Detroit not alone under mountain of debt

Todd Spangler / Detroit Free Press /

Published Jul 25, 2013 at 05:00AM

WASHINGTON — Detroit may be alone among the nation’s biggest cities in terms of filing for bankruptcy, but it is far from the only city being crushed by a roiling mountain of long-term debt.

At the heart of Detroit’s problem is a growing unfunded debt on benefits owed to current and future retirees — some $3.5 billion, according to its emergency manager, Kevyn Orr — which mirrors a circumstance being seen across the U.S.

From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010.

For years, watchdog groups and public-sector analysts have warned of the threat posed by unfunded liabilities.

Much like the legacy pension costs that weighed on Detroit’s automakers before the Chrysler and General Motors restructurings of 2009, the worry is that revenues can’t keep up with growing debt and that rosy predictions for market returns downplay the actual financial risk.

As examples of the results: Chicago recently saw its credit rating downgraded because of a $19 billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.

It’s no surprise — given the pressure public pensions are putting on municipal budgets — that any move to ease those liabilities, especially through a bankruptcy court order like what’s happening in Detroit, is being watched carefully nationwide by state and municipal officials, union leaders, bond traders and retirees.

“We’re just at the front of the line here,” Michigan Treasurer Andy Dillon said Friday. “It could be a landmark case.”

Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few started saving to cover the long-term costs,” the report said.

Public-sector pensions, given a municipality’s supposed ability to raise taxes and set its level of services, were expected to be secure all the same. Corporations might seek relief from pension and health care costs in bankruptcy court, but laws in many places are supposed to protect public-sector pensions. Michigan’s constitution, for instance, says they constitute “a contractual obligation which shall not be diminished or impaired.”

But, barring a settlement now with public-sector unions, it’s hard to see cuts not being part of Orr’s plan in Detroit: relying on a bankruptcy judge to rule that federal law trumps the state constitution.

And such a ruling, once made, could change how public employees across the country see their futures, how their unions negotiate contracts, and how their retirees — some of whom, like police and firefighters in Michigan, don’t contribute to or receive Social Security benefits because their pensions were expected to be guaranteed — pay the bills.

Last week, Lee Saunders, the president of the American Federation of State, County and Municipal Employees, noted that public workers aren’t protected by federal pension insurance, like many private-sector employees. He openly wondered whether Republican Gov. Rick Snyder and Orr want public employees “to have to work until they die.”

Hyperbole aside, the situation in Detroit just took a big stride onto the national stage. Even the White House said officials there are monitoring the case — and offering help — though they stopped well short of any action that could be seen as involving them in a court dispute between the city, the state and creditors, knowing that any such move could be fraught with political overtones.

“I do think unions and political leaders are going to wake up and say this is something we really need to address,” said Eric Scorsone, an expert in local government finances at Michigan State University. “The perception now is that these problems are widespread.”

No one really expects a rush on the bankruptcy courts nationwide, however — the unfunded pensions and health care liabilities notwithstanding. In a sense, that’s why the Detroit bankruptcy filing, at $18 billion or more the largest municipal bankruptcy ever, is so unique. And its potential outcomes are possibly precedent-setting.

Municipal bankruptcies are exceedingly rare, considering the 1.2 million personal and business bankruptcies filed last year. Governing magazine says there have been just 36 municipal bankruptcies since 2010, including Detroit’s. And they were extremely occasional long before that.

New York City’s storied financial problems in 1975 never led to bankruptcy, even after then-President Gerald Ford said he’d block any attempt to bail out the city. He later relented on low-interest loans after the city began to repair its finances. And Cleveland and its then-Mayor Dennis Kucinich defaulted on loans in 1978 but never went into bankruptcy.

There’s a host of solid reasons for a municipality not to file bankruptcy: The stigma, the fact that it effectively blocks a city from the regular bond market for years and state laws that often remove it as an option in the first place, among those reasons.

“It’s a black mark against the city,” said Matt Fabian, managing director for Municipal Market Advisers, a Massachusetts research firm. “Bankruptcy is just bad. There’s no mayor who wants to put his city in bankruptcy.”

Judge’s ruling — A federal judge dealt back-to-back wins Wednesday for Kevyn Orr’s effort to petition the nation’s largest municipal bankruptcy for Detroit on a day that brought emotionally charged reactions from protesters.

Saying the city would suffer irreparable harm if delays to its bankruptcy were upheld, U.S. Bankruptcy Court Judge Steven Rhodes denied attempts by lawyers for pension funds, unions and other creditors to halt Detroit’s Chapter 9 filing.

Rhodes said it’s clear that Orr, the state-appointed emergency manager, has the authority under state law to act as the official representative for Detroit in bankruptcy, and that matters of the city’s eligibility to enter bankruptcy should be decided in Rhodes’ courtroom, not in state courts.

The rulings put a stop to an earlier Ingham County Court ruling that Detroit shouldn’t proceed until state courts decide whether the filing violates Michigan’s constitutional protections of public pensions.

— Detroit Free Press

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