Tag : debt

Detroit’s bankruptcy filing is designed to solve the city’s short-term financial crisis and give city leaders a bit of fiscal breathing room. But the city’s long-term prospects still look bleak.

Over the past 60 years, the city has lost more than half of its residents. As its tax base  declined, the city struggled to pay for basic city services. As service quality declined, the city became an even less appealing place to live and so more people left.

Really turning Detroit around will require some outside-the-box thinking. And there’s been some. Here are six big ideas to revitalize America’s most troubled city.

Jack Kemp, Detroit's savior? (AP)

Jack Kemp, Detroit’s savior? (AP)

And all the regulations: Jack Kemp, the former congressman and housing secretary, 1996 Republican vice-presidential nominee and 1988 presidential candidate, had an idea for America’s inner cities. He wanted to make them “enterprise zones,” where federal taxes and regulations were greatly relaxed, to spur outsiders to come and do business. That’s been tried to varying degrees, including a federal program creating “empowerment zones,” but why not go all the way? Eliminate all taxes for year-round residents of Detroit, with the federal government paying the cost of the abolition of state and local taxes. Get rid of zoning, parking requirements, occupational licensing and other cumbersome regulations while you’re at it. See how many businesses come.

2. Make it into a tax shelter

Sort of like the Caymans. (Roger Wollstadt/Creative Commons)

Sort of like the Caymans. (Roger Wollstadt/Creative Commons)

Delaware’s strategy of structuring its corporate tax code to favor corporate headquarters has brought billions of dollars of investment into the state. It’s possible to do that with catastrophic insurance reserves, as a former insurance commissioner once proposed for the District. They’re currently taxed as income in the United States, so tens of billions of dollars are sitting in bank accounts in Bermuda and the Cayman Islands. If the federal government allowed Detroit to host that money at a much-reduced rate, it could create a small but significant financial industry to manage it.

3. Create a Detroit Visa



What Detroit needs, more than anything else, is to replace the million people it lost over the past six decades. The easiest way to do that would be to import them. Most Americans don’t want to live in Detroit. But as Matt Yglesias has noted, there are about 165 million foreigners would like to become Americans. Presumably some of them would be willing to live in Detroit if that’s what it took to get a green card.

The proposal would work like this: Immigrants would get a visa that would be good for five years, during which they’d be required to maintain residence within the city limits. After that, immigrants would get normal green cards and could live where they liked. But hopefully, as they put down roots and Detroit as a whole prospered, many would choose to stay.

It might seem like these new Detroiters would have trouble finding work, but population growth tends to create job opportunities. Immigrants tend to be highly entrepreneurial; some of them would not only create jobs for other immigrants, but for some native-born Americans too.

4. Go vegan

Save pigs, save money? (People for the Ethical Treatment of Animals Facebook page)

Save pigs, save money? (People for the Ethical Treatment of Animals Facebook page)

The People for the Ethical Treatment of Animals have a proposal, too. They say they’ll give the city $100,000 to make all meals in government buildings — mostly schools, hospitals and jails — meat free. As if that weren’t enough, they’ll also plaster trash and fire trucks with vegan-boosting advertisements, supporting a strapped public transit system. PETA President Ingrid Newkirk notes that vegans are less prone to obesity, which would lower health-care costs. And think of the chickens! “I don’t know if you know, but twenty thousand chickens an hour being killed for Detroit,” Newkirk says. “So if we could make all government workers try a vegan diet, that’s a lot of chickens not having their throats cut.”

5. Move federal workers to Detroit

The federal buildings in DC are ugly. We can do better. (Photo by NCinDC)

The federal buildings in D.C. are ugly. We can do better. (Photo by NCinDC)

Another way to increase Detroit’s population would be to move federal workers to the city. There’s a precedent for this: the U.S. Patent and Trademark Office opened a satellite office in Detroit last year.

The feds could do this on a larger scale. There are about 2.7 million federal civilian workers. If 10 percent of them moved to Detroit over the next decade, that would be an extra quarter-million people. Many workers would bring their families with them, and their spending would create additional jobs in the city.

Federal agencies could open satellite offices in Detroit and require most new federal workers to work there. Existing workers could be offered financial incentives to relocate voluntarily. Detroit’s extremely low cost of living would be an added draw. And not only would this help to save Detroit, but the federal government would save money on office space.

6. Give Detroit to Canada

President Obama and Canadian Prime Minister Stephen Harper (Charles Dharapak/Associated Press)

President Obama and Canadian Prime Minister Stephen Harper (Charles Dharapak/Associated Press)

Detroit is one of the few parts of the United States (other than Alaska) that’s actually north of Canada: The city of Windsor, Ontario, lies south of it. So why not make this Canada’s  problem? Much of the city’s fiscal problems boil down to retiree benefits. For example, it has $5.7 billion in unfunded retiree benefits and $3.5 billion in unfunded pensions. Luckily, Canada has a single-payer health-care system and not one but two publicly funded pension systems. Let those pay off the debt!

Canada’s provinces do more for municipalities than our states do for cities. Toronto gets 19 percent of its budget from the Ontario and Canadian federal governments. That’s much more than U.S. cities typically get. Ontario’s generally in better shape than Michigan, which is good news for tax money going to Detroit. Toronto and Ottawa are better cities to have helping you out than, say, Flint.

via Ezra Klein at wonkblog

Michigan governor laments lowest point in city’s history after emergency manager fails to broker deal between city’s bondholders and pension funds.

Sinking under huge debts and decades of mismanagement, Detroit formally filed for bankruptcy on Thursday, becoming the biggest US city ever to take such a drastic measure.

Kevyn Orr, Detroit’s emergency manager, took the decision after failing to broker a deal between the city’s bondholders and its pension funds.

The filing sets a new record for municipal bankruptcies and dwarfs the previous record filings by Jefferson County, Alabama, and Stockton, California. No other city of Detroit’s size has ever gone bust.

Orr and the city’s creditors and pensioners will now begin a fraught legal  consultation period while a court determines whether the city is eligible for “chapter 9″ bankruptcy protection for its $18.5bn debts and liabilities.

In a letter posted with the filing, the Michigan governor Richard Snyder confirmed he had received Orr’s request to start the bankruptcy proceedings. He said it was “clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available.”

Snyder said he hoped the bankruptcy would be the beginning of the end of Detroit’s woes. “This decision comes in the wake of 60 years of decline in the city, a period in which reality was often ignored. I know that many will see this as a low point in the city’s history. If so, I think it will also be the foundation of the city’s future,” he wrote.

The governor painted a picture of a city in collapse. Citizens wait 58 minutes for the police to respond to calls, compared to a national average of 11 minutes.  Only a third of ambulances were in service in the first quarter of 2013. There are approximately 78,000 abandoned buildings in the city. The unemployment rate had nearly tripled since 2000 and the homicide rate was at its highest level in 40 years, he said. Detroit is unable to meet its most basic obligations to its residents, let alone its creditors.

“The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services,” Snyder wrote.

Orr had set out a restructuring plan in June for the city, which has been plagued by corruption and plummeting revenues for years. But pension groups and bondholders balked at the terms. This week, pension funds objecting to Orr’s plan sued to stop him from making the move.

At a press conference in Detroit on Thursday evening, Orr said the city’s debts were currently claiming 38 cents on every $1 it receives in revenue. That figure would rise to 65 cents by 2017. “This is the right thing to do,” he said of the bankruptcy filing.

The White House said it was monitoring the situation but stopped short of offering any federal aid. Spokeswoman Amy Brundage said: “While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities.”

Matt Fabian, the managing director of bond expert Municipal Market Advisors, said the filing had been widely anticipated. “Detroit’s story has been terrible for 50 years. This is just the latest terrible thing to happen.”

He said bankruptcy would allow Orr to renegotiate government contracts and other broad powers to impose draconian costs cuts. But he warned bankruptcy was not an easy path. “This will make it hard for the city to conduct day-to-day business. It will drain a lot of time, it could put people off moving businesses to Detroit and it could last for years,” he said.

Other major cities have teetered on the edge of bankruptcy, including New York in 1975, Cleveland in 1978 and Philadelphia in 1991. But all brokered deals rather than face the dire consequences of going bust. “Detroit has severe difficulties, but this would be an extraordinary event,” said James Spiotto, a chapter 9 expert and head of the bankruptcy unit at Chicago’s Chapman & Cutler, before the bankruptcy was confirmed.

If the filing is approved, Detroit’s cost of borrowing will soar and the city will struggle to raise cash, Spiotto warned. Meanwhile, officials would spend years battling in the court over who is owed what. “Chapter 9 is time-consuming, expensive and uncertain,” Spiotto said.

Orr has said bankruptcy was not his preferred option. But as talks foundered, his options narrowed. His original plan was to slash benefits to retirees, including pensions and healthcare, and cut already minimal services to the bone. Police and firefighters who retire before age 55, for example, would get no healthcare under one proposal. Bondholders would have received cents for every dollar in debt they hold.

Municipal bonds have traditionally been viewed as among the safest available investments. When Central Falls in Rhode Island went bust in 2011, the state passed a law giving bondholders priority over other creditors, including retirees. Detroit’s investors must now be wondering whether bankruptcy would give them a better deal.

Neither side was willing to sign up for Orr’s settlement.

This week, the city’s two pension boards – the General Retirement System and the Police and Fire Retirement System – sued Orr and Michigan governor Rick Snyder in an attempt to block a bankruptcy.

“It appears imminent the governor will grant the emergency manager the unconditional power to proceed under chapter 9, and the emergency manager will seek to have the city’s pension debts impaired unless the retirement systems and their participants accept the emergency manager’s unilateral imposition of significant impairments to their accrued financial benefits,” the lawsuit says.

Orr was appointed in March after Snyder declared a “financial emergency” in Detroit. A lawyer and University of Michigan alumnus, Orr helped steer Chrysler out of bankruptcy, but this is a dilemma of an altogether greater magnitude.

Even after years of decline, Detroit remains the US’s 18th most populous city. The city’s finances may have hit an all-time low but its business is bouncing back. The car firms that made the city are back in rude health, and downtown Detroit is being revitalized by new businesses.

Some local business leaders believe that the city has already hit rock bottom, and that a stronger Detroit is already emerging. Dan Gilbert, founder of the Quicken Loans lender, has rebuilt downtown and encouraged new businesses and old to move into the city. In a recent interview with the Guardian he said he is “finally going to do what needed to be done if not in the last several years then in the past decades. It’s essentially good news for the city because it means this period is coming to an end.”

But for Detroit’s poor, bankruptcy is likely to make life even harder in the short term. About 60% of Detroit’s children live in poverty. Orr had planned to bus creditors to some of the city’s poorest areas so they could see what was at stake. Armed security would have gone along for the ride.

“If they can see what it’s like for Detroiters, what they endure every day in this city, I think they’ll begin to understand what’s at stake,” Orr told the Detroit Free Press. The tour was canceled as bankers became worried about the PR impact of captains of finance touring the city’s poorest neighbourhoods.