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After months of speculation, Detroit finally filed for Chapter 9 bankruptcy protection. The move is not a surprise after decades of mismanagement, population flight and loss of tax revenue. Diane and her guests discuss what’s next for the Motor City and its citizens, investors and employees.
- Stephen Henderson Editorial page editor at Detroit Free Press.
- Jennifer Bradley Fellow of the Brookings Institution Metropolitan Policy Program and co-author of "The Metropolitan Revolution."
- Steven Kreisberg Director of Collective Bargaining & Health Care Policy at American Federation of State, County and Municipal Employees, AFL-CIO.
- Douglas Mintz Attorney at Orrick Restructuring Group.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. After months of speculation, Detroit filed protection on bankruptcy protection last week. The move is not a surprise after decades of mismanagement, population flight and loss of tax revenue. Joining me to talk about what's next for the Motor City and its citizens, investors and employees: Douglas Mintz with the Orrick Restructuring Group, Jennifer Bradley of the Brookings Institution, and Steven Kreisberg of the American Federation of State and County and Municipal Employees.
MS. DIANE REHMJoining us from a studio at the WDET in Detroit, Stephen Henderson of the Detroit Free Press. We all talk not only about Detroit but how other cities on the verge of bankruptcy could be affected by what's happening in Detroit. So I welcome your questions, comments, 800-433-8850. Send us your email to firstname.lastname@example.org, follow us on Facebook, or send us a tweet. Thank you all for joining us.
MS. JENNIFER BRADLEYThanks. Glad to be here.
MR. STEPHEN HENDERSONThank you.
MR. STEVEN KREISBERGGreat to be here.
MR. DOUGLAS MINTZThanks for having us.
REHMGlad to see you. Stephen Henderson, let me start with you. As of today, where do we stand?
HENDERSONWell, the city filed for bankruptcy last Thursday in the southeast district court here in Michigan. We expect that this week maybe as early as today or tomorrow the judge who's been appointed to oversee the case, a bankruptcy judge here, named Steve Rhodes, who's got a lot of experience with these kind of matters, we expect him to hold a hearing pretty quickly to start docketing this case.
HENDERSONAlready there are some requests in front of him to start dealing with the various interests that are involved here, some of the claimants that we expect to come into court, namely the pensioners. So right now, we're in a little bit of a holding pattern because of the weekend, but we expect that things are going to move pretty quickly the next couple of weeks.
REHMBut tell me about this petition to freeze the bankruptcy process made by the 20,000 retirees.
HENDERSONYeah. Well, they went to state circuit court last week to try to essentially head this off before it even gets going. Their claim which is one of the claims is going to have to be resolved in federal court anyway is that the constitutional protection that we have here in Michigan which is to my knowledge at least unusual if not unique in the nation, the constitutional protection for pensions in their view prevents the city from going into a Chapter 9 bankruptcy where pensioners would be in line essentially behind lots of other interests.
HENDERSONIn their view, I think they would say that that our constitutional protection of pensions puts pensioners essentially at the front of the line where you'd find secured creditors in a normal bankruptcy proceeding. And so what they're trying to do is have that matter adjudicated first in state court before the federal court would get to rule.
HENDERSONNow, of course, I think we all know that, you know, the rules of federal procedure and the supremacy clause of the U.S. Constitution probably suggests that that matter will be set aside. Everything should come under the federal bankruptcy judge to decide in federal court, not in state court, but certainly, the state court judge has not acquiesced on that point as of yet.
REHMStephen Henderson, he's editorial page editor for the Detroit Free Press. But, Steven Kreisberg, doesn't constitutionality here trump what the bankruptcy court is trying to do?
KREISBERGWell, I would hope so. The citizens of Michigan do you have a Constitution, and they adopted that Constitution that does provide the pension protections, as the other Steve pointed out. Now, it's well known that the federal bankruptcy courts do have tremendous jurisdiction, very large jurisdiction regarding contracts and setting aside contracts. But there are actually three separate cases that have been filed in court.
KREISBERGAnd I think it's important to realize that one of them actually challenges the law itself that gives the right to the governor to implement a Chapter 9 proceeding. And that particular suit really is not directed at Detroit or the city -- the emergency financial manager, Kevin Orr. It's really directed at the law itself and challenging the constitutionality of that law to the extent that it allows the governor and his financial manager to impair the pension obligations.
REHMSo it sounds as though you've got a long process ahead before you actually get to the bankruptcy.
KREISBERGI think so. I think under any normal circumstance these Chapter 9 bankruptcies seem to take a very, very long period of time. If we look at Stockton, Calif., it's been filed about a year ago, and they really still are dealing with procedural issues at this point. Bankruptcy is a very inefficient process and probably not well-suited to dealing with the various claims from our perspective at least.
KREISBERGSo what we're looking at in a sense in Michigan right now is something that we consider a constitutional crisis. You've got a governor who had adopted a financial manager law last year, and the voters decided to set it aside in November. They voted to repeal that law. In a matter of weeks, he re-enacted virtually the same exact law despite the will of the people.
KREISBERGA few short months later, he's authorized a bankruptcy filing to impair pension obligations which are constitutionally protected. So we know that Gov. Snyder has an agenda. We're just not sure that it involves the representation of the citizens of Michigan.
HENDERSONOne thing I'd want to make clear...
HENDERSON...is, yeah, it's true that P.A. 436, which is the law that Mr. Kreisberg said, talking about, is a new law and has some robust provisions that that we didn't have before. But even without that, in the state of Michigan, cities are creations of state government, and going back to the Home Rule Cities Act, which is almost 100 years old here, the state has always had the power to put cities through the bankruptcy process.
HENDERSONI mean, that's part of any sort of management. It's referenced in a number of different statutes here, not just P.A. 436. The pension provision is different, but the bankruptcy question is long settled.
REHMOK. But tell me what your worst fear is for those pensioners, Steve Kreisberg.
KREISBERGWell, obviously, the worst fear would be that they would be cut off from their pensions, or they would be significantly impaired. So let's describe what those pension benefits look like. For the typical city worker, they have to work at least 30 years to be eligible to receive their pension immediately upon retirement. The pension at that point would be equal to about 55 percent of pay.
KREISBERGThe average pensioner of the people we represent, which is non-uniformed employees, is less than $18,000 per year right now. So these are not very generous pensions. They're significant, and it's what people live on. In fact, it's life savings. The average Detroit worker right now makes about $41,000 a year.
KREISBERGThose are the people we represent. So we're talking about people who work for the city, provide public services, doing so on the promise that when they retire, there would certain benefits available to them. And they've earned those benefits. Those benefits are not some kind of gratuity that's provided after the fact.
REHMAnd you said these were non-uniformed employees.
KREISBERGThe ones that we represent are.
KREISBERGThere's a -- uniformed employees have pension benefits that are a little bit more substantial reflecting the nature of that occupation.
REHMAre they protected?
KREISBERGNo more protected than we are.
REHMI say. All right. Steven Kreisberg, he is director for collective bargaining and health care policy at the American Federation of State, County and Municipal Employees. Jennifer Bradley, there are a lot of people who are wondering if you can bail out a huge corporation, like Chrysler in Detroit, why can't you bail out the city?
BRADLEYI think the first answer is a practical one. There doesn't seem to be any political will. You know, Vice Pres. Biden over the weekend or Friday said we don't know what we can do to help out the city of Detroit. So there's this feeling at the federal level that this is not something that they want to ride to the rescue on. What my colleagues and I at the Brookings Institution are trying to work on is how can the federal government redirect or loose up funds that are already going into Detroit.
BRADLEYOne of the issues about the federal government vis-a-vis cities is that the federal government often has a very top-down prescriptive very we know best approach to telling cities how to spend federal money. And the cities will say, you know, this isn't the best thing for us. You know, when the federal government stepped in during the foreclosure crisis with a program called NSP a lot of cities were very upset that NSP funds weren't allowed to be used for demolition.
BRADLEYThey had to be used for rehabilitation of housing stock, and a lot of cities said that's not what we need. We have a big vacancy problem. We don't need to rehabilitate houses. We need to take them out of the housing stock. So the federal government is kind of an unreliable partner for cities and municipalities.
BRADLEYSo what we hope is that the feds can look at where they've already invested in Detroit. They're a major investor in the city, whether that's through things like Social Security, whether that's through research grants -- and think about how the investments that they're already making can be used better.
REHMJennifer Bradley, she's a fellow at the Brookings Institution, and she's co-author of "The Metropolitan Revolution." Short break here. And we'll talk further, take your calls, comments, questions. I look forward to speaking with you.
REHMAnd we're back, talking about the filing for bankruptcy in Detroit. If you'd like join us, call us on 800-433-8850. Three guests are here in the studio: Douglas Mintz, an attorney with the Orrick Restructuring Group here in Washington, Jennifer Bradley of the Brookings Institution, Steven Kreisberg. He is with the American Federation of State, County and Municipal Employees.
REHMOn the line with us from a studio at WDET in Detroit: Stephen Henderson, editorial page editor for the Detroit News. Douglas Mintz, how do you see all this, the question of whether it's a mistake for either the state or the federal government to step in and help Detroit?
MINTZWell, this is a political question that...
MINTZ...I don't know that I'm the right person to answer, especially what makes the most sense in Michigan. I will say, and we were just talking about this during the break, that there is a big difference between where we are today versus 2009 when the government stepped in to help GM and Chrysler, which I had the pleasure of working on in bankruptcy. In 2009, there was pretty significant political clamoring for the government -- the federal government to do something about a lot of things.
MINTZBecause the economy was at a standstill in January of 2009.
REHMAnd because of the effort to save jobs in Detroit.
MINTZWell, there is certainly a lot of debate about what the rationales were, and certainly, the initial loans were made by the Bush administration whereas the subsequent involvement was by the Obama administration. That being said, the world was different in January of 2009, politically, than it is today. And so it's easy to see that the federal government, as Jennifer noted, is just -- doesn't appear to be making the same decisions that it made several years ago.
REHMHere's what I don't get: the city appointed this manager, and I gather that he was appointed to try to sort everything out. What happened to his effort, Stephen Henderson?
HENDERSONWell, actually, he's an appointee of the state. And again, that gets back to the way that municipal government is organized here. Cities and other local jurisdictions are creations of the state. And so the governor appointed Kevyn Orr, who's a very experienced bankruptcy lawyer to come in and try to set things right financially in Detroit. He came up with, you know, a very robust plan for doing that, one that asked creditors to take a huge hit and promised to try to renegotiate pension terms, at least the unfunded part of our pensions, which is somewhere between 2.8 and $3.5 million.
HENDERSONHe came up with a way to sort of recast all of this in a way that would let the city spend more of its money on actual city services as opposed to legacy costs or debt. He has been negotiating with all of the parties that needed to sign off on that agreement for about a month. He's already extracted deals with some of the creditors. I mean, there are some banks who have said they would take what was on the table. My understanding is that this week we may see some more of that.
HENDERSONBut I think the process started to break down, to some extent, with some of the creditors and certainly with the pensioners, who went to court to try to stop the city from being able to resolve this in a way that Kevyn Orr saw fit. And I think in the end, the calculus was that rather than fight a million different little lawsuits all over the place, it would be better get all of this sort of accumulated in one big federal action.
REHMStephen Henderson of the Detroit Free Press just made a point that many of these pensions were unfunded. Steven Kreisberg, how come?
KREISBERGWell, under the constitution of the state of Michigan, pensions are supposed to be funded annually. And over the last 10 years, city leaders had pressured the pension fund to change its actuarial projections and actuarial methods in a manner that would lead to some underfunding. The extent...
KREISBERGWhy? Because they have casual problems of their own. If you look at what's going on with the state of Michigan, they have reduced state-shared revenue to the city by about 50 percent over the last 10 years. So you're talking about somewhere close to $200 million less state aid to the city of Detroit since 2002 to 2012.
KREISBERGIn addition to that, the 2.8 to $3.5 billion, an unfunded obligation number that Steve Henderson discussed, is a number that Mr. Orr likes to use. It is not a credible number. The number is not nearly that high. The pension funds are much better funded than are depicted by Mr. Orr. Now in terms of the negotiations from Mr. Orr -- now we have not met with Mr. Orr. He seems like a fine guy. But despite five different requests of him, he has refused to meet with us.
REHMWith whom did he meet?
KREISBERGI don't know who he met with. He has not met with our union.
REHMAny representatives of the union?
KREISBERGHis representatives -- we had requested a meeting with his representatives on July 2. On July 3, they refused to meet with us and suggested we come to a meeting the following week with a bunch of other groups, who were also -- may have had similar interests but not the same interests as our union.
REHMSo what would the offer been on the portion of your pensions that would have been paid had the bankruptcy agreement gone forward or had his management agreement gone forward?
KREISBERGWell, what we intended to do is explore with him and with his representatives, what they intended to do with the pensions, see if we could establish a process to come to some kind of conclusion and to some kind of agreement for the payment of the pension benefits. For whatever reason, Mr. Orr decided not to meet with us and not to have those discussions and instead file to his bankruptcy case. Now I would point out, I think there's a certain element of this as pre-ordained.
KREISBERGIf you look at Mr. Orr, he has no experience running cities. He has no experience in public financial management. He's a bankruptcy lawyer. You'll appoint a bankruptcy lawyer to manage a city when you want to move that city to bankruptcy, and I think that's what Gov. Snyder's aim was when he appointed Mr. Orr as the emergency financial manager. There was never an intention to negotiate a settlement.
REHMAnd just to let our listeners know, we did invite Kevyn Orr and Gov. Snyder to appear on the program today. Other major cities are coming close to declaring bankruptcy, Jennifer. What was it that put Detroit over the edge as compared to, say, Philadelphia or San Diego?
BRADLEYI think that in Detroit, you had a kind of a perfect storm of hits to the city's financial condition. You had some degree of public mismanagement over the years. You had a global economy that was, you know, really pushing manufacturing, one of the core industries in Detroit, into an offshoring model. You had a flight to the suburbs. You know, people talk -- there's a sort of a perfect storm, again, everything from individual decisions to macroeconomic trends, to decades of state and federal policies that facilitated suburbanization often at the cost of, you know, a stable urban core.
BRADLEYWe're seeing, actually, a turnaround in parts of Detroit. In the midtown downtown section, there is a lot of private investment. People want to live there. Rental vacancy rates are very low. The issue is that good stuff and that good economic momentum, you know, a certain return to valuing manufacturing and rethinking manufacturing in the country, all that's happening, it didn't seem to be happening fast enough to provide Detroit with a stable tax revenue that could have shored up city services and staved off bankruptcy.
BRADLEYAnd I think in other cities like Philadelphia that you mentioned, there is a better balance. The economy is revving up fast enough to sort of keep everything in equipoise. That's not to say they don't have challenges, but it looks like they're going to be able to harness their growth machines before those challenges throw the whole system out of whack.
REHMDouglas Mintz, how far back can we see this perfect storm beginning to build? How soon should the red flags have gone off? And the kinds of moves Jennifer was talking about that have taken place elsewhere, how soon should they have gone into place in Detroit?
MINTZWell, Detroit's difficulties have been building for 50 years. As the auto manufacturing world began to crumble and change in the '60s and '70s, Detroit's been facing significant problems, both social and political, for years. From a restructuring perspective, people have been looking at it very closely in my industry for quite some time. So by quite some time I mean several years, certainly going back to 2009.
MINTZMy guess would be that by that point, the die had mostly been cast and that there was only so much you could have done to reverse that course, short of someone coming in investing hundreds of millions or billions of dollars in the city or the state. But there was not much that could be done at that point other than hope to bring in enough revenue to keep things afloat, I think, as Jennifer is alluding to in Philadelphia.
REHM...what you had, Stephen Henderson, was the federal government bailing out the Big Three automakers and then leaving Detroit, moving those jobs overseas and to Mexico. To what extent was that very bailout the beginning of Detroit's undoing?
HENDERSONWell, it certainly wasn't the beginning. I mean, this is a 60-year slide that we've been on here, that we now -- at least those of us who live here -- hope this is, you know, the bottom, and after which we can start to sort of climb our way back up. You know, there are a lot of -- and I sort of want to make the case here for federal help, which I don't call a bailout. We don't need it -- I don't think we're going to need a bailout in Detroit after the bankruptcy.
HENDERSONThe bankruptcy should restructure our debt in a way that gives us enough revenue to try to stabilize the city and the city services, at least for the foreseeable future. What we need is reinvestment, and the slide over 60 years is a reflection of the disinvestment of the federal government in urban course and urbanism generally in America. I mean, you go back to the '50s, the decision to subsidize, heavily subsidize suburbanization, which was done in Detroit to an extreme that you would not see in other cities.
HENDERSONThat is a big driver of our population loss, the fact that we have five major freeways built with federal money to sort of carve the city up and make it easy to get out to other places to live as opposed to, you know, living in the urban poor. You think of the schizophrenic manufacturing policy we've had at the federal level for the last 30 or 40 years. That has helped decimate jobs here in Detroit. We used to have 300,000 manufacturing jobs. We have 27,000 now. So there's a lot...
HENDERSONOh, sure. Go ahead.
REHMStephen Henderson of the Detroit Free Press. You're listening to "The Diane Rehm Show." Douglas Mintz, how would restructuring work?
MINTZWell, Diane, Chapter 9 of the bankruptcy code, which is what a municipal bankruptcy is filed under, gives the state or the city here, rather, a fair bit of latitude to do an awful lot of things, as it wishes, to proceed. So in Chapter 11, which people are more familiar with, where companies file for bankruptcy, a bankruptcy judge has the -- is charged with overseeing significant numbers of aspects of the company's day-to-day business.
MINTZIn municipal bankruptcies, because of constitutional concerns, bankruptcy judges have much less involvement in the process. They are, instead, charged with making sure the process is moving along and making sure that a plan that the municipality comes up with is viable and permissible under the bankruptcy code and pays creditors as they should be paid in accordance with a variety of provisions of the bankruptcy code.
REHMAnd what would happen to the pensioners under a restructuring? They would have to contribute as well.
MINTZWell, presumably -- it depends on how they're treated in the bankruptcy plan. But assuming they were unsecured creditors, they'd be treated --depending on a variety of questions which will be settled before the judge -- the same as other similarly situated unsecured creditors. A question will be whether the pensioners and other retirees and unions and parties to CBAs are, in fact, similarly situated to other unsecured creditors.
MINTZIs their situation different? Is there a provision of Michigan state law that requires them to be treated differently? Those are all questions that nobody knows the answer to today and that the judge will spend a lot of time resolving.
REHMHere's an email from Jeffrey in Ypsilanti, Mich.: "Please comment on the propriety or conflict of interest relative to Kevyn Orr retaining lawyers from Jones Day -- the firm from which he is either on leave or from which he has allegedly resigned -- to represent Detroit in its bankruptcy." Kevyn -- Steve Kreisberg.
KREISBERGWell, one thing we know for sure that'll emerge from this bankruptcy is that the lawyers will make out pretty well. We've already seen published reports in...
REHMThey usually do, don't they, in matters of bankruptcy?
KREISBERGYeah, it does work out that way. It does work out that way. They're always paid first. As -- we've seen published reports indicating that this bankruptcy will cost upwards of $100 million in legal and in professional fees for -- to go through this bankruptcy in the city of Detroit. Mr. Orr has retained his previous law firm, Jones Day, as indicated by the emailer. And they've been paid. They've been paid about $1.5 million so far.
KREISBERGUpfront. They've been paid so far. They're paid as they're being -- as they're billing, they're being paid.
REHMStephen Henderson, how are the people of Detroit reacting to that news?
HENDERSONWell, I mean, you know, nobody's thrilled about it. And as you point out, in any bankruptcy, that's what happens. Bankruptcy is designed to pay the lawyers very well and not everybody else. But at the same time, I think there are a lot of people who understand that that $100 million figure that Mr. Kreisberg just cited is one-half of 1 percent of the 18.5 billion that we're restructuring. So if we can get out from under that, that's better.
REHMAll right. Stephen Henderson, editorial page editor for the Detroit Free Press. When we come back, time to open the phones. Stay with us.
REHMAnd welcome back. We're talking about the filing for bankruptcy in Detroit, what that means for the city, its residents, its employees, its pensioners. And we're about to open the phones. First to Tecumseh, Mich. Hi there, Lawrence. You're on the air.
LAWRENCEI'd like to give a little background on my employment with the city of Detroit. I was an employee for 27 years, 25 years as a sworn police officer. I rose to the mid-management level, and when I retired, I supervised over 300 sworn and civilian personnel. I've heard the term, not necessarily on your show, but on a whole lot of other -- particularly TV shows, the term exorbitant pension benefits being provided to city retirees.
LAWRENCEI had a master's degree. I -- my pension now is about $35,000 a year. Social Security affects my pension because of the so-called windfall benefit act. I figured out between the time that I have drawn Social Security till now, between the impact on my benefits of Social Security, my wife's benefits of Social Security, we've lost over $60,000. We're not getting rich (unintelligible).
REHMYeah. Exactly. Do you want to comment, Steven Kreisberg?
KREISBERGYeah. I think the caller is right. I think we talked about the average pension benefit for non-uniform employees being less than $18,000 and for uniform employees being about $30,000. So public employees in Detroit certainly are not getting rich, and we politely use the term restructuring. I think for some pensioners, they might use a word like theft because this is something that they've earned. And we normally don't reach into people's bank accounts and take their money.
KREISBERGThis country almost came to standstill, bringing about global economic collapse because the Republicans and the House Representatives would not agree to raise taxes on the wealthiest people in this country by a total of 3 percent -- a marginal rate increase of about 3 percent of income over $1 million. And that could bring the country to -- and maybe the world to an economic standstill. But yet, we just flippantly think that we can cut pension benefits by 30 or 50 percent, and that's OK.
BRADLEYI think one of the things that makes the Detroit story so compelling, right, is that everyone who looks at it can see the justification for their own particular policy point of view, right? So people who believe that cities are chronically disastrous and mismanaged can say it's the city's fault. And people who believe that suburbanization is the cause of urban ills can say it's the suburb's fault.
BRADLEYAnd people who say that it has to do with manufacturing policy can say it's that. So it can be very hard to sort through the noise and work out something for the people, you know, the 20,000 former employees of the city, something that fair for them. The 700,000 people who live in Detroit, who are dealing with a level of municipal services that most of us absolutely wouldn't be able to tolerate -- but they're there because they either can't go anywhere else or because they have a commitment to rebuilding the place.
BRADLEYSo, you know, there's a lot of loose talk about whose fault it is. And I think that can often get in the way of understanding the subtleties and the complexities and the fact that Detroit is where a bunch of stuff all hit over the same time period.
REHMAnd here's an email from Kenny in St. Louis, who says, "Auto companies were perceived as white-owned, but the city is perceived as black-owned by the majority of the country. How much does this have to do with the lack of interest in a bailout?" Jennifer.
BRADLEYWell, I think, the auto companies -- when we said bailing out Detroit and we meant the Big Three...
BRADLEY...that was actually a geographical misnomer. The auto supply chain in this country reaches from Michigan down through Ohio, into Kentucky and Tennessee. It employs not only the people who work for the Big Three themselves but a range of small business suppliers. And again, these are in many states throughout the county.
BRADLEYSo the auto industry is a major economic engine in a lot of different places. So that was not the same as the bailout of Detroit. I think the issue has perhaps less to do with the federal government and, you know, it's a black city, it's a white company. I think it has to do with the federal government wondering, if they step into Detroit, what are they on the hook for in, you know, in a Stockton, in another round of municipal bankruptcy?
BRADLEYAnd again, in a democratic system, if there's not political will for the federal government to do something, if there's not authorization, they're not able to do something, you know, new and grand. They really are going to have to look and they should be looking a little harder than maybe they are...
BRADLEY...at what they can do with the money that's already going to Detroit or with existing funding flows.
REHMHere's a tweet: "Without a federal bailout, Detroit's most valuable real estate and other assets will be raided by wealthy individuals and corporations." Douglas Mintz, is that what happens?
MINTZI'm not sure that a government bailout such as it is would prevent someone from going in and buying up lots of land in the city. And that's already happening. People have been buying up some of the land downtown at, what you would assume, very discounted prices because the city has been gutted.
KREISBERGWell, there's also public assets, and I think that's what the tweeter is referring to. And there's been some speculation that's part of the agenda here, is to going to a bankruptcy and let the vultures from Wall Street pick the assets clean. And it's happened elsewhere, and it's possible that it could be happening in Detroit. This is the venture capital model.
REHMSo what are you talking about, privatizing the services that the city receives?
KREISBERGYeah. There's infrastructure that can be privatized. You know, anything that you can buy, Wall Street wants to buy. Now, the city of Detroit, of course, could also make more money if they would raise fees for water and sewer services. But there's a political component to that. When you privatize it, there's no longer a political component. It's just a commercial component. And there's money to be made. There's money to be made by selling off public lands.
KREISBERGThere's money to be made by selling off the water and sewer systems. There's money to be made by selling various elements of infrastructure. Former Mayor Daley in Chicago brought it to an art form when he sold off a parking meter concession in a terrible deal for city residents. And -- but that's the kind of model that we're seeing develop and being essentially promoted by many on Wall Street.
HENDERSONYou know, one of the problems with that theory here is that most of our assets are so underwater that they have little market value. Our water department that you pointed out is carrying $6 billion in debt has $2 billion in backlog maintenance and infrastructure upgrades. Our parking is also terribly underwater.
HENDERSONPart of the problem in Detroit, in fact, and part of the reason we're in this position is that we've plundered our assets already. We've essentially hocked all of that stuff over and over again with bad management, poor caretaking. And so we don't have very much for people to pick over, frankly.
KREISBERGBut when you repudiate that debt and alleviate that debt burden, then you could liquidate the asset free of that debt.
HENDERSONWell, that -- no.
KREISBERGThat's the plan.
HENDERSONThe water department, that is secured debt. That's got to be paid out. It'll be paid out on 100 percent under Kevyn Orr's plan.
REHMAll right. Let's go to Sparta, Mich. Betty, you're on the air.
BETTYI -- the only thing I had to say is no one has made any reference to the part that Kwame Kilpatrick played in this whole mess. I know his contribution was small compared to the big figures, but all of the arms that played in the situation are a problem. And I think in many cases, the -- this applies all over these problems that people are having. And I thank you for letting me blow off steam.
REHMBetty, let me ask you. What kinds of problems are you in particular having there in Sparta, Mich.?
BETTYNone that I know off.
REHMOK. That's good to hear. Steven Henderson, do you want to comment on the ramifications of Kwame Kilpatrick, his contributions?
HENDERSONWell, his major contribution to this was some of the borrowing he did, borrowing, in fact, to pay off some of the pension -- the unfunded pension liability. He got us involved in some pretty risky credit swaps that went bad on us just like it did on everybody else. That's a big part of the debt that we're carrying right now. That's not pensioner's fault. None of these is pensioner's fault, but that has -- that's one of the drivers here.
HENDERSONI don't think his personal behavior, which, you know, has now landed him with the federal conviction had much to do with it. It really was his continuation of the pattern of poor management, over barrowing and getting us into a situation where we owe 33 times what we're worth and can't service the debt anymore.
BRADLEYBut I think one of the things that tends to happen in the way we think about cities and conversations about cities is that there's one lightning rod figure that is perceived very negatively often by people outside this city, and it allows them to say it's his fault. Right? No one person created this $18 billion gap, but it allows people in the rest of Michigan and the rest of the country to say, it's his problem. He broke it.
BRADLEYThey need to fix it rather than understanding that, you know, cities and suburbs are linked economically, whether you like the mayor of one jurisdiction or not, rather than people understanding that cities and metropolitan areas are economic engines. It becomes -- the lightning rod figure of the mayor becomes a sideshow and a target for all kinds of negative feeling that obscures the way the economy really works.
REHMTo Flint, Mich. and to Claudia, you're on the air.
CLAUDIAI love your show.
CLAUDIAHi. I've got a question. Did New York City not claim bankruptcy in 1978? And did their state not bail them out?
MINTZYeah. New York did not file for Chapter 9 in 19 -- it was 1976, I'm sorry -- but they did not file for bankruptcy at that time. And, in fact, the difficulty they had in managing their issues is what gave rise to the modern version of Chapter 9 that makes it little easier for municipalities to file for bankruptcy and manage their debts in bankruptcy.
REHMBut didn't New York come close?
MINTZAbsolutely. And the federal government did as famously noted on The New York Post cover 'till Gerald Ford did not bail them out of that time either.
REHMDid not bail them out?
MINTZRight. Their famous post-headline was "Ford to New York City: Drop Dead."
REHMAnd what about that, Steven Kreisberg?
KREISBERGOh, I think the difference between New York and Michigan is in New York, you had a state that was bounded, determined to assist its city.
KREISBERGYou can't have a first-class state without a first-class city. Gov. Snyder says that, but his actions belie that fact. He has reduced state sharing revenue to the city of Detroit by $66 million between 2011 and 2012 alone. That's...
REHMBecause of a drop in a population?
KREISBERGNot just a drop in a population. I mean, Michigan may have had its own financial problems but also because they've reduce taxes for business. There's no free lunch here. If we're going to reduce revenue, we're going to have problems.
REHMAnd you're listening to "The Diane Rehm Show." Stephen Henderson, what comes next?
HENDERSONWell, we all sort of hold on to our hats here in Detroit and hope that we can start to make some progress on some of these issues. I think, you know, the pension issue will take front and center pretty quickly in terms of how that should be negotiated. You know, one thing that gets lost in this is that pensioners are not just former employees, a lot of them are citizens still of the city of Detroit. And so you're talking about, you know, people's livelihoods...
HENDERSON...here in the city where it's very tough to live as it is. And so there's a lot of sensitivity around that, there's a lot of anxiety, I think, about what will happen to them in this. But I think at the end of it, we're all hopeful that we start to, again, rebuild on the things that are actually going well here in Detroit.
REHMAnd, Steven Kreisberg, why didn't the unions take that first deal offered by Kevin Orr? Did they believe they'd do better under bankruptcy?
KREISBERGTo be very clear, Kevin Orr has yet to make a deal and offer on pensions. So if there's any indication from him that he thinks he's negotiated with us, it's simply not true. We still don't know what his plan is for pensions. We know that his plan is for pensions going forward. He wants to freeze and close the plan, but he has not offered anything regarding current pensioners or what would happen to accrued benefit so far. So it's very difficult to have these discussions.
KREISBERGAnd, in fact, when we met with them the week before last, we had talked about developing a process so we can have those discussions very intelligently and hopefully bring them to conclusion. Mr. Orr then decided to seek bankruptcy instead of actually having discussions in a serious manner with our union.
REHMJennifer, what's the best outcome going forward?
BRADLEYThe best outcome is that Detroit reinvest in its city services so that people who live there can expect that when they pick up the phone and call 911, they'll have a response in a reasonable amount of time and not an hour.
REHMBut how does it do that?
BRADLEYIt does that by building on the tremendous assets that even after 60 years of disinvestment are still there -- medical institutions like Henry Ford and the Karmanos Cancer Center, the College of Creative Studies. It does that by taking advantage of the reshoring of manufacturing, which has 4,000 people working round the clock at a Chrysler plant making Jeep Cherokees that's now in Detroit.
BRADLEYThere are -- there's a lot that Detroit can do, and there's a lot that Detroit can do in this next economy that's revaluing the nexus between innovation and production. We think of things and build them in the same place. And Detroit is a great place to do that. If you -- you know, again, people still want to be in Detroit -- 700,000 people do.
BRADLEYPeople are moving into downtown and midtown just about as fast as housing can go up for them. Imagine if there were reliable services, right? If Detroit had good services, I think you -- or even average services, you could see Detroit flourishing again and showing people why you should never give up on a city.
REHMAnd how do you see it going, Douglas?
MINTZWell, for a more technical perspective as a bankruptcy lawyer, I see there being an effort by the emergency manager and the parties to move more quickly than some of the Chapter 9 cases have in the past. I don't know if they'll succeed, but I think that's the intent and an effort to try and wrap things up as quickly as possible, which could be more than a year.
MINTZIf they do what they set out to do, it will reduce the debt load for the city and, I think, give the city the opportunity, as Jennifer said, to rebuild so bankruptcy can have a benefit down the road. It's a tough process, and a lot of people do get hurt along the way.
REHMStephen Henderson, how quickly do see this getting resolved?
HENDERSONI think we have some advantage in the fact that Kevin Orr is pretty experienced at this and seems to have a roadmap for how he wants to go and...
HENDERSONYeah. Go ahead.
REHMAll right. And that's Stephen Henderson for the Detroit Free Press, Steve Kreisberg of the American Federation of State, County and Municipal Employees, Jennifer Bradley of The Brookings Institution, and Douglas Mintz, an attorney with the Orrick Restructuring Group. Thanks for listening, all. I'm Diane Rehm.
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