Detroit Bankruptcy Could Hit Millions of Retirees

Pain in the Motor City
Detroit is the largest U.S. city to file for bankruptcy and that puts the city on an uncertain course that could lead to laying off employees and selling assets, reports CNBC’s Brian Sullivan.

“Everyone will say, ‘Oh well, it’s Detroit. I thought it was already in bankruptcy,’ ” said Michigan State University economist Eric Scorsone. “But Detroit is not unique. It’s the same in Chicago and New York and San Diego and San Jose. It’s a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems.”

The bankruptcy filing follows a decades-long decline of a city that prospered through much of the last century as the capital of U.S. manufacturing. But as that industrial base has declined, so to have the city’s fortunes.

Detroit has endured booms and busts in the past. Even as the auto industry has roared back to life since the Great Recession, the economic recovery has left the Motor City in its rear-view mirror.

Though unemployment has fallen from a peak of nearly 28 percent in 2009, some 16.3 percent of Detroit workers are still without a paycheck. As a result, income tax revenues have fallen 30 percent in the last decade. Meanwhile, the national recovery in home prices has yet to spread to Detroit. Property taxes are 20 percent lower than 2008 levels.

Fighting Blight in Detroit
Chairman of the Detroit Blight Authority, Bill Pulte is looking to get rid of the dangerous homes in the depressed city of Detroit. He is working to stabilize the city and help fix the suffering public safety issues by decreasing the number of abandon buildings.

Union officials also argue that the city is owed hundreds of millions of dollars in unpaid taxes that should be collected before retirees are asked to take a cut in benefits.

“If they went after that money, they could pay their debts,” said McNeil.

Investors holding Detroit’s bonds have already taken a hit as the steady erosion of the city’s finances has slashed the city’s credit rating to junk status. Last month, Kevyn Orr, a bankruptcy lawyer named to restructure Detroit’s debts, declared a “moratorium” on some interest payments.

In the days leading
up to
Thursday’s bankruptcy filing, Orr had been working with individual creditors to renegotiate those debts at dimes on the dollar.

That could help close the gaping financial hole in the short run. But inflicting too much pain on bondholders could have dire long-term consequences, according to Kim Rueben, a senior fellow at the Urban Institute who specializes in municipal finance

Detroit files for bankruptcy
Detroit is asking a federal judge for permission to go into Chapter 9 bankruptcy protection, reports CNBC’s Scott Cohn.

“You don’t want to have to do that because you want to keep your ability to borrow again to rebuild your city,” she said.

Orr must now persuade a bankruptcy judge to invalidate the city’s pension contracts, freeing him to reduce payments to retirees. The unions’ lawyers will argue that pension and health benefits are protected by Michigan’s constitution, one of seven states that specifically ban cuts in retiree pension and benefit payments.

That’s why the case will be closely watched by states such as Illinois and California, which also have badly underfunded their pensions. If Detroit is allowed to cut payments to its retirees, city and state workers in those states and others could see their future benefits pared back.

Future public sector workers can all but count on lower retirement benefits, as many state and local governments scale back the kind of financial promises that sank Detroit. With retirees living longer, those promises have become too costly to make.

China Cities to Become Like Detroit?
Medium-sized industrial cities across China could suffer the same fate as Detroit, which suffered a sharp economic decline as industry left the city, Sanjeev Sanyal, Global Strategist, Deutsche Bank told CNBC.

“I think there is going to need to be an understanding with public employees that working for 30 years and being able to have a pension for that much time or longer is not sustainable,” said Rueben.

Automakers said they plan to standby the city.

“We believe a strong Detroit is critical for a strong Michigan and our industry. The city has a difficult job ahead, and we are optimistic that governmental leaders will be successful in strengthening the community,” said Jay Cooney, a Ford spokesman.

Chrysler said it “believes in the City of Detroit and its people. We not only continue to invest in the city and its residents by adding to our presence in Detroit, we also are committed to playing a positive role in its revitalization.”

The crisis is also being watched closely in the White House.