Rod Meloni: Real deal behind Detroit's restructuring plan

Detroit emergency manager hands city creditors lengthy restructuring proposal

By Rod Meloni - Reporter, CFP ®
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DETROIT - You can spend hours reading through Kevyn Orr's turnaround plan here on and you will learn much about what plagues the City of Detroit.

You will for instance read what should or would seem impossible anywhere else. The payroll computer is 1990s technology and has never worked properly. It is no longer supported by its manufacturer and most of the input for the system is accomplished by hand. That makes the city's cost of doing payroll for ten thousand employees four times more expensive than any other comparably sized American city. Page after mind numbing page, everywhere you look in the city's operations, problems like this exist.

After a while it all bleeds into one bleak looking picture. But you are looking for the stuff that's between the lines. You want to know what's really going on here to understand what has happened and what is likely to happen. Here is the deal.

Rod Meloni: The D's turnaround is here

The City of Detroit and many other governmental agencies across the state are built on the old General Motors business model. Yes, there was a time when General Motors was the richest biggest and best company in the world. Defined benefit pensions and lifetime healthcare created cradle to grave benefit payments families came to rely upon. Couple those with management approved union work rules that protected boundless numbers of employees but ignored the core business.

View/download PDF: City of Detroit Proposal for Creditors

It was a massive distortion of reality. At the end of its former life General Motors was a healthcare provider that just happened to build cars. When the federal government got a look at that financial rat's nest it did the only thing it could to preserve the company and its workers, push the reset button through bankruptcy. Using millions upon millions of government dollars it bailed out the company. So, how could anyone who understands this failed business model reasonably believe any entity similarly constructed would somehow survive? [Can anyone say Chrysler or Kmart?]That is where the City of Detroit finds itself. It is a bloated, outmoded, impossibly expensive jobs program masquerading as a service provider. This too is the world turned upside down. Beleaguered residents pay the highest taxes in the state and yet get the worst of all possible city services anywhere.

Kevyn Orr put this mess into perspective today when he said you have 10,000 employees in the city, 20,000 retirees and 700,000 residents living in the city. When you consider the 30,000 scoop up the lion's share of the money something is askew. Here's an example of how that works. Looking out into the future, by 2017 the City of Detroit left in its current state would be spending 60 cents of every dollar just paying for the retiree benefits. Now that the city has borrowed until no one will lend it another dime and it's turned on itself, surviving only on its own pension funds lending it money, there is nowhere else to turn. You either negotiate a settlement or you go into Chapter 9 Municipal Bankruptcy.

Well, as you read the report, think of yourself as the federal government looking in on General Motor's financial rats nest. Realize that the City of Detroit's financial condition is so bad makes the old GM look like Toyota! Now, Kevyn Orr must negotiate by law to try and avoid bankruptcy and that is exactly what he is doing right now. He says it's a 50/50 shot bankruptcy is avoidable. He has to say that and claims it will take him 30 days to figure out whether an out of court settlement is possible.

When he says that is his goal there is no doubt he wants that outcome. But he left out one important little item from today's presentation, the most important number of all: the size of the general, police and fire defined benefit pension underfunding. By how much is the question? Should those numbers be the size city hall insiders tell me they are, there is no doubt the nation's largest ever Chapter 9 is inevitable. The real deal here is we are seeing here is the extinction of a dinosaur, collapsing under its own weight. The sad part is a lot of people who actually did work hard and retired assuming all they worked for will come their way are going to be left holding an empty bag. That is a kind of pain no one should have to endure yet many will.

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