Another day, another US city on the brink of insolvency. This time it's Detroit, whose recently appointed emergency financial manager Kevyn Orr said may run out of cash next month and must cut costs such as long-term debt and retiree obligations. According to Bloomberg [10], "Orr’s report says the cost of $9.4 billion in bond, pension and other long-term liabilities is sapping the ability to provide such basic services as public safety and transportation. He listed cutting debt principal, retiree benefits and jobs among options he may take. “No one should underestimate the severity of the financial crisis,” He called his report "a sobering wake-up call about the dire financial straits the city of Detroit faces."
Funny, the above bolded sentence, because we have long since crossed into a stage where absolutely everyone is underestimating the severity of the financial crisis, which incidentally is long over if one listens to the broader media. As for Detroit, may we suggest the same medicine that the "expert economists" prescribe for every other instance of overlevered insolvency: just issue more debt. Surely with worthless Greek bonds soaring, there must be some Japanese investment funds that can't wait to buy up all that paper on nothing but promises of untold riches courtesy of the endless carry trade that apparently can do no wrong.
Then again, Detroit may not be Greece:
The Motor City is caught in a downward spiral of revenue from a shrinking tax base -- it has lost two-thirds of its postwar peak population -- while unemployment at 18 percent is twice the state level, according to Orr’s report. Managing an area larger than Boston, San Francisco and Manhattan combined has become increasingly difficult.
“Without a significant restructuring of its debt, the city will be unable to break the cycle of damaging cutbacks in essential municipal services and investments,” according to Orr’s report. He also cited the need for concessions from unions, and revamping the police and fire departments to protect residents beset by crime and arson-inviting blight.
Detroit’s long-term obligations are at least $15.7 billion, including unfunded pension and retirement benefits. The general fund this fiscal year, with revenue of about $1.1 billion, will pay about $461 million for debt and health costs, according to the report.
All the city’s revenue couldn’t pay off its debt in 20 years, said Bill Nowling, a spokesman for Orr.
“If we don’t change and restructure, we are going to run out of cash,” he said yesterday by telephone. “That shouldn’t come as a shock to anybody.”
Maybe Detroit can pull a Cyprus and just confiscate a few billion from the savings accounts of the locals. Oh wait.
So with that option out of the picture, the only other one is to scare everyone into the domino theory of M.A.D. unless someone ponies up and injects some more good money after bad:
“We want to be very clear and strong: This is exactly the situation the city is in, and our creditors need to know that,” Nowling said. “Some do. A lot don’t.”
Orr’s plan lays out alternatives for dealing with long-term debts, including reducing interest rates, stretching out payment schedules, outright forgiveness of principal or refinancing. The city’s credit rating is below investment grade.
It will be difficult to reach consensus among debt holders, said Doug Bernstein, a bankruptcy lawyer with Bloomfield Hills, Michigan-based Plunkett Cooney PC. Curbing pension benefits will be crucial to gaining an agreement from bondholders to cut debt costs without resorting to bankruptcy-court protection, he said.
“That’s an optimistic view, that you can do it by consensus,” Bernstein said. “Maybe when they read the numbers, they’ll agree. But given the number of different credit classes and collective-bargaining units, I don’t see them conceding voluntarily.”
So if a collective effort of sticking heads in the sand here is out of the question, the only other option is bankruptcy. Sure enough:
Orr’s report is probably a prelude to the city’s seeking Chapter 9 bankruptcy protection, said Manny Grillo, the New York-based head of restructuring practices for Goodwin Procter LLP. He said there are too many creditors, including 48 employee unions, to reach a consensus without court intervention.
“No one is ever going to be the first to cut a deal,” Grillo said. Michigan, led by Republican Governor Rick Snyder, may step in with financial help “to fill in the gaps” only after deals have been struck to lower debt costs, Grillo said.
And just in case there is any confusion about what the future holds for the once proud headquarters of America's automotive genius, the next steps include the city going dark. Literally.
Orr wants to continue an effort to turn over the aging streetlight system to a public lighting authority by 2020. The plan calls for eliminating almost half of 88,000 streetlights, concentrating replacements in more populous areas. The plan also says Detroit should exit the business of supplying electricity to businesses and municipal operations.
Finally, the vision of the creator of RoboCop, which was set in a crime-ridden Detroit in the "near-future" seems to have been 100% spot on:
Hiring a new police chief and restructuring the department will happen soon, Nowling said. Given cuts in the city workforce over the past few years, additional employees may be needed in the short term to implement more efficient practices, including the replacement of outdated computer systems, according to Orr’s plan.
So will the Detroit PD soon be staffed entirely by bulletproof cyborgs as a cost-cutting strategy? Perhaps they can be funded by whatever profits the robotic vacuum tubes that are the only traders left in this farce of a market. And what happens once said robocops begin a universal suffrage and demand a legal right to vote in one of their robotic brethren into public office?
Surely, more insane things have happened in the new centrally planned abnormal.