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    Senior Member JohnDoe2's Avatar
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    Detroit bankruptcy could hit millions of public sector retirees

    Detroit bankruptcy could hit millions of public sector retirees

    John W. Schoen CNBC
    1 hour ago

    Spencer Platt / Getty Images file

    Once American’s third-largest city, Detroit’s population has fallen by a quarter since 2000. A shrinking population further erodes the tax base, intensifying the budget squeeze.

    With its bankruptcy filing, the city of Detroit has entered uncharted territory. It's a dark place that no major U.S. city has ever gone — but that could change.
    Despite the uncertainties surrounding what’s expected to be a hard fought legal battle, the outcome promises to inflict more pain on Detroit’s already-beleaguered city workers, residents, businesses, creditors and investors.

    The case will also set a legal precedent that will be watched closely by other major cities across the country struggling under the weight of years of accumulated debt and underfunded pensions covering millions of public sector retirees.

    "Everyone will say, 'Oh well, it’s Detroit. I thought it was already in bankruptcy,' " said Michigan State University economist Eric Scorsone.

    Read more: Detroit becomes largest city to file for bankruptcy

    "But Detroit is not unique. It’s the same in Chicago and New York and San Jose.

    It’s a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems.”

    The bankruptcy filing follows a decades-long decline of a city that prospered through much of the last century as the capital of U.S. manufacturing. But as that industrial base has declined, so too have the city’s fortunes.

    Video: Detroit is asking a federal judge for permission to go into Chapter 9 bankruptcy protection, reports CNBC's Scott Cohn.

    Detroit has endured booms and busts in the past. But even as the auto industry has roared back to life since the Great Recession, the economic recovery has left the Motor City in its rearview mirror.

    Though unemployment has fallen from a peak of nearly 28 percent in 2009, some 16.3 percent of Detroit workers are still without a paycheck. As a result, income tax revenues have fallen 30 percent in the last decade. Meanwhile, the national recovery in home prices has yet to spread to Detroit. Property taxes are 20 percent lower than 2008 levels.

    As tax revenues have shrunk, the cost of maintaining city services has grown. Tens of thousands of abandoned buildings and vacant lots, and a resulting increase in fires and crime, have increased the burden on firefighters and police.

    Forty percent of the city’s streetlights don’t work.

    “There’s no way Detroit can afford to service 140 square miles anymore,” said Scorsone. “So for parts of the city, if your streetlight’s out, they’re not going to fix it. If your road has massive potholes, it’s going to turn it to gravel. It’s that stark.”

    Many residents have responded by simply moving away. America’s fourth-largest city from the 1920s to the 1940s, Detroit’s population has further fallen by a quarter since 2000. A shrinking population further erodes the tax base, intensifying the budget squeeze.

    cnbc

    As tax revenues have shrunk, the city’s financial obligations have grown — mainly to an ever-expanding pool of 30,000 retirees, promised life-time pensions and health benefits by short-sighted government officials over decades who consistently failed to fund those future obligations. The city now owes more than $18 billion — roughly $25,000 for every resident.

    Union officials, who have vowed to fight any effort to reduce benefits to retirees and vested workers, claim the city has undermined the pension fund by outsourcing city services to workers who don’t pay into the system.

    "As older people leave the workforce, the city has been privatizing those jobs instead of bringing people back in to pay into the fund,” said Ed McNeil, special assistant to the president of Michigan AFSCME Council 25, which represents city workers.

    Union officials also argue the city is owed hundreds of millions of dollars in unpaid taxes that should be collected before retirees are asked to take a cut in benefits.
    “If they went after that money, they could pay their debts,” said McNeil.

    Investors holding Detroit’s bonds have already taken a hit as the steady erosion of the city’s finances has slashed the city's credit rating to junk status. Last month, Kevyn Orr, a bankruptcy lawyer named to restructure Detroit’s debts, declared a “moratorium” on some interest payments.

    In the days leading up to Thursday’s bankruptcy filing, Orr had been working with individual creditors to renegotiate those debts at a dime a dollar.

    That could help close the gaping financial hole in the short run. But inflicting too much pain on bondholders could have dire long term consequences, according to Kim Rueben, a senior fellow at the Urban Institute who specializes in municipal finance.

    “You don’t want to have to do that because you want to keep your ability to borrow again to rebuild your city,” she said.

    Video: Chairman of the Detroit Blight Authority, Bill Pulte is looking to get rid of the dangerous homes in the depressed city of Detroit. He is working to stabilize the city and help fix the suffering public safety issues by decreasing the number of abandon ...

    Orr must now convince a bankruptcy judge to invalidate the city’s pension contracts, freeing him to reduce payments to retirees. The unions' lawyers will argue that pension and health benefits are protected by Michigan’s constitution, one of seven states that specifically ban cuts in retiree pension and benefit payments.

    That’s why the case will be closely watched by states like Illinois and California, which also have badly underfunded their pensions. If Detroit is allowed to cut payments to its retirees, city and state workers in those states and others could see their future benefits pared back.

    Future public sector workers can all but count on lower retirement benefits, as many state and local governments scale back the kind of financial promises that sank Detroit. With retirees living longer, those promises have become too costly to make.

    “I think there is going to need to be an understanding with public employees that working for 30 years and being able to have a pension for that much time or longer is not sustainable,” Rueben said.

    The crisis is also being watched closely in the White House.

    “The President and members of the President’s senior team continue to closely monitor the situation in Detroit," Amy Brundage, a White House spokeswoman, said. "While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America's great cities.”

    http://www.nbcnews.com/business/detroit-bankruptcy-could-hit-millions-public-sector-retirees-6C10681571
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    Here are some of the most notable examples of bankruptcies that hit U.S. towns and counties.



    Photo: AP Moffett, Okla.

    Year of filing: 2007

    Just a few weeks after the Oklahoma Legislature passed a bill that included a clause keeping the town of Moffett from issuing speeding tickets on a four-mile stretch on U.S. Highway 64, the town filed for bankruptcy . The issuance of these speeding tickets was reported to account for 78 percent of the Sequoyah County town’s revenue, crippling Moffett’s ability to pay down $200,000 in outstanding debt.

    On top of the town’s sudden loss in revenue were allegations that now-deceased mayor, Billy Yandell, had incurred debt that was never disclosed to the village’s board of trustees. Among the debts were credit purchases of $3,200 from Dell Computer, $4,900 from Lowe’s Commercial Services, as well as $16,183 owed to AWA, a collection agency in Orange County, Calif. Moffett also owed $95,000 for two vehicles it had previously purchased. Court filings showed the town had $43,000 in assets and almost $200,000 in liabilities.


    Photo: Westfall Township, PA | FacebookWestfall, Pa.

    Year filed: 2009

    Following several crippling lawsuits, Westfall, Pa., was pushed to file for Chapter 9 bankruptcy in early 2009. At issue was $ 20 million dispute over payments to a developer after the town’s supervisors halted a 1,500-unit residential project.

    At the time, Westfall was in good economic health, but the burden of a $20 million debt was too much for the 2,400-resident township, which had an annual revenue of only $1 million.

    The bankruptcy allowed for the restructuring of the initial debt to a more manageable $6 million, which was to be repaid in $75,000 increments per quarter over 20 years. The town funded this through a property-tax increase that amounted to about $200 per year for the average homeowner. The circumstances of Westfall’s bankruptcy are rare, since the town’s obligations stemmed from a single large judgment, rather than debts owed to a multitude of creditors.


    Photo: John Colleti | The Image Bank | Getty Images Jefferson County Ala.

    Year of filing: 2011

    On Nov. 9, 2011, the biggest such bankruptcy to date in U.S. history was filed. J

    Jefferson County, home to Birmingham, the state’s largest city with 212,237 residents, opted to file for bankruptcy after the county failed to restructure over $3.1 billion in sewer bonds.

    The sewer bonds were issued following a 1996 incident where the federal government accused the county of leaking sewage into the area’s river systems and required them to upgrade the sewers . The eventual bankruptcy resulted from not only the problems with the county’s sewers, but also the overall economy, court rulings and political corruption, according to The Associated Press.


    Photo: AP Central Falls, R.I.

    Year of filing: 2011

    Central Falls, the smallest city in the state of Rhode Island, filed for Chapter 9 bankruptcy in August 2011.

    The Central Falls economy began its decline in the 1970s with the departure of textile manufacturers, and between 1997-2000, at least 11 textile plants closed .

    In addition to the declining economy, the city had $80 million in pension obligations and retiree health benefits on its books, many of which were promised to police officers and firefighters. During this time, the city was significantly underfunded, with an annual budget of $17 million for these benefits, pushing it to file for bankruptcy. As part of a restructuring, pensions were slashed, staff were laid off, library funds were cut and the city closed a community center.

    http://finance.yahoo.com/news/u-s--municipalities-that-went-bankrupt.html
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    Senior Member JohnDoe2's Avatar
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    Detroit's Filed For Bankruptcy, What Happens Next?
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    Detroit declares bankruptcy, with $18 billion in debts


    By Tina Susman and Matt Pearce The city files for Chapter 9 four months after the appointment of an emergency financial manager. 'Let me be blunt: Detroit's broke,' says Michigan's governor. . .
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    Judge selected to oversee Detroit bankruptcy

    Tresa Baldas and Brent Snavely, Detroit Free Press 8:15 p.m. EDT July 19, 2013

    A Detroit-area lawyer describes U.S. Bankruptcy Judge Steven Rhodes fair but tough.


    U.S. Bankruptcy Judge Steven Rhodes.(Photo: Courtesy of Detroit Legal News Publishing)
    Story Highlights


    • Outside of courtroom, Rhodes plays class-rock guitar
    • He has been federal bankruptcy judge in 6th Circuit since 1985
    • Rhodes graduated from University of Michigan Law School


    DETROIT -- U.S. Bankruptcy Judge Steven Rhodes, one of Detroit's most experienced judges, has been picked to oversee the city's historic bankruptcy case, the biggest such filing in U.S. history, involving more than $18 billion in debts that officials say piled up over 60 years.

    Detroit's financial fate will rest in the hands of a hometown judge, who has more than just legal skills. Outside the courtroom, Rhodes plays rhythm guitar in a classic rock band called The Indubitable Equivalents, according to the band's website. The group says it's the band of the American Bankruptcy Institute (ABI), a trade association for bankruptcy professionals, and that Rhodes picked up his guitar skills from his father at the age of 15, later serenading his wife with tunes such as "Sound of Silence" and "Eve of Destruction."

    The latter song is fitting for the municipal bankruptcy case.

    Rhodes has been a bankruptcy judge in the Eastern District of Michigan since 1985 and graduated from the University of Michigan Law School.

    Some local bankruptcy attorneys, who declined to be named because they practice before Rhodes, describe his demeanor as unpleasant and difficult.

    STORY:
    Mich. judge rules Detroit bankruptcy unconstitutional
    STORY: Orr says time, not lawsuits, led to Detroit bankruptcy

    Southfield bankruptcy attorney Neal Brand, who has handled dozens of cases before Rhodes, believes he is the perfect fit for Detroit's bankruptcy case. He described Rhodes as a fair judge who gives second chances but doesn't like to have his time wasted by ill-prepared lawyers, and "he doesn't take bull----."

    "He knows what (lawyers) are going to do, what they're going to say, and he's always ready for it," said Brand, who believes no lawyer will sneak anything past Rhodes. "No one is going to trick him. He's going to force the attorneys to be in their A-game."

    Some of the judge's toughness was demonstrated in a 2005 head-to-head debate, in which Rhodes took on noted UCLA law professor Lynn LoPucki about various controversial aspects of bankruptcy law.

    LoPucki, a nationally recognized bankruptcy law specialist, had written a book titled Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts.

    During the debate, Rhodes attacked LoPucki's theories and took issue with the book.

    "The bottom line is that this book is an inflammatory attack on the judges in New York and Delaware,'' Rhodes told LoPucki at the time.

    STORY:
    GM CEO: Auto industry had role in Detroit fiscal slide
    STORY: Detroit bankruptcy: What will happen next

    In recent years, Rhodes has handled bankruptcy cases such as Awrey Bakeries, Simplified Employment Services and Collins & Aikman, a complex case that involved large debts resulting from an aggressive acquisition strategy.

    Rhodes taught at the University of Michigan Law School from 1992-2002 and is a former associate editor of the Michigan Law Review and American Bankruptcy Law Journal.

    Before becoming a bankruptcy judge in the Eastern District of Michigan, he served on the Bankruptcy Appellate Panel of the U.S. 6th Circuit Court of Appeals.

    He also formerly served as a law clerk for U.S. District Judge John Feikens, who oversaw Detroit's troubled water department. Last year, he co-authored The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.

    Rhodes was handpicked to oversee Detroit's bankruptcy case by Alice Batchelder, chief judge of the U.S. 6th Circuit Court of Appeals, a conservative who was appointed to the federal bench by former President Ronald Reagan, and to the appeals court by President George H. W. Bush.

    http://www.usatoday.com/story/news/nation/2013/07/19/judge-selected-to-oversee-detroit-bankruptcy/2570417/
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