Kevyn Orr told Detroit’s creditors today it is game over.
Detroit is now out of the business of fooling itself and its residents and the rest of the world that it can pay its bills. Things are bad now, but because the city’s leaders over the last generation kicked the financial can down the road the city’s obligations are even more onerous in the years to come.
By 2017, based on the way the city does business, 60 cents of every dollar the city would spend would go to paying legacy costs which are pensions and retiree healthcare. Yes, you read that right; Detroit would be spending more money on its former employees than its current employees or operations. It is entirely unsustainable and Kevyn Orr says it ends here and now.
His report today is a sobering look at big government spending run amok, so to fix that he will do a number of things immediately. Today he announced he will stop making payments on the city’s bond debt. That’s a standard practice when bankruptcy is looming, and clearly it is here. Orr will move employee and retiree healthcare over to Medicare/Medicaid and so called Obama care Exchanges [that currently don’t exist].
Pensioners can expect to receive reduced pension payments. Just how much those numbers will go down is a moving target and Orr won’t give us the specifics today. He also made a sobering and startling admission. The City of Detroit General, Police and Fire Pension Funds are Under Funded. This is of great concern and it is likely going to get the federal court system running a little quicker. He admitted the investments the Pension Funds have made and the loans they have given to business people as investments have in large measure not panned out.
They did not follow the usual prudent pension guidelines of bonds or blue chip stocks. Therefore we can expect further investigations into those improper investments and the fact that Detroit City officials deliberately hid these problems. Orr and his staff say they are still trying to figure out how poorly funded the pensions are and will not say today and there is a reason. As I have written previously if the pensions are irretrievably underfunded the Federal Government’s requirements to pay can only be unwound by a bankruptcy court.
Therefore the City would be forced into Chapter 9 Municipal Bankruptcy. Orr can’t go there today because under the emergency manager law he has to establish that he made a good faith effort to negotiate settlements with creditors before going to Chapter 9. We will be watching this corner of the process like a hawk!
Finally Orr and his team say the City of Detroit is falling apart at the seams. Their job is to not only fix the finances; it’s also about making the City work the way it is supposed to. So they are budgeting more than a billion dollars over the next ten years to do things like knock down houses, fix the street lights, add public safety officers and improve operations on every level. It’s a "Quality of Life" concern that they say is a must to restore Detroit to a properly functioning city.
Orr and his team today said to us in the media Detroit runs pretty much like no other city in America and it shows. It is their intent to get the city on board with operating the proper way, the way you can provide good services, grow jobs and feel safe walking down the street.
Oh, and one final thing: One of the more controversial issues that has arisen during the “they’re trying to steal our jewels” protests was the possible sale of the Detroit Water Department. Orr attempted to allay fears by announcing that the city is negotiating a regional water authority much like the Cobo Center program that would have surrounding counties pay the city to participate.
It is a lease deal, not a sale. Orr said if the counties don’t come up with enough money they’ll figure out something else. But, he will NOT sell the Detroit Water Department. The party is over, the pain will be great.