruptcy is the only way to do so ….. bring it on, and lets be done with it.

  3. Avatar
    Howard Beale says:

    TL, I have been reading your work for years and, what can I say, Dude you really rock. BUT, take it from someone (me) who was in Brown Act closed session meetings (as the lawyer) and had to listen to these members of the public sector administrative ruling class snooker the elected officials who mostly had other jobs and depended upon their city managers and his/her finance and human resources directors for guidance. Sure, there were some city council or member of a county’s board of supervisors who were going to give in to the unions no matter what their administrators recommended, but my experience is that the majority of publicly elected officials were trying to do the best job they could. They recognized that they did not have the expertise so they yielded to the true masters of it all, the adminstrative ruling class.

    Picture yourself a city council member of say the City of Lompoc, Redding, Eureka, Blythe, El Centro, Rialto, Taft, whatever small town, who was the owner of a local deli or insurance salesperson not knowing anything about all the complexites of CalPERS, the costs of health insurance, etc. You would depend on the city manager and his/her department heads to guide you.

    I just want to incessantly make the point that not enough is heard about these truly bad folks. Please don’t forget to mention them in the future. These were, are, really rotten people.

  4. Avatar
    Tough Love says:

    Howard, I don’t disagree at all. I was just pointing out that without the affirmative votes of the elected officials, none of this thievery would have happened.

    And speaking of being “snookered” here’s the worst case I am aware of ….

    Several years back in Allentown PA, with Union-City lawsuits flowing and contentious labor negotiations with City Police under way, the City’s Mayor took it upon himself to negotiate an all-encompassing deal that would end the negotiations and the lawsuits. Well, the Mayor ultimately sign a Memorandum Of Understanding (MOA) that allowed retiring police to base their pensionable compensation (which included overtime) on the highest SINGLE MONTH within a window of about the next 6 months. Suffice it so say, that all retirement-eligible police worked almost 24/7 for a single month and then put in their retirement papers, most eligible for annual (COLA_adjusted) pensions STARTING well above their annual base pay. By the time the City figured out what was going on, it was too late (and of course, not only was the mayor “snookered”, but incredibly incompetent as well)

    YUP … to “Protect and Serve” …. and rip-off the City’s Taxpayers.

  5. Avatar
    alan says:

    The question nobody ask is who is in a position to run for “volunteer offices”. The answer is not private sector IT, Engineers, Accountants, Pharma, Small Business is young lawyers,insurance agents, real estate agents, etc who can run to build their business. The biggest customer base for legal, real est, insurance in town is the Board of Ed Employees, followed by Public Safety Employees, and by running for office they can tap into that base just by being the nice guy and doing their bidding. Many lawyers will go back to their swollen practices (from their giveaway) and be long out of office when the bill is due..some will become commissioners in the state with 125k salaries and pensions. The engineer, IT, Pharma, Sales guy will go to work every day and have no idea how they are being sold down the river. How can this be changed..I have no answer as business will NOT allow their employees to get involved in the is too competitive. Years ago in Conn defense plants, telecom, rail all had people in office..that environment is long gone

  6. Avatar
    Howard Beale says:

    Ten more reasons to hold the administrative ruling class fully accountable for the current state of public agencies’ financial mess and to despise them:

    10. They come into work and leave whenever they wish and when doing so make certain anyone within earshot hears them talk about their long grueling days.

    9. Whenever they decide to take an day off here and there–and this can be several times a year– they never tell their administrative assistants to take it off their vacation leave bank. This way whenever they decide to leave the employment of their public agency they will leave with a monster vacation leave payout check.

    8. Whenever they are sick for just a few days here and there, they never tell their admins to dock their sick leave bank. This way they can accrue as much skill leave as possible so that in the event their agency pays out for accrued unused sick leave they can leave with a monster sick leave payout check.

    7. They go to as many conferences as possible always staying at the finest hotels and eating at the finest restaurants.

    6. They constantly complain to their publicly elected governing body that sets their pay, that if they worked in the private sector they could be earning so much more and therefore they need another pay increase.

    5. They have their public agency pay for as many memberships in as many professional organizations as possible to increase the number of conferences they have to attend. (Also see number 7 above.)

    4. If you talk to them about their pay and benefits, they will complain to you that the people they went to college with or their neighbors who work in the private sector make so much more than they do, and that they have sacrificed so much to work in the public service (hearts and violins please).

    3. They are as friendly and chummy as they can be with the leadership of all their agencies’ represented groups, especially the public safety and teacher unions, so they can all go about kissing each other’s fundaments and plotting about how they can all get more in pay and benefits because lord knows, they’ve all had to sacrifice by not going to work in the private sector where they all would have been rich if they had.

    2. Since they don’t think their pay is high enough and they don’t get enough vacation (usually 4 to 6 weeks per year), sick leave (usually 12 days per year) and holidays (usually 12 to 16 a year depending on the agency), they work to convince their governing body that they should be granted additional time off. This additional paid time off is called, “management/executive or personal leave”, which unfortunately is of the use your yearly allotment of it or lose it (poor babies).

    1. The retirement systems that they participate in (CalPERS, CalSTRS or whatever) will not pay them enough to live comfortably when they finally get around to retiring, so they talk the governing body to contribute additional public agency funds into 403(b)’s or 457 deferred comp plans to supplement what will be an insufficient retirement check to meet their needs.

    1A. If they are police and fire department administrators, they seek and receive disability retirements because after all that bad back, knee, shoulder, _____ (fill in the blank) has been killing them all these years and they need that retirement check to be 50% tax free.

    And there you have it.

  7. Avatar
    Tough Love says:

    Howard, Nice list.

    I’ve always suspected #s 8 & 9 …. how does one go for decades w/o a vacation day ?

    We need some whistle-blowers (perhaps funded by Mr. Arnold??) to catch, and hopefully prosecute them for theft of services ….. perhaps with a loss-of-pension as punishment.

  8. Avatar
    Howard Beale says:

    TL, no wonder they call you Tough, because that’s what you are
    TOUGH. Here I give you an A List and you say “nice list”, man that’s tough.

    Anyway, about your comment regarding a whistle-blower, that would be these peoples’ secretaries ratting them out and that’s not going to happen.

    The other thing that I’ve come to call the public employee crowd is the C Minus crowd. Yup, these C- types get A+ pay and benies and the rest of us have to pay up for them.

    Seems to me, that it’s time for a June 1978 type taxpayer rebellion.

    Que Viva La Revolucion.

  9. Avatar
    Tough Love says:

    Personally we need another Ronald Regan moment ….. (firing the Air Traffic Controllers en mass). I hope the BART workers are offered nothing but ZERO increases in pay, health care cuts & premium increases, and higher pension contributions.

    I hope they then choose to repeat their strike and that the Governor has the balls to fire them all.

  10. Avatar
    Ron says:

    Elected governmental officials and union leaders are like two seasoned hookers ,waiting on the docks for the ships to come. They sit, working together, to get from the sailors as much as possible and for doing as little as they can. In the end, the sailors(the public) end up broke and not feeling satisfied.

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