Disaster in Detroit
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Yesterday, Detroit filedÂ the largest municipal bankruptcy in US history. Today, a Michigan judge ruled that the bankruptcy planâ€™s move to cut city workersâ€™ pensions violated the stateâ€™s constitution.
Cate Long has been leading on this story since the beginning, and has a good breakdown of why Detroitâ€™s bankruptcy case could be different than recent municipal bankruptcies, should it proceed. Until the 2011 derivatives-fueled bankruptcy of Jefferson County, Alabama, she writes, bondholders were treated with kid gloves. â€śNow the blood has begun to flow,â€ť Long writes.
As Felix wrote last month after looking over Detroitâ€™s Proposal for Creditors, that blood will come partially from unsecured debtholders and their insurers.Â All such debtholders are being treated equally under the plan put forth by Detroitâ€™s Emergency Manager Kevyn Orr. That means holders of unlimited general obligation bonds, typically considered to be the safest in this category of muni debt, will likely get the same deals as holders of unsecured debt. (Detroitâ€™s two biggest unsecured debtors are city retirement funds). This move irked more than a few commentators — including SIFMA and Bloomberg View, which said the plan risks â€śviolating the trust that underlies the $3.7 trillion market in municipal debtâ€ť. (The muni market slumped after Detroitâ€™s filing, but itâ€™s still unclear if itâ€™ll set any precedent outside of Michigan.)
Then there are Detroitâ€™s retirees, who, Felix writes, may be getting the worst of this deal. UBS and BofA will get 75 cents on the dollar in a reported deal with Detroit, the WSJ says, while retirees could get just pennies on the dollar. BlackRock, Jason Windawi, and Long have all questioned whether Detroitâ€™s emergency manager is inflating how big the cityâ€™s pension problems are: accounting changes caused the cityâ€™s unfunded pension liabilities to balloon to $3.5 billion from $650 million over two years, BlackRock says. (This wouldnâ€™t be the first time Detroitâ€™s pension math had been manipulated. More on that multi-decade farce here).
Still, Long writes, â€śDetroitâ€™s pensions are not, on the surface, excessive.â€ť Neither, says Alec MacGillis, is the auto industry to blame. The larger problem, as Matt Yglesias says, is demographic. Detroitâ€™s population has been cut in half to 700,000 since 1970, steadily destroying the cityâ€™s tax base. And MacGillis notes that Detroit encompasses 139 square miles — enough to fit all of Boston, Manhattan and San Francisco in its borders. That land isnâ€™t an asset, he writes: rather, itâ€™s a resource-draining curse. — Ryan McCarthy Â
On to todayâ€™s links: