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Detroit declares bankruptcy

Thucydides said:
I notice the US media is being very quiet about the "how" Detroit failed....

It's surprising to you that the conglomerate of media outlets and their employed chattel, lecture and scold, cajole, and support politicians who adovocate craddle to grave social welfare programs, hug a thug programs and the like, are silent when a large metropolis finally implodes due to the inability to carry the costs of such programs anymore....I thought you were a little more learned than that  ;) ;D
 
          Bob was sitting on the plane to Detroit when a guy took the seat beside him. The guy was an emotional wreck, pale, hands shaking, moaning in fear.

          "What's the matter?" Bob asked.

          "I've been transferred to Detroit - there are crazy people there. They've got lots of shootings, gangs, race riots, drugs, poor public schools, and the highest crime rate in the nation."

          Bob replied, "I've lived in Detroit all my life. It's not as bad as the media says. Find a nice home, go to work, mind your own business, and enroll your kids in a nice private school. It's as safe a place as anywhere in the world."

          The guy relaxed and stopped shaking and said, "Oh, thank you. I've been worried to death. But if you live there and say it's OK, I'll take your word for it. What do you do for a living?"

          "I'm a tail gunner on a Budweiser truck."
 
Why would there be any risk on a Budweiser truck?  Is there anyone so desperate that they'd stoop to drinking that stuff?
 
dapaterson said:
Why would there be any risk on a Budweiser truck?  Is there anyone so desperate that they'd stoop to drinking that stuff?

when all you can get to drink is Shitty Kitty (Labatt Wildcat) you will drink anything  ;D
 
You really can't make this stuff up. Detroit declares bankruptcy then wants taxpayer funds to build a $650 million dollar arena (transferring tax dollars to a billion dollar conglomorate. Great optics there):

http://www.cbc.ca/sports/hockey/nhl/story/2013/06/19/sp-nhl-red-wings-arena-detroit-ilitch.html

Detroit, Red Wings announce plans for new arena
Over 40% of cost to come from public funds

The Associated Press Posted: Jun 19, 2013 3:30 PM ET Last Updated: Jun 19, 2013 9:40 PM ET 
Joe Louis Arena, seen in a file photo, first opened to the public in December 1979. (Carlos Osorio/Associated Press)
The Detroit Red Wings and city officials on Wednesday announced a $650 million US plan for a new arena development for the NHL team in Detroit's downtown entertainment and sports district.

Plans for an 18,000-seat arena were announced by the team's owners and local economic development officials. Red Wings owner Mike Ilitch has long said he wanted a replacement for the 32-year-old Joe Louis Arena.

The new proposal — essentially a framework of financing and development plans — still needs to be approved by the City Council and a handful of state and local agencies, but it's seen as an important first step. The Red Wings said there will be $367 million in private investment and $283 million in public funds in the complex, which would also include residential, retail and office space.

Developers said the public money would come from existing economic development funds and requires no new taxes or funds from the cash-strapped city. Detroit, the largest city in the country under state financial oversight, is struggling with a long-term debt that emergency financial manager Kevyn Orr believes is more than $17 billion.

"Today, this public-private partnership took a significant step forward in laying the groundwork for a major catalyst development, which will create approximately 8,300 jobs, stimulate economic activity and have a positive and lasting impact on our community," said Christopher Ilitch, son of Mike Ilitch and president and chief executive of Ilitch Holdings Inc., another family company.

The city's Downtown Development Authority approved a "memorandum of understanding" with Olympia Development of Michigan, which is owned by Ilitch and his wife, and Wayne County, home to Detroit. Ilitch also owns the Detroit Tigers, and his family owns Little Caesars Pizza and downtown Detroit's Fox Theatre.

Under the plan, the authority would own the arena and event centre complex, while Olympia Development would have exclusive rights to use, manage and operate it, and hold naming rights.

The arena is slated to be built near the Detroit Tigers' Comerica Park and the Detroit Lions' Ford Field, close to the intersection of Interstate 75 and Woodward Avenue. The proposed location is a couple miles away from the Red Wings' current arena.

Red Wings officials said it was too soon to estimate when construction would start or end.

Michigan lawmakers in December approved legislation allowing property tax dollars collected by the Downtown Development Authority to be used for the development. The authority has been allowed for nearly two decades to finance economic stimulus projects by selling revenue bonds to be paid off with the tax money. It takes in about $12.8 million a year that otherwise would have gone into a fund for public schools statewide.

Developers and supporters of that legislation said it will create thousands of new construction jobs and pump $1 billion into Michigan's economy. Opponents counter that funding a private stadium with taxpayer dollars shouldn't be a priority, especially when that money was otherwise going to the School Aid Fund.

"We're talking about jobs ... talking about enhancing the entertainment district. It's a win-win for everybody. The Ilitch family has been a very big supporter of Detroit and we agree that Joe Louis Arena is dated," Wayne County Executive Robert Ficano said, adding that county road funds may be used for some infrastructure work associated with the new stadium.

Mayor Dave Bing said in a statement that the project will "continue to add momentum to the transformation of the city." Detroit is experiencing economic activity in its downtown and Midtown neighbourhoods, but other parts of city are grabbling with tens of thousands of abandoned or vacant homes and businesses.

Orr, the city's state-appointed financial emergency manager, didn't return messages seeking comment Wednesday.
 
The Mayor of Detroit might be getting company soon, Chicago's financial situation is pretty bleak as well. The reported debt for Chicago is more than twice what the reported figure for Detroit is (and there is reason to think Detroit's reported debt isn't all there is). You might think that the wave of bankruptcies in California municipalities might have attracted a bit of attention, maybe a learning opportunity...

http://blogs.the-american-interest.com/wrm/2013/07/30/detroit-is-that-you-chicago-in-big-trouble/

Detroit, Is That You? Chicago In Big Trouble

It looks like Detroit may yet have competition for the distinction of America’s most poorly run city. The unprecedented triple-drop in Chicago’s bond rating and the city’s shiny new long-term debt figure—$29 billion—should have pols quaking in their boots. The Chicago Sun-Times has published some distressing numbers from Chicago’s recent audits:

The number of “physical arrests” by Chicago Police officers declined again — from 152,740 in 2011 to 145,390 in 2012. That continues a six-year trend that coincides with the hiring slowdown that caused a dramatic decline in the number of police officers. Police made 227,576 arrests in 2006.

The number of arrests has been dropping like a rock ever since….
Emergency responses continued their steady rise — to 472,752. That’s up from 300,971 in 2006.…

The 55 percent subsidy to retiree health care that Emanuel wants to phase out and retirees are suing to maintain cost the city $97.5 million in 2012.
The condition of Chicago’s four city employee pension funds is growing ever more precarious. The firefighters pension fund has assets to cover just 25 percent of liabilities, followed by: Police (31 percent); Municipal Employees (38 percent) and Laborers (56 percent).

In addition to the pension, law enforcement, and emergency response concerns that remind us of a certain bankrupt city across the lake, the report notes that three of Chicago’s four largest private employers (JP Morgan, Accenture LLP, and Northern Trust) are in finance. It seems like blue cities have a codependent relationship with the one percenters progressives claim to hate.

It hasn’t all hit the fan quite yet, but Chicago seems perilously close to real trouble. The city is all out of money, and with an imploding public education system and harrowing levels of violence, it is losing residents fast. Illinois, which itself lost more than 800,000 people to out-migration in the past two decades, is essentially Chicago on a larger scale, with hundreds of billions in unfunded pension liabilities and complete political sclerosis. The state cannot bail out Chicago, and judging by the feds’ reluctance to even lift a finger for Detroit, Chicago shouldn’t expect much more.

Stories like these tend to expose the pointlessness of a lot of American political debate. Defenders of the blue social model will prattle on about its many virtues, and they certainly have some accomplishments to point to. But ultimately the blue model is no longer a matter of choice: cities like Detroit and Chicago and states like Illinois will eventually have to shift away from blue policies whether they like them or not. When the money runs out, one of the luxuries you can no longer afford is self-deception.

We hope that an economic recovery will give cities like Chicago some more time to make adjustments, but if the past is any guide to future behavior, any new income the city sees will be spent on maintaining a Potemkin façade, with the next inevitable downturn finding Chicago in worse shape than ever.

And after Chicago, what other American cities are poised to go over the edge?
 
E.R. Campbell said:
Millions of American voted themselves the American dream: well paying jobs, many in the public sector, early retirement and guaranteed (maybe) defined benefit pension plans.

Few private sector companies still offer defined benefit pension plans - the sort we, retired CF members, have - any more. In fact pension liabilities are amongst the biggest threats facing industrial enterprises, companies like Ford or General Motors. Defined benefit pensions were the "jewel in the crown" for most trade unions, and industrial works bargained, struck and picketed for them, trading off pay raises in the bargaining process. Public sector workers got them, too ... usually without any bargaining, much less strikes and tradeoffs at all. Defined benefit pensions were part and parcel of the old, pre-union civil service "iron rice bowl," along with great job security and, relatively, low salaries. It seemed, to taxpayers and workers alike, a fair bargain: civil servants worked hard, for modest (but adequate) salaries and they got a level of job security about which unionized, industrial workers could only dream and then they received a guaranteed pension.

But that's no longer the case; we (Americans, Brits, Canadians  Danes, etc, etc, etc) all voted for the American dream on credit ... for some of us. But the same we, although this time "we" are shareholders in corporations (either directly, or indirectly through our pension plans and RRSPs and mutual funds), voted to take the "jewel in the crown" away from industrial workers ... at least away from the relatively few who still work in industry in Western Europe  and North America. But we kept our old bargain with the public sector even after it unionized and negotiated higher and higher wage packages and gave us examples of "featherbedding" that would shame an old CNR unionized fireman in the diesel age. We - Americans and Canadians (and a lot of others) alike - now have large (many would say too large), well paid (broadly and generally better paid than private sector workers with similar jobs) public sectors with guaranteed pensions ... in some cases, like Michigan, with pension "rights" that are may be enshrined in the state's constitution. But, as Detroit shows those pension guarantees may be all smoke and mirrors. What happens to Detroit's firefighters or city workers when there is, quite simply, no more money to pay anyone's pensions? Will the State of Michigan pay up? For how long? Does it have an infinite supply of money? And what about California and, indeed, what about Quebec and Ontario?

Treasury Board President Tony Clement is, already, albeit slowly, taking steps to safeguard the pension rights of Canadian federal civil servants by changing the rules. The best protection, maybe the only protection, for public sector workers is smaller, more efficient and effective public sectors: governments that do less, that do only what is absolutely necessary, and that require Canadians, like you and me, to pay more for the services we want and to pay for them to private contractors.

It isn't just Detroit, it isn't just Ontario, it is also Brazil and Turkey and Greece and Spain, and, and, and ... it is every single too large, too careless (of the people's money) government. And of course, Pogo was right ...
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George F Will appears to agree with me in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Washington Post:

http://articles.washingtonpost.com/2013-07-31/opinions/40912818_1_loaves-and-fishes-democracy-caterpillar
Old-London-Alternate_Washington-Post-Logo-Font.jpg

Detroit’s death by democracy

By George F. Will,

July 31, 2013

DETROIT

In 1860, an uneasy Charles Darwin confided in a letter to a friend: “I had no intention to write atheistically” but “I cannot persuade myself that a beneficent and omnipotent God would have designedly created the Ichneumonidae with the express intention of their feeding within the living bodies of caterpillars.” What appalled him had fascinated entomologist William Kirby (1759-1850): The ichneumon fly inserts an egg in a caterpillar, and the larva hatched from the egg, he said, “gnaws the inside of the caterpillar, and though at last it has devoured almost every part of it except the skin and intestines, carefully all this time avoids injuring the vital organs, as if aware that its own existence depends on that of the insect on which it preys!”

Government employees’ unions living parasitically on Detroit have been less aware than ichneumon larvae. About them, and their collaborators in the political class, the question is: What. Were. They. Thinking? Well, how did Bernie Madoff or the Enron executives convince themselves their houses of cards would never collapse?

Here, where cattle could graze in vast swaths of this depopulated city, democracy ratified a double delusion: Magic would rescue the city (consult the Bible, the bit about the multiplication of the loaves and fishes), or Washington would deem Detroit, as it recently did some banks and two of the three Detroit-based automobile companies, “too big to fail.” But Detroit failed long ago. And not even Washington, whose recklessness is almost limitless, is oblivious to the minefield of moral hazard it would stride into if it rescued this city and, then inevitably, others that are buckling beneath the weight of their cumulative follies. It is axiomatic: When there is no penalty for failure, failures proliferate.

This bedraggled city’s decay poses no theological conundrum of the sort that troubled Darwin, but it does pose worrisome questions about the viability of democracy in jurisdictions where big government and its unionized employees collaborate in pillaging taxpayers. Self-government has failed in what once was America’s fourth-­largest city and now is smaller than Charlotte.

Detroit, which boomed during World War II when industrial America was “the arsenal of democracy,” died of democracy. Today, among the exculpatory alibis invoked to deflect blame from the political class and the docile voters who empowered it, is the myth that Detroit is simply a victim of “de-industrialization.” In 1950, however, Detroit and Chicago were comparable — except Detroit was probably wealthier, as measured by per capita income. Chicago, too, lost manufacturing jobs, to the American South, to south of the border, to South Korea and elsewhere. But Chicago discerned the future and diversified. It is grimly ironic that Chicago’s iconic street is Michigan Avenue.

Detroit’s population, which is 62 percent smaller than in 1950, has contracted less than the United Auto Workers membership, which once was 1.5 million and now is around 390,000. Auto industry executives, who often were invertebrate mediocrities, continually bought labor peace by mortgaging their companies’ futures in surrenders to union demands. Then city officials gave their employees — who have 47 unions, including one for crossing guards — pay scales comparable to those of autoworkers. Thus did private-sector decadence drive public-sector dysfunction — government negotiating with government-employees’ unions that are government organized as an interest group to lobby itself to do what it wants to do: Grow.

Steven Rattner, who administered the bailout of part of the Detroit-based portion of America’s automobile industry, says, “Apart from voting in elections, the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs.” Congress, he says, should bail out Detroit because “America is just as much about aiding those less fortunate as it is about personal responsibility.”

There you have today’s liberalism: Human agency, hence responsibility, is denied. Apart from the pesky matter of “voting in elections” — apart from decades of voting to empower incompetents, scoundrels and criminals, and to mandate unionized rapacity — no one is responsible for anything. Popular sovereignty is a chimera because impersonal forces akin to hurricanes are sovereign.

The restoration of America’s vitality depends on, among many other things, avoiding the bottomless sinkhole that would be created by the federal government rescuing one-party cities, and one-party states such as Illinois, from the consequences of unchecked power. The consequences of such power — incompetence, magical thinking, cynicism and sometimes criminality — are written in Detroit’s ruins.


Read this bit again: "There you have today’s liberalism: Human agency, hence responsibility, is denied. Apart from the pesky matter of “voting in elections” — apart from decades of voting to empower incompetents, scoundrels and criminals, and to mandate unionized rapacity — no one is responsible for anything. Popular sovereignty is a chimera because impersonal forces akin to hurricanes are sovereign."

I agree!
 
These numbers could apply to a province or small nation; quite frightening when applied to a city. And of course the population of cities and even States is quite mobile. Attempting to rectify the problem using "revenue enhancement" as opposed to bringing spending under some sort of control will simply accelerate the cycle as anyone with the ability to leave does so:

http://blogs.the-american-interest.com/wrm/2013/08/06/chicagos-pensions-crisis-in-black-and-white/

NYT: Chicago The Next Detroit

How much trouble is Chicago in? According to the New York Times front page this morning, this much trouble:

The pension fund for retired Chicago teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red—as much as it would cost to pay 4,300 police officers to patrol the streets for a year.

“This is kind of the dark cloud that’s coming ever closer,” Mr. Emanuel said in a recent interview, adding that he had no intention of raising his city’s property taxes by as much as 150 percent—the price tag, he says, that it might take to pay such bills. “That’s unacceptable.” [...]
Among the nation’s five largest cities, Chicago has put aside the smallest portion of its looming pension obligations, according to a study issued this year by the Pew Charitable Trusts. Its plans were funded at 36 percent by the end of 2012, city documents say. Federal regulators would step in if a corporate pension fund sank to that level, but they have no authority over public pensions.

That 2015 mandatory increase? $1 billion.

The fact that the Times is giving Chicago’s long-festering mess such prominent coverage this morning is a testament to how Detroit’s thunderous collapse has made all these sorts of previously over-the-horizon problems seem a lot closer and menacing. Also prominently featured in the article is the blue civil war simmering beneath the surface: public unions are squaring off against Mayor Rahm Emanuel, who has threatened to increase retirement ages and freeze inflation adjustments to union benefit plans in order to help cushion the impact of those approaching mandatory increases in the city’s outlays.

The article’s best quote goes to another close Obama aide who’s running against Governor Pat Quinn in next year’s elections, William M. Daley: “Anyone who thinks that this is just a problem on paper, those are the same people who looked at Detroit 20 years ago and said, ‘Don’t worry about it, we can handle it.’” We’re glad to see that at least a couple of the cogs in Chicago’s long-ruling Democratic machine have awoken to the crisis at the city’s doorstep. Better late than never.

The one unspoken question: can Obama stand idly by if his hometown starts going down the tubes on his watch?

Well Obama effectively told Detroit to drop dead (and Detroit has long been a Democrat bastion), so the optics of helping one city but not another will wreak havoc on the Democrat "base". The fact that Detroit is also largely populated by minority Americans will also put a lot of stress on the Democrat coalition if Chicago is favoured over Detroit.
 
A piece on Via Media that goes into the bankruptcy in a bit more detail. Notice the long term pattern of failing to fix the problem and attempting to rely on taxation to cover the ever growing shortfalls. Lessons for Ontario and Quebec tested out on a smaller scale (also lessons for many American "Blue" jurisdictions):

http://blogs.the-american-interest.com/wrm/2013/09/16/a-financial-history-of-detroit/

A New Financial History of Detroit

The story of Detroit’s decline has been told and retold so many times now that you’d be forgiven for assuming there’s nothing more to say. But the Detroit Free Press has put together a new, comprehensive financial history of the city from 1950 to the present, gleaned from tens of thousands of pages of archival data on the city’s finances. It provides a much clearer picture of the city’s collapse than anything we’d seen before.

It appears that the city took all of the hallmarks of blue governance to extremes. For years, it tried to address its revenue shortfall by raising taxes, which drove residents out of the city and shrunk the tax base in the process. Detroit lost 61 percent of its residents between 1950 and 2010, and the total value of its property fell from a peak of $45 billion to $9.6 billion in 2012. Meanwhile, even as the city’s revenue base was imploding, public employee benefits remained generous and in some cases even expanded.

The Free Press notes that there were a few periods of hope during thee postwar period when the city’s finances were relatively strong, but each time the city squandered these opportunities and used its good standing to borrow more rather than address the core problems that got it in the mess in the first place:

“Detroit got into a trap of doing a lot of borrowing for cash flow purposes and then trying to figure out how to push costs (out) as much as possible,” said Bettie Buss, a former city budget staffer who spent years analyzing city finances for the nonpartisan Citizens Research Council of Michigan. “That was the whole culture — how do we get what we want and not pay for it until tomorrow and tomorrow and tomorrow?”

The city has paid a heavy price. Today, Detroit has more pensioners than employees, and a debt that is more than twice what it had in 1960. It spends considerably more on police and fire retirees than active workers. And despite the fact that the city has the highest income and property taxes in Michigan—by a wide margin—the state’s inflation-adjusted revenue is lower than it was in 1960.

The piece incisively recounts an often confusing history, and a number of charts do an excellent job of depicting the decline of the Motor City. Read the whole thing.
 
Citizens of Detroit (and I mean citizens in the truest sense of the word) take matters into their own hands to keep a functioning community going. How well the succeed can be debated, and I'm sure self important bureaucrats will try to insert themselves into the process (I have heard stories in the past where citizens who start attending to parks that have been essentially abandoned by city work crews receive cease and desist orders from the city since they are doing jobs reserved for the city work's department).

BZ for rebuilding the "small platoons" of civic life. Best of luck to them:

http://reason.com/reasontv/2013/09/23/the-mower-gang-anarchy-in-detroit-part-i

The Mower Gang: #Anarchy in Detroit, Part I
Zach Weissmueller | September 23, 2013

We all know Detroit's in trouble: A bankrupt city full of crumbling houses, abandoned factory buildings, and a dwindling population.

But while politicians, unions, and investors slug it out in bankruptcy court and grasp for their share of what little cash is left, ordinary citizens are left to fend for themselves in a city with no functioning government. This is Reason TV's coverage of what happens when people are left to their own devices and forced to come up with creative ways to pick up the pieces and find solutions in a city they once loved.

This is #Anarchy in Detroit, a four-part series showcasing what actual Detroit residents are doing to make the Motor City a better place to live.

In Part I, Tom Nardone is tired of seeing Detroit's public parks go unmowed by the city government. He thinks that children should have a place to play. So, he hops on his mower and does it himself. Then, he invites others.

"I was surprised when the first person showed up. I was like, 'All right. I guess someone's as crazy as I am,'" says Nardone.

Hence, the Mower Gang is born.

Watch the video above, and check out the rest of the series here. Part II profiles Detroit Threat Management, a private security firm supplementing the efforts of the city's beleaguered law enforcement. Part III explores Fireweed Universe City, a neighborhood of anarchist squatters. And Part IV takes a look at one man's wild idea to purchase an island in the Detroit River and turn it into a libertarian paradise. Or, watch the whole thing here.

Approximately 3 minutes. Produced by Zach Weissmueller. Shot by Tracy Oppenheimer and Weissmueller. Music by Cassiopee Asphodel and Treaty.

Click the buttons below for downloadable versions of this video, and don't forget to subscribe to Reason TV's Youtube channel for more content like this.
 
Thucydides said:
Citizens of Detroit (and I mean citizens in the truest sense of the word) take matters into their own hands to keep a functioning community going. How well the succeed can be debated, and I'm sure self important bureaucrats will try to insert themselves into the process (I have heard stories in the past where citizens who start attending to parks that have been essentially abandoned by city work crews receive cease and desist orders from the city since they are doing jobs reserved for the city work's department).

BZ for rebuilding the "small platoons" of civic life. Best of luck to them:

http://reason.com/reasontv/2013/09/23/the-mower-gang-anarchy-in-detroit-part-i

You are probably thinking of Toronto, and yes it did happen.
 
Hatchet Man said:
You are probably thinking of Toronto, and yes it did happen.

Like so many other things, the City wrote a Policy regarding Volunteers:
https://wx.toronto.ca/intra/hr/policies.nsf/9fff29b7237299b385256729004b844b/aeff121824d7b2fe85257402005f765f?OpenDocument
 
The cautionary tale continues:

http://dealbook.nytimes.com/2013/09/25/undisclosed-payments-cost-detroit-pension-plan-billions/?_r=1&

Detroit Spent Billions Extra on Pensions
BY MARY WILLIAMS WALSH

Detroit’s municipal pension fund made payments for decades to retirees, active workers and others above and beyond normal benefits, costing the struggling city billions of dollars and helping push it into bankruptcy, according to people who have reviewed the payments.

The payments, which were not publicly disclosed, included bonuses to retirees, supplements to workers not yet retired and cash to the families of workers who died before becoming eligible to collect a pension, according to reports by an outside actuary and other people with knowledge of the matter.

How much each person received is not known. But available records suggest that the trustees approving the payments did not discriminate; nearly everybody in the plan received them. Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments.

Since June, Detroit’s auditor general and inspector general have been examining the pension system for possible fraud or misfeasance, and their report is expected to be released on Thursday. Among the findings is likely to be how much damage was done by the extra payments.

“It was like dandelions,” said Joseph Harris, who served as Detroit’s independent auditor general from 1995 to 2005. “You just accept them. They were there, something you’ve seen all your life.”

When asked on what legal authority the trustees made the payments, Mr. Harris said, “My understanding was, it had to be approved by City Council, and council was under the belief that the money was there — that the pension funds were earning the money — with the consideration that in bad times the city would be making up the difference. I hate to say that. Ultimately the fund has to be funded by the taxpayers.”

A spokeswoman for Detroit’s pension trustees, Tina Bassett, said she thought the outside actuary’s analysis, which concluded that the extra payments had cost the city nearly $2 billion over 23 years, was “not being fully straight with what happened.”

She said that the trustees were administering benefits that had been negotiated by the city and its various unions and that they had established an internal account to set aside “excess earnings” that would cover the cost. She said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.

“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.

Of all the nonpension payments, she said, 54 percent went to active workers, 14 percent went to retirees and 32 percent went to the city, which used its share to lower its annual contributions to the fund. The excess payments were often made near the end of the year, when recipients needed money for the holidays, or to heat their homes.


Paul Sancya/Associated Press
Detroit, which filed for bankruptcy in July, is the largest city in the United States ever to do so.
Detroit has nearly 12,000 retired general workers, who last year received pensions of $19,213 a year on average — hardly enough to drive a great American city into bankruptcy. But the total excess payments in some years ran to more than $100 million, a crushing expense for a city in steep decline. In some years, the outside actuary found, Detroit poured into the pension fund more than twice the amount it would have had to contribute had it paid only the specified benefits.

And then the city’s contributions were not enough. So much money had been drained from the pension fund that by 2005, Detroit could no longer replenish it from its dwindling tax revenue. Instead, the city turned to the public bond markets, borrowed $1.44 billion and used that to fill the hole.

Even that did not work. In June, Detroit failed to make a $39.7 million interest payment on that borrowing — the first default of what was soon to become the biggest municipal bankruptcy case in American history.

Detroit said at the time that making the interest payment would have consumed more than 90 percent of its available cash. And besides, the hole in its pension fund was growing again, and it needed another $200 million for that.

When Detroit went to the bond market, it acknowledged that it needed cash for its pension fund but did not explain its long history of paying out more than the plan’s legitimate benefits, including the bonuses, known as “13th checks,” which were reported this month by The Detroit Free Press. Nor did the city describe the pension fund’s distributions to active workers, or that a 1998 shift to a 401(k)-like plan had been blocked and turned instead into a death benefit. In its most recent annual valuation, the plan’s actuary said it was still trying to determine the “effect of future retroactive transfers to the 1998 defined contribution plan” without mentioning that it had been changed into a death benefit.

All of these eroded the financial health of the pension system, but neither the magnitude of the harm, nor its effect on the city’s own finances, were disclosed to investors. German banks were big buyers of Detroit’s pension debt; now they are complaining that they were told it was sovereign debt, as if it were issued by a national government.

Finally, in 2011, the city hired the outside actuary to get a handle on where all the money was going. The pension system’s regular actuaries, with the firm of Gabriel Roeder Smith, would not provide the information because they worked for the plan trustees, not the city.

The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost Detroit nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. It appears that Mr. Esuchanko could not get data for years before 1985.

His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments. Mr. Esuchanko could not get the data he needed to calculate those, either.

When he reported his findings in November 2011, Detroit’s City Council voted to halt all payments except legitimate pensions. The police and firefighters’ plan trustees appear to have discontinued excess payments earlier.

An investment banker now advising Detroit, Charles M. Moore, has said in a court declaration that the trustees of the general pension plan were “effectively robbing” the fund when they diverted its assets. He criticized in particular the transfer of money from the pooled pension trust fund to a group of individual accounts for workers who had not yet retired. The individual accounts had been established as a savings plan for city workers; the board credited them with interest at its chosen rate, often higher than what the fund’s investments actually earned.

“This abuse of discretion was most egregious in 2009,” said Mr. Moore, a managing director at the firm of Conway MacKenzie. He said the pooled pension trust had lost 24 percent of the value of its assets that year, but the trustees appeared to have credited the individual accounts with 7.5 percent interest.

“Hundreds of millions of dollars of plan assets intended to support the city’s traditional defined-benefit pension arrangements were converted,” he wrote, “to provide a windfall to the annuity savings accounts of active employees outside of the defined-benefit pension plan.”


Rebecca Cook/Reuters
Kevyn Orr, a Washington bankruptcy lawyer, is the emergency manager of Detroit, which has nearly 12,000 retired workers.
The actuarial firm of Gabriel Roeder Smith did not respond to an e-mail request seeking information about the excess payments and how they were disclosed in its annual valuations. The firm has already been dueling with a second actuarial firm, Milliman, hired by Detroit’s emergency manager, Kevyn Orr. Milliman said the two city plans appeared to have a $3.5 billion shortfall, much larger than one previously disclosed by Gabriel Roeder Smith in its annual valuation.

Detroit’s trustees say they think Milliman was told to come up with a big shortfall on purpose. Under Michigan’s emergency manager law, a city’s pension trustees can be dismissed if the fund under their care falls below an 80 percent funding level.

Unions fear the machinations are under way to reduce their benefits in the city’s Chapter 9 bankruptcy case. They say this cannot happen because Michigan’s Constitution explicitly protects public pensions.

James E. Spiotto, an expert on municipal bankruptcy with the firm of Chapman & Cutler in Chicago, said that if pension money was, in fact, misused, leaving an insolvency, it might affect the terms of an eventual settlement.

He said it was conceivable that the city might sue the pension fund, arguing it was unjustly enriched by the infusion of money from the bond market, because the city itself was misled about the size and causes of the pension shortfall. But that approach, if successful in court, would pose a practical problem: if the pension fund disgorged the bond proceeds, its own financial condition would just get worse. And it still has an obligation to pay the pensions.

Another approach might be for the city to try to claw back money from people who received more than they should have, using bankruptcy rules about fraudulent conveyances.

“A clawback is always hard,” Mr. Spiotto said. Instead of trying to get back the money, he said, Detroit might try to reduce those people’s future pension payments, to get back at least part of the overpayments.

“Somebody should be responsible for it,” he said. “And I think the municipality may have a legitimate argument — ‘We don’t have to pay twice.’ ”
 
Video: Detroit at night (Guy gets run over by a car near the end).

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https://www.youtube.com/watch?v=vMWHJDr8fxE



 
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