Kevyn Orr has made a good deal for Detroit, and it’s surprising people are hostile to it. Contrast The Economist with the local newspaper. The latter is focused entirely on the workers’ demands, as if Detroit is hardwired for UAW negotiations. The rules in bankruptcy are a little different, and this attitude could lead to negative outcomes for the city.
Even if the actual return to the pensioners is lower than the figures being thrown around, it is still vastly more than they would get …If the pensioners reject the grand bargain … I don’t think Judge Rhodes is going to be sympathetic.
Mr. Orr, the administrator, is asking for minimal reductions in city salaries and pension benefits – with no deadline pressure, as would be his prerogative – and meanwhile asking bondholders to take twenty cents on the dollar. An 80% haircut! That’s worse than Greece. Orr is also trying to protect Detroit’s art collection by moving it off the books.
Some people feel there is a moral obligation to pay back your debts – or at least a legal one. Media pressure is not going to make a judge overlook these obligations. GO bonds are supposed to be paid from ongoing tax proceeds – as they say, “full faith and credit.” Some bonds even claim specific revenues, like the water works, and they have strong covenants.
Municipal bonds will be harder to sell after Detroit, making finances tighter for all the other struggling cities in America. Politicians should never have been allowed to make these pie in the sky pension deals in the first place.
It’s a beautiful museum, by the way. We note the irony that its main gallery was painted by Diego Rivera, a communist.