Thursday, July 18, 2013

Detroit files for Chapter 9!

Today, emergency manager Kevyn Orr filed for Chapter 9 bankruptcy as he was unable to obtain "secure agreements with enough bondholders, pension funds, and other credits to restructure the city's debt out of court"(http://blogs.wsj.com/moneybeat/2013/07/18/detroits-bankruptcy-40-of-street-lights-dont-work-66-of-ambulances-out-of-service/) Governor Richard Snyder wrote (http://l.yimg.com/dh/ap/default/130718/C4208687718.PDF) to Kevyn Orr and Andrew Dillon (State Treasurer in Michigan), "I have reached the conclusion that this step {filing Chapter 9} is necessary after a thorough review of all the available alternatives, and I authorize this necessary step as a last resort to return this great City to financial and civic health for its residents and taypayers. This decision comes in the wake of 60 years of decline for the City, a period in which reality was often ignored." Gov. Snyder concluded after reading Mr. Orr's Financial and Operating plan in conjunction with a report to creditors that filing Chapter 9 bankruptcy protection is:"

  1. Right now, the City cannot meet its basic obligations to its citizens.
  2. Right now, the City cannot meet its basic obligations to its creditors
  3. The failure of the City to meet its obligations to its citizens is the primary cause of its inability to meet its obligations to its creditors
  4. The only feasible path to ensuring the City will be able to meet obligations in the future is to have a successful restructuring via the bankruptcy process that  recognizes the fundamental importance of ensuring the City can meet its basic obligations to its citizens."
The city of Detroit is estimated to be $18.5 billion in debt. At first thought one may ponder the thought of why doesn't Detroit raise taxes to cover the obligations. Gov. Snyder stated in his letter, reference above, "a vital point in Mr. Orr's letter is that Detroit tax rates are at their current legal limits, and that even if the City was legally able to raise taxes, its residents cannot afford to pay additional taxes." 

Unfortunately, Detroit is just a microcosm of poor management by our government officials of taxpayer money and the bloated pension funds of public union workers. In the private sector if a company files Chapter 9 and a pension exists concession are made on behalf of the pension group. Public Unions feel entitled to their pension funds despite the fact that their underfunded pension is an obligation that the city, state or country cannot meet. In Detroit, two of the biggest bond holders agreed with Mr. Orr on a plan to get some money back for the money borrowed while the Public Union gives up nothing. 

If Americans don't wake up soon, Detroit will not be the last major city to file Chapter 9. Governments need to re-tool their budgets with everything on the table. No sacred cows exist. A bailout is not an option. I as a Minnesotan do not need to bailout Detroit for their bad decisions over the past 60 years nor does any other American need to.