“What happened in Detroit must never happen again”. It is with this final sentence that Judge Steven Rhodes, Friday, November 7, concluded the most painful chapter of the American automobile capital, during a judgment approving a plan to bring the city out of bankruptcy.
After a little less than sixteen months of negotiations, the courts gave the green light to renegotiate Detroit’s gigantic debt, deeming it to be legally reasonable, fair and equitable for the city’s thousands of creditors.
This plan aims to end the vicious circle in which Detroit had entered in recent years. The collapse of its population, the inexorable reduction in tax revenues at the rate of its industrial decline, pervasive corruption and management errors had led the city to bankruptcy.
INEVITABLE SOLUTIONS
The plan provides for the cancellation of nearly a third of the debt (7 billion of the 18 billion accumulated over time). In return, the city’s finances are placed under surveillance, while the administration will undergo a vast restructuring. Part of the available funds ($ 1.7 billion) will be invested in completely dilapidated services such as the fire department or the police. Here, vehicles have to be bought back, there, IT services have to be upgraded which have become obsolete. The plan also provides for a real estate component in order to rehabilitate some 80,000 buildings that have been abandoned for lack of resources.
Judge Rhodes warned city mayor Mike Duggan not to spoil the opportunity for a ” new start “. “Now is the time to restore democracy to the people of Detroit”, he said solemnly. “Detroit’s inability to provide most essential municipal services” constitutes a situation “Inhuman and intolerable, which must be resolved. This plan solves these problems ”, said the judge.
It is the result of a real balancing act between the demands of the different parties, an equation that still has many unknowns. Retired municipal services thus had to accept a significant reduction in their pensions. They will drop by 4.5%, not to mention that they will no longer be indexed to changes in the cost of living and that reimbursements of health costs will now be less generous.
Inescapable solutions to deal with a serious imbalance: municipal services have two retirees for one asset. A situation which can be explained by the spectacular fall in the workforce, which has fallen by 53% since 1970. The retired police and firefighters have also accepted sacrifices, even if they are less important: their pensions will only drop by 2 , 25%. Conditions that were approved last summer in a referendum.
“STRAIT HAS A BIG FUTURE”
This lesser evil was obtained great at a “Great bargaining”, which was made possible by contributions from private donors and the State of Michigan, who will inject $ 816 million into the city’s various pension funds over a period of 20 years. A negotiation that also saves the Detroit museum and its prestigious collections.
Creditors are also required to make substantial efforts.
And sometimes the pill was not easy to swallow, as for the insurer Syncora, which will ultimately recover only 14% of its stake. Along with another creditor, Financial Guaranty Insurance Co., the group had tried to demonstrate that the procedure was illegal because it favored retirees to the detriment of creditors. But they ended up agreeing to this plan, as did the two main banks exposed, UBS and Bank of America Merrill Lynch.
“Detroit has a great future”, now assures Rick Snyder, the Republican governor of Michigan, during a press conference Friday while stressing that“There is still work to be done”. It’s the least we can say. Almost everything needs to be put back together in this city which, in sixty years, has lost half of its population. A year ago, 40% of the streetlights were no longer working and the police response time to emergency calls averaged 1.5 hours. Since then, significant progress has been made, says Kevyn Orr, administrator public appointed by the Governor in April 2013 to negotiate with creditors. A thousand new lampposts have been installed, the responsiveness of the emergency services is gradually improving and hundreds of ruined buildings have been demolished.
On the legal front, Orr has returned control of the city to the mayor, Mike Duggan, who however remains under surveillance. Over the next decade, the city will have to report to a commission responsible for overseeing municipal finances. It will be flanked by an investment committee which will oversee the city’s two pension funds. Judge Rhodes called this plan “Ideal model for future debt restructuring”. Now it remains for Detroit to rebuild itself.
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