The largest municipal bankruptcy in U.S. history is moving ahead. U.S. Bankruptcy Judge Steven Rhodes on Monday approved Detroit's restructuring plan to cut $18 billion in debt and liabilities and reinvest a small portion in services over 10 years, setting the stage for a vote by 170,000 creditors, including retirees, bondholders and other creditors, by mid-July.
Following the vote Judge Rhodes will decide whether the plan is fair to creditors and feasible. Assisting him in that effort is Richard Ravitch, former New York State Lieutenant Governor who helped save New York City from bankruptcy in the mid 1970s and will advise Judge Rhodes on the viability of Detroit's restructuring plan.
Just days before the latest development, many city workers and retirees marched in downtown Detroit protesting the city's plan to reduce retirement benefits, and AARP, CalPERS (California Public Employees Retirement System), the National Conference on Public Employee Retirement Systems and the Texas Association of Public Employees Retirement Systems filed amicus briefs opposing those cuts.
Under the latest plan, pension payments for civilian retirees would be cut by 4.5% and annual cost of living adjustments (COLAs) would be eliminated. Pensions for police and fire retirees would not be cut but their COLAs would be reduced to 1% from 2.5%.
Secured bondholders would get paid in full but unlimited general obligation bondholders would get paid 74 cents on the dollar and the remaining 26 cents would be diverted to cover pension costs.
On the East Coast, Newark is nearing its own financial reckoning. The Star-Ledger reports that a state takeover of city finances may be the only way that Newark can balance its budget.
Cities around the country are increasingly facing financial problems similar to Detroit's, says Ravitch. "You have Arizona selling its state capital and using the proceeds to balance its budget [and] the city of Chicago selling its parking revenues for 75 years to balance its budget. Some governors have raised taxes ... but most students of the pension system say that we're dramatically underfunded -- maybe by as much as $2-$3 trillion."
In a newly released memoir So Much to Do: A Full Life of Business, Politics, and Confronting Fiscal Crises, Ravitch writes that policymakers need "to recognize that the fiscal difficulties in states and localities are not just a series of individual crises but also a national problem that reflects a national history of promises made and obligations undertaken, often for the best of reasons, without the present resources to support them."
As far as Detroit goes, Ravitch writes that the bankruptcy filing shook up the public pension world with a "perfectly rational decision by the court that ruled that federal bankruptcy law preempts even the constitutional protection of the payment of benefits."
But in the long run, he writes, the filing means "a federal judge will allocate Detroit's inadequate resources between citizens who lent the city money in good faith and employees who worked for the city in good faith."
Ultimately, writes Ravitch, the federal government will need to use its resources "to provide the discipline and incentives that will force state and local governments to address their own fiscal future." In the meantime, efforts by the federal government to cut its own deficit could cause even more hardship for states, who receive in total about $650 billion, or more than a third of their total revenues, from the federal government.
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