Happy Public Finance Story: The Bankruptcy of Detroit Brings Good Results
by meep
I’m getting a bit tired of all this doom-and-gloom (there is plenty to be found without trying hard), so I thought I’d highlight something good on Wednesdays for now.
So: the bankruptcy of Detroit.
WAIT! Don’t go!….
[…that’s what New York said when it heard AllianceBernstein is leaving to New York for Nashville, and taking a thousand jobs with it…]
Where was I?
Look, the story isn’t exactly happy – that Detroit went into bankruptcy is not a good thing.
But given where it was, bankruptcy was the only thing that gave it a chance to come back.
HAPPY NEWS: DETROIT IS RESPONSIBLE FOR ITSELF AGAIN
For my first part, let’s go with the official press release from the city govt of Detroit itself:
The State Financial Review Commission, which was created in late 2014 to oversee Detroit’s finances as it emerged from bankruptcy, voted unanimously today to end active oversight after the city delivered its third consecutive audited balanced budget.During its three years of active oversight, the FRC had final decision making power on all city budgets, collective bargaining agreements and contracts larger than $750,000.
The FRC will continue to exist for a 10-year term, although it will play no active role in City of Detroit operations. The city will be required to submit monthly financial reports, and will also submit its adopted budget and 4-Year Financial Plan each year. So long as the city continues to balance its budgets and meet other basic fiscal requirements, the FRC will stay inactive for the rest of its existence.
And here’s a diagram to give you some perspective:
And a news piece:
Detroit in full control of self for 1st time in decades
Detroit — The city emerged from state oversight Monday in a historic milestone that ends the last vestige of Detroit’s bankruptcy and marks the first time in four decades that the city has full control of government operations.
The restoration of local control comes as Detroit touts stabilized finances with a projected $36 million surplus in fiscal year 2018, increasing property tax revenues and a plan to have $335 million set aside by 2024 when the city resumes pension payments.
The nine-member financial review commission voted unanimously Monday to release Detroit from the state’s oversight. Since 2014, the commission has had the final say on all city budgets, collective bargaining agreements and contracts larger than $750,000.
“Today is one of the most important days that I’ve had since I’ve been on council,” Council President Brenda Jones said after the commission meeting. “It’s an important day for the history of the city of Detroit.”
Celebration!
SEPARATE HAPPY NEWS: BUSINESSES INVESTING IN DETROIT
I didn’t go seeking this one out — I’m on a lot of different mailing lists, including Working Knowledge from Harvard Business School. This story caught my attention:
Why JPMorgan Chase Is Investing Millions in Detroit
In Detroit, JPMorgan Chase is working with local economic- and workforce-development organizations, small businesses, philanthropies, and the mayor. The goal? To put in place a series of investments to help turn around the struggling city. Professor Joseph Bower and JPMorgan’s head of corporate responsibility, Peter Scher, discuss why businesses should create philanthropic programs of their own.
….
Scher: Jamie often gets asked, “What’s the one thing we can do?” There’s never one thing. You had blight, you had no real estate market, per se. The population was continuing to decline. So all of the objective criteria for urban growth was absent. Blight was both a symbolic and real sign of the deterioration, and the mayor had just set up the Detroit Land Bank, so we made a number of early investments in addressing blight particularly using technology.We created with a local firm an app that people could use to take pictures of blight, of properties, and feed that information back into the Detroit Land Bank, so they could make better decisions. We called it Motor City Mapping. It was so successful that we have now taken that technology to three cities in Ohio: Cleveland, Columbus, and Cincinnati. Again, part of the theory was if you can resolve blight in Detroit, you can resolve it anywhere, so blight was a big early focus. Residential development was a big early focus. Commercial developments, skills, small business. We were really focused, as the study lays out, on areas where we have unique skills and expertise and resources that we can bring to bear.
Sure, blight isn’t happy, either.
But actually documenting where it is, and how extensive, is really important in making sure one knows where things need to be done.
I had an example of the deterioration of a neighborhood in an old post. There were loads of people who simply up and moved away from Detroit, especially once the credit bubble burst. This hit city revenues a lot.
Bower: When we were writing the case, we heard from both sides. Guys in the mayor’s office saying that what’s really interesting now is I can pick up the phone and call someone at JPMorgan about a problem, about specifics, because they know they’ve got knowledge that can really help me. The reverse was also true. People in the bank were kind of thrilled that someone from the mayor’s office was calling and asking what they knew. It was really powerful.
Scher: One of our rules of thumb now is that if the only thing we’re doing is writing a check, that’s considered a failure. When you take this business-like approach to solving these problems, the scale that you can get to is enormous.
Kenny: Back to your point about the excitement within JPMorgan about this. I would imagine that this is helping you rebrand JPMorgan to the millennial generation who are going to be so important to the future of your company, right? They want to be involved in an important way in these kind of things.
Scher: It’s interesting. I didn’t think of this certainly when we started, but it is a big part of how we recruit on campuses. Look, millennials want to be part of firms like ours. They may want to make a lot of money, but they also want to feel like they’re having an impact. When you tell them you can join a firm in which you have an opportunity to be a part of this program and go help a community, it’s a very powerful thing. We do a debrief with everyone who’s been on the service core, and they will tell us it’s been the most impactful and meaningful professional experience. Our odds of retaining that talent will pay for itself beyond anything else in terms of the cost to a company, in terms of lost talent. I think the benefits to the firm across so many criteria are just enormous.
It’s not just a Millennial thing. People want to think that their expertise is important, that they actually have some sort of meaning in what they do. It feels really good to think that you’re helping a city rebuild out of a large hole.
I highlighted the one line because I want to note that he didn’t mention it was only young folks feeling good about their experience. One can lose mid-career folks, and even close-to-retirement folks who can still contribute productively to the company…why not give them a positive, meaningful experience outside their usual work? I think that really is a win-win situation.
Look, I understand a lot of these types of initiatives are happy-slappy-hippie-dippie shit. That said, there is a lot of knowledge and skill in these companies. I think that if they are really allowed to accomplish stuff in the public sphere, this is a true win-win.
BACKGROUND READING
The best item for understanding the whole bankruptcy wheeling-and-dealing is Nathan Bomey’s book Detroit Resurrected, which I reviewed in this post.
He gets into some of the details how Detroit got into its mess, but the book is primarily about getting to bankruptcy court and the negotiations that went on to get a deal together.
I have a few posts from before the bankruptcy process was finished (we started STUMP about a half year after the process started, so I just got the end bits):
- 9 April 2014: Public Pensions Watch: Detroit Deal – the Basics
- 3 August 2014: Detroit Bankruptcy Watch: What, exactly, is up? Down? Whatever?
Woot.
CLOUDS ON THE HORIZON
So, that’s my happy story.
Okay, I can’t leave it there. At the time the bankruptcy court ruled things were settled, I noted the following:
Detroit Bankruptcy: It’s Over, But It’s Not
Last week, Detroit’s bankruptcy plan was approved, and the judge overseeing the process has given “Detroit the go-ahead to implementing its bankruptcy exit plan.
Thing is, there are several clouds looming over Detroit, the main one being its pensions
…..
This is a problem for Detroit. Even if they didn’t have various parties suing and appealing over the bankruptcy workout, or huge fees paid to consultants and lawyers as part of the plan, they could be seeing a return to bankruptcy court when they really can’t pay the pensions.
And it’s worse than you may think.
Because the Detroit Public Schools weren’t part of the workout (kind of like how the Chicago Public Schools are separate from Chicago…)
But the point is that it wasn’t totally a fresh start. Some obligations are still hanging on the city. As noted in an earlier post, the Detroit Public Schools were separate from all this…. And they’re not in the best of shape, beyond dismal education. Their financial picture is ugly. Then there are a few ongoing lawsuits, but I haven’t checked their status lately. I believe the deals made as recounted in the book will hold for now.
And the DB pensions still exist. They’ve not been wrapped up in a captive insurer, like a life insurance company does when it cuts off a line of business and tries to manage what we call a run-off block. When the insurer does that, it has the capital and reserves to back that business (and hopes no additional capital) and then it can walk away from worrying about it. But even with pensions cut, there is still an unfunded amount. I haven’t looked at the recent numbers, and there should have been at least one actuarial valuation since the bankruptcy closed….
And I haven’t looked at the Detroit pensions lately. There are two Detroit pensions in the Public Plans Database, Detroit Police and Fire and Detroit RS.
Supposedly, they didn’t get any contributions for FY 2015 and FY 2016. At least, what I’m seeing in the PPD shows that. Maybe it’s just missing data…. but they’ve got the funded ratios for those years in there, so I don’t think that’s it. The funded ratio of neither plan looks good.
And here’s the Bloomberg take:
Detroit Exits State Oversight as City Mounts Fiscal Recovery
Given the losses that investors took in bankruptcy, even that may be optimistic, said Gabe Diederich, portfolio manager for Wells Fargo Asset Management, which oversees about $40 billion of state and local bonds, including what was formerly Detroit water and sewer debt.
“The city continuing on a step ladder toward improvement, that is a very good thing for their citizens and I think investors,” Diederich said.
“But the economic conditions in Detroit, while improved, still don’t convey material strength,” he said. “While the core has gotten better, you still are surrounded by a ring of pretty distressed areas.”
A full recovery for a municipality the size of Detroit may take more than a decade, said James Spiotto, managing director at Chapman Strategic Advisors, which advises on financial restructuring. The city needs to reinvest, focus on economic development and attracting businesses and residents, he said.
“You’ve got to stay the course,” Spiotto said. “You’ve got to keep fiscal responsibility as a key issue.”
Sandy Baruah, president and chief executive officer of the Detroit Regional Chamber, a business group, is optimistic. He said investment has increased because the private sector is “voting with their feet” and checkbooks.
“When I moved here in 2010, downtown was pretty much dead all the time,” Baruah said. “Now it’s pretty much vibrant all the time. It’s a pretty significant change.”
While parts of Detroit are thriving, others are still economically-depressed and crime-ridden, said Luther Keith, executive director of Arise Detroit, a neighborhood community group. There’s still a “significant number” of residents who feel the progress hasn’t come to their block because the improvements aren’t as widespread as they should be, he said.
“We have not recovered,’’ Keith said. “We have not completed the comeback. We are coming back. There are signs of that, but we still have huge, huge issues that we are confronting, but we are moving the needle in the right direction.’’
It’s mixed.
And to exit with: Detroit released from state oversight; expensive debt and pension bills loom | MLive.com
Detroit’s chief financial officer said the city’s biggest unresolved financial challenges will come in 2024, when the city will begin paying roughly $160 million per year toward the pension systems that currently cover 30,000 former city employees and $70 million toward unaddressed debts.
Both of Detroit’s pension systems, one for general employees and another for police and firefighters, are currently underfunded.
The general pension is funded at about 65 percent and the police and fire pension at 75 percent, according to Kevin Kubacki, executive director of the Financial Review Commission.
So….. uh, yay.
This is about as happy as I can get re: public finance.
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