What Detroit needs is an actual expert
Photo by Anne C. Savage, special to Eclectablog.
The following is a guest post by Roger Kerson and is Part 2 of a 2-part series. You can read Part 1 HERE. Roger is a Michigan-based media consultant for labor unions, environmental group and non-profit organizations. He was director of public relations at the United Auto Workers during the GM and Chrysler restructuring. As an associate of the Arlington, Virginia-based firm PRWRK, he has provided strategic counsel to the Transport Workers Union of America during bankruptcy at American Airlines and to the United Mine Workers during bankruptcy at Patriot Coal.
Plan B for Detroit, Part II — Does Kevyn Orr know how to manage a municipal emergency?
Richard Larkin, who has proposed a Plan B to keep Detroit out of bankruptcy, knows a thing or two about municipal finance. He’s worked in the field for nearly four decades, including positions as managing director at Fitch Ratings and chief municipal ratings officer at Standard & Poor’s.
Kevyn Orr? Not so much. Orr, a University of Michigan graduate, came to the emergency manager post in Detroit after a dozen years in the DC office of mega-law firm Jones Day, where he specialized in corporate bankruptcy – most notably, the successful restructuring of the Chrysler Corporation.
But corporate finance is a different world than municipal bonds, says Larkin. Orr and his team, Larkin asserts, are underestimating the implications of bankruptcy on the city and its residents – especially a bankruptcy in which pensioners and bondholders receive just 20 cents on the dollar.
The “D” is in the mud:
“It’s a precedent that doesn’t need to be set,” says Larkin. “Detroit’s name in the municipal bond market is mud.” Eventually, he says, “the city is going to need to borrow. You can’t build a bridge, you can’t replace a firehouse with current tax revenues. What if they need 20 firehouses? Borrowing and bonding is a normal fact of life, when you [as an individual] buy a house or when you [as a city] build a bridge.”
Years of deindustrialization, disinvestment and depopulation have left Detroit with a decaying infrastructure, thousands of abandoned properties, and many other problems that can’t be solved without large sums of money. Finding those funds won’t be easy if Orr’s plan to pay bondholders just 20 cents on the dollar succeeds in U.S. Bankruptcy Court.
Gone fishing – elsewhere:
“A lot of investors won’t forget this for a long, long time,” says Larkin. “Investors have plenty of fish. Why bother to go fishing” where an investment has gone bad? If Detroit is denied access to capital markets, or if the cost of borrowing becomes exorbitant, city residents and businesses will pay the price when borrowing costs increase for necessary infrastructure projects – or when the projects don’t happen at all.
Kevyn Orr will be long gone by then. “To hear people in Detroit speak, this is a minor blip, a temporary phenomenon,” says Larkin. “This is spoken by a bankruptcy attorney from Washington DC who has no experience in the municipal bond market.”
Larkin prefers to focus on the numbers that underlie his proposals; he’d rather not discuss politics. Much of what he suggests, however, is inherently political. In addition to new taxes, he proposes a new bond offering to fund blight removal. He also says Orr is underestimating a reasonable return for city pension plans, while overestimating the amount needed to keep the funds solvent. Orr’s restructuring proposal calls for funding the pension plans at 100 percent of their future obligations.
Larkin argues that’s not a smart way to value pension plans, since the city has decades to make payments to current and future retirees. “These are long-term obligations,” he points out, “but the emergency manager would have you believe they are not.” An 80 percent standard is adequate, he says, which reduces the need for the cash-strapped city to pour funds into additional pension contributions.
No easy lifting:
New taxes, new bonds, more state aid, maintaining the status quo on pension assumptions: None of this is an easy lift. But stiffing bondholders to the tune of 80 cents on the dollar might not be so easy either. Not to mention city retirees. Orr has avoided specifics on how severely he intends to slash retiree pensions, merely stating that “significant” cuts are needed.
According to Larkin’s estimates, “significant” means an 80 percent cut. According to figures from the Detroit General Retirement System, as reported in USA Today, a typical Detroit city worker gets a pension of about $18,000 a year. Orr’s plan could cut his or her retirement income to about $3,600 a year.
Detroit’s retired police officers and firefighters do a little better, with an average pension of $30,000 a year; an 80 percent cut would mean a reduction to about $6,000. Due to quirks in public pension funding, however, Detroit police officers and firefighters don’t contribute to the federal Social Security system. Their city pension is all they’ve got.
If Richard Larkin is right, there’s no reason they can’t keep it – and there’s no reason other city retirees have to lose so much ground. Detroit, he says, “looks like a city that doesn’t have to go into bankruptcy.”
