Key players provide inside look at Detroit bankruptcy
Key players in Detroit’s now-infamous bankruptcy proceedings convened at the Ford School of Public Policy on Wednesday to discuss the city’s growth since the city first filed for bankruptcy in 2013.
The panel focused on the impact of the Detroit “grand bargain,” which decreased the city’s $18 billion debt, restored public safety services and increased funding to city infrastructure.
U.S. Bankruptcy Judge Steven W. Rhodes, who oversaw Detroit’s bankruptcy, designed the $194.8 million bailout, known as the grand bargain, to garner support for a deal from unions and retirees. Rhodes joined Wednesday’s panel along with Judge Gerald Rosen, Judge Mike Gadola, former State Sen. Randy Richardville, former State Rep. Thomas Stallworth and Chad Livengood, a political reporter for The Detroit News.
The panelists examined how Detroit’s financial challenges halted the city’s full operation — from its road, school and emergency services to the pension plans and benefits for city retirees — and credited the grand bargain with its revival.
“From a constitutional perspective, this is the state of Michigan coming to the federal government to solve a problem that it could not solve on its own under our constitutional structure,” Rhodes said.
Rhodes said when the city filed for bankruptcy, the largest portion of debt came from the water department’s secured debt and post-employment benefits — like health care for retirees — which totaled $5 billion.
Detroit’s two pension plans accumulated $3.5 billion in debt obligations Rhodes said. Bond debt was another factor, estimated between $500 million and $1 billion when the city filed for bankruptcy.
“I assumed one way or another the debt would get worked out in the bankruptcy process,” Rhodes said. “What really concerned me was the anger of the people of the city.”
Many Detroiters were angry their city’s bankruptcy proceedings were being handled by an unelected emergency manager, University alum Kevyn Orr, whom Rhodes said the people believed had unlawfully displaced their elected government.
“They were protesting about that,” Rhodes said, “There were demonstrations in the streets.”
Bargain and bankruptcy
Rosen, who served as the chief judicial mediator for Detroit’s bankruptcy case, said in addition to the city’s financial obligations, there were human costs to Detroit’s debt.
“Detroit was what municipal bankruptcy experts refer to as service, delivery and solve,” Rosen said. “That means for the city’s residents, businesses and visitors, the city really isn’t a city at all.”
Rosen said prior to the filing, the city was not effectively providing basic public safety services like police, firefighters and emergency medical services.
“Response time for police was running close to an hour against the national average of 11 minute response times,” Rosen said.
Rosen said 12,000 fires a year went unanswered, and 40 percent of the city’s roughly 90,000 streetlights were out in Detroit, leaving large portions of the city in the dark.
“And of course, criminals thrive in the darkened streets,” Rosen said.
Rosen said in 2013, the city had less than eight weeks of operating cash when it filed for bankruptcy. He said time was running out for Detroit, and the bargain could not wait.
Stallworth, who represented Michigan’s seventh legislative district during the creation of the grand bargain, said it was heavily debated when it was introduced, and attributed its success to the strong leadership in the Senate and House interested in putting partisanship aside. As part of the deal, the state of Michigan, private donors and foundations cobbled together $800 million to pay down the debt. The bargain also resulted in cuts to pensions for many retired city workers.
Controversy surrounded Detroit’s eligibility for bankruptcy when the General Retirement System and the Detroit Police and Fire Retirement Committee argued that by filing for bankruptcy, Detroit violated its pension policies protected under the state’s constitution.
“The city wasn’t even making its contributions to the pensions, and the retirees who had given their working lives,” Rosen said.
Stallworth said he still gets targeted by citizens who say he’s responsible for losing their pensions, but he is at peace with his actions during his time. Approving the grand bargain required pensioners to approve reductions to the benefits they owed as a condition of forgiving some of the city’s debt.
“When we talk about outcomes, everyone wants to get well but nobody wants to take their medicine,” Stallworth said.
Stallworth said police and firefighters were not required to take pension cuts under the bargain.
The Detroit Institute of Arts
An aim of the bargain was to preserve the Detroit Institute of Arts, and rumors circulated that the museum would be forced to sell city-owned artwork.
“The art was the only readily monetized asset, as the only asset that I, as the mediator, had available to monetize,” Rosen said.
However, Rhodes disagreed that creditors had the potential to monetize the art outside of bankruptcy.
“Creditors would not have access to the art outside of the bankruptcy under any circumstance, and they admitted that,” Rhodes said.
Rosen said liquidating the DIA would be devastating to the region and the state, however Rhodes could not override Orr’s authority as emergency manager.
“It would suck the life out of Midtown and create a civil war,” Rosen said.
Detroit Public Schools
Gadola said the grand bargain cannot be replicated to address Detroit’s other issues without the leverage of an asset like the DIA.
“The DIA was the lynchpin of the grand bargain,” Gadola said.
The panelists discussed how the bankruptcy had negatively impacted Detroit Public Schools.
Livengood said bailing out DPS would require the state to spend $715 million over 10 years, doubling the amount of the grand bargain. DPS currently faces as $200 million deficit.
“Not only is DPS failing, so are the charters,” Stallworth said. “There's no real question of who’s to blame.”
In confronting how the debt affected Detroit Public Schools, Rhodes said there was nothing worse than denying there was a problem.
“Denial is a river in Egypt,” he said. “Denial can play no part in the rational solution of insolvency.”
Rhodes said the city exceeded its constitutional debt rate, and raising taxes would not increase their revenues, but actually lower them because people would flee the city.
“Residents and businesses look at cost of living in a city compared to what services they get,” Rhodes said. “Detroit was in no position to compete, let alone if they raised taxes.”
Livengood said people had to come to terms with what was in front of them, facts ignored by the former Gov. Jennifer Granholm administration, Detroit residents and the media.
“It was a classic case of a city that had been mismanaged at several levels,” Livengood said.