Took its capitol of detroit with it. Today the city is shrinking and broke. To solve its financial crisis detroit will have to cut city workers pensions. Illinois just pass emergency legislation to tackle 100 billion shortfall in its pension obligations. Thats huge money and people will pay the price. On this edition of inside story well look at the tradeoffs and solutions when Balance Sheets teeter to the brink of disaster, and we start in detroit. Let me just say that the judge has spoken, and i do think its a tough day for all of us here in detroit [ music ] once the nations fourth largest city, the heart of the Auto Industry and the soul of American Music todays detroit is a portrait of urban decay and facing a water shed moment. It is the largest municipality in u. S. History to file for bankruptcy. A federal judge ruled the city is not only insolvent but in a decisive verdict declared that pensions will be included on the chopping block. Dave bing is the outgoing mayor. The only way we stayed alive, quite frankly, is through cuts. We cut everything that we could. Unless there is more investment coming into the city, and a new stream of revenue there was no way, i guess, to fix the the problem. Now with bankruptcy emanant i think that debt off of our Balance Sheet will be less than it is today. That will be positive in a Going Forward basis. The judge restored essential Services Like basic ambulance, fire and police protect. The citys Public Workers and retirees will bear some of the brunt of the cuts. A rare decision as benefits are typically cleaned untouchable, protected by the Michigan State constitution. Kevin orr is detroits emergency manager. There is not ruc restructur ing. Bisi onileere is covering the bankruptcy for al jazeera. The judge has given orr until march to submit a Restructuring Plan for the city. This is a report that the emergency manager said he will complete within the next couple of weeks. This is when well get a good idea of how deep orrs cuts will go, and how he plans to generate new revenue here in the city. Retirees will get a better idea of how much they stand to lose. With a crushing 18 billion in debt, unions, Pension Funds and retirees as well as other creditors could stand to lose. For every 1 detroit collects, 0. 40 goes back to paying off legacy debt, a figure that could rise as much as 0. 65 without bankruptcy relief. When a city files for chapter 9 it must first qualified for protection before reducing its debt to creditors. Additionally it must negotiate in good faith with those creditors who understand that theyll be paid also than they are owed. Some say that hasnt happened. When youre an institutional creditor, you make decisions. When you work for the city of detroit for your entire life, you retire and then they say sorry, we didnt mean it, thats a very different situation. Despite being rare and last resort, detroit is not the only municipality who has sauce assistance in debt reduction. Since 2015 eight cities including roa central falls, owed rhode island , including pension, and then came out of debt and assu assured bonds would be paid in full. And then Jefferson County is the second largest municipal bankruptcy in history. In california, the city filed for bankruptcy in 2012 with only 150,000 in the bank unable to pay for the basic daytoday operations. It would be an ongoing disaster if the city continued as we are going without reorganizing. Debt and pension liability is not just a municipal problem. The state of illinois is feeling the billion dollars, solving fissioncal problems of the magnitude of detroits or illinois is more than moving numbers on a Balance Sheet. It involves tough choices, Vital Services and peoples lives. Joining us to discuss detroits bankruptcy and lessons the motor city can learn are kill, director of state and local Fiscal Health for the few charitable trusts. In pennsylvania, david, a state appointed receiver for the city of harrisburg. He specializes in Municipal Bonds and dean, professor of economic research. Kil, cities across the country saw declining sales takes revenues, declining tax ref news as peoples homes reduced in valley. Value. A lot of cities are experiencing fiscal stress but i want to reiterate bankruptcies are rare. Those who issue debt in the credit market only 10 a year going g into bankruptcy. While fiscal stress is a chief concern, bankruptcy is still a very rare phenomenon. Is it stuffer at a time when the economy is not robust when the states in which these cities and counties are located are also feeling a lot of strain, is it tough for put these restructuring deals together . The state plays a significant role in the Fiscal Health of the city. They offer state aid to local governments. That makes up a third of the city revenues. When cities cut back due to their own fiscal pressures local governments experience a lot of fiscal squeeze as well. Are there fewer good choices when youre finally pushed to make a bankruptcy declaration. Bankruptcy is a measure of last resort. Joining anybody enjoys having to papaying pensioners, or putting cops on the street or fixing potholes and doing things that create vibrant cities. When they declare bankruptcy it is an indication they have got themselves backed in a corner that they cannot get out of. Pennsylvania is a sizable place with an enormous budget. What got the city there and how did it get out . There were two problems. On a regular basis the revenues that the city could generate through taxes were insufficient to cover regular expenses. A lot of that as with any city, has to do with labor costs. So in pennsylvania because of the stay laws that the city ies operate under, it was difficult to keep their labor costs within their ability to raise taxes. The other big problem in harrisburg was that they undertook an incinerator project to dispose of trash and issued a lot of bonds to try to get the incinerator to operate properly. It was just basically a functional disaster. It really faced those two problems which caused a lot of stress on everything in the citys budget. Dean, right now the judge has cleared the way in detroit for a wide set of stake holders to take a haircut. A lot of cities are still in the process. Does that decision make it more to be that places like stockton, san bernardino, may look back at their pensioners, their obligations to city workers in a way that they might not have before . Well, every city has its own circumstance. What was striking in detroit, and i dont know if this is the case in california, is that in michigan, the state constitution guarantees pension. This in my view was a striking ruling. The constitution is a creation of the state. It says pensions should not be cut yet the creation of the state, the city goes into court and goes through a process that is almost certain to cutting pensions. To my view thats strange and strong court ruling. If you could do it even in spite of the state constitution, i gather some other cities may look that way. There are reasons that you dont want to cut workers pensions. I dont think people will be anxious to do it, but it will increase possibility. Well take a short break. This isnt a new channel, this is a watershed moment in media for america. This entire region is utterly devastated. People our here are struggling. The fire jumped the highway we took earlier. Your average viewer wants to actually understand how the Health Care Law is going to help them or hurt them. They know they can get extremist bickering somewhere else. People say that were revolutionary. Our revolution is just going back to doing the best in journalism. This is the place to go watch high quality journalism, period. Fault lines investigates. Fracking Shale Gas Development could actually double the Economic Growth rates in the province. This is our land for thousands of years. Do you drink money . You must have a lot of money to drink. As tensions rise, and protests turn violent, where will the debate lead . The situation was no longer peaceful or safe. They were bashing my head with their boots. They had their guns on me and everything. How much more real can this get . Fault lines only on Al Jazeera America what happens when big cities like detroit go bust. People are effected as politicians make hard fiscal decisions. We closed last segment talking to dean baker about retired workers taking a hit. In fight after fight, in illinois, wisconsin, in other places when the issues has become workers pensions. They have been portrayed as greedy municipal workers. People who would drive the city, the county into bankruptcy rather than do their fair share to get them out. Is this a problem . I mean after all these pro negotiated between collective bargaining agents the states and the counties and cities. The problems that have been earned are promises that need to be kept. The problem is the benefits, retirement that the workers have earned, its the fact that the state has never put aside what they were opinioned to year after year and theyve developed in huge unfunded liability. You see the kicking the can down the road coming to bear on todays workers and its unfair. Most states that have enacted reform have tried very hard to preserve the benefits to the existing workers while changing plans for workers Going Forward. In detroits place they ran out of time and money. In the laws governing this part of our civic life, were states able to treat funds in a different way, is this a recent development . Well, you had variation across states. I think the recent problema lot of states had been somewhat reckless, but the recent problem dates from the stock bubble. What happens is in the 90s the stock market was going up so much that states felt they didnt have to contribute to their pensions. The bond agencies blessed this. We assume that the bubble will continue inperpetuity, and they didnt. So you had a lot of places, illinois being one of them where they stopped making the required contributions in the late 90s which was okay when the market awas really high. But now it came back to earth. And you miss the contribution in one year, two years, but many years, you get into trouble. In harrisburg did it involve pensions take a haircut. The Pension Funds were well funded. But the medical costs, regular wage and huge amount of bond debt that was outstanding. When you look at the human dimension its very sad and distressing what happens to workers in these situations. But theyre not the only individuals involved. There are the tax payers and the city. When i was receiver in harrisburg i would talk to the citizens all the time who were very concerned about what it meant to them and how much taxes they would have to pay. The other i think said in your introduction people talked about the constitutional investors but a lot of bond holders are Holding Shares in mutual funds and using their retirement money to invest partially in bonds. When you have a meltdown situation like this, its not just the workers who are hurt but the toda taxpayers, the city, and bond holders, the individuals. When youre doing a work out like this, the goal is not to let anybody off free. I know in some of your guests are arguing that pensions should be sacks cro sac rosant. At debt is too great for the tax tax payers have to pay. All parties will have to accept that they will have pain as part of the process. It takes a while to get there. You see detroit with its pensioners saying dont touch us. The goal is to have a fair and proportion nat loss suffered by everybody who is dealing with this city in distress. I think david has a good point. The retired city electrician has a face, we can put him on the 6 00 news, and understand him very well. But in the case of, for instance, Franklin Temple ton and investments, they own 35 million of stockton paper, and in the recent proposal from the city theyre offering less than a penny on the dollar. Well, Franklin Temple doesnt have a face. Its symmetry. You expect them to have well informed people investing their money. I mean, you might have ill informed people. You might have ordinary people putting their money there, but the persons investing the money is getting paid a lot of money to know that stockton is a high risk place and they made a mistake. There is symmetry there. But another thing these people worked for their money. Why am i making that special . Well, they sell off property. They make concessions. Detroit has a sports team. They made all sorts of problems. Why dont we go to the sports team. Well, that was a done deal. Thats a contract, why do the workers going back on taking part of their pay, but we dont go back over the last ten years and say, who did you make concessions to . Who did you sell property two . We would never consider doing that. Why are we doing this to the workers . How does this get worked out when everyone is around the table . Well, i think david hit on a point. The deal has to be fair and equitable. And the judge will determine whether or not if thats the case where the plan that emergency manager kevin orr puts forward. I think from judge rose perspective. Hell look to see that everyone has sharing of the pain Going Forward. One thing that makes detroit different than some example, you mentioned central falls, it was contentious from the beginning. They took on a highly based model where the union and other stake holders were at the table and they were able to work out their differences pretty quickly. They also had a state playing a significant role offering up some direct aid in the form of 2. 4 million to soften the blow to workers. How is detroit different . Well, the state has been largely absent with what has been going on in the city. Early on when the city was struggling to sort of make ends meet, so to speak, the state agreed to collect taxes that was owed to the city where workers who live in the city who were employed in the suburbs were supposed to pay income taxes, and that was never done and that kind of aid never came to the city from the state. Ill pick up our conversation in a minute after this break. Youre watching inside story on Al Jazeera America. Al Jazeera America is the only news channel that brings you live news at the top of every hour. Here are the headlines at this hour. Only on Al Jazeera America. And now, a techknow minute. While you were asleep, news was happening. Here are the stories were following. Find out what happened and what to expect. International outrage. A day of political posturing. Every morning from 5 to 9am Al Jazeera America brings you more us and global news than any other American News channel. Tell us exactly what is behind this story. From more sources around the world. The situation has intensified here at the border. Start every morning, every day, 5am to 9 eastern with Al Jazeera America. Welcome back to inside story. Im ray suarez. Were wrapping up our conversation on municipal debt, bankruptcy and the city of detroit. Still with us, kal , david the state appointed receiver of the city of harrisburg, and dean baker in research. When something so big goes down, does that send a shiver through the entire system and make a difference landscape that might meet the next city or county to go through this . When you look at the terrible situation in detroit, the one good thing about it is that a lot of legal issues which are uncertain now are going to be resolved. For example, are pants sacrosant, are bonds sacrosant. I think its going to make it easier for municipalities to sit down with their workers, bondholders, or whoever it is that they have to negotiate with, and get this done. This is what is going on in harrisburg. Its not going into bankruptcy. They had to threaten it to get creditors to the table. Unions, and everyone else. But there has been a plan that was accepted by all the creditors. They knew they had to take losses and they negotiated a fair and reasonable st. Settlement. There are a some funds that will complete the work out for harrisburg. David sees a tool kit coming ouout of the experience in detroit, do you . I worry about the tool kick. You worked for this, but turns out we dont have the money. Are we going to go back to people we sold property to, would we take it back . I think its a very extreme measure. I think not really justified. I under the detroit but michigan stayed out. It. Detroit is michigans responsibility as much as the governor might like to pretend otherwise. But do you have to do it for print, saginaw and others. I think youre going to see that story, i would be worried working with the cities. Detroit is so big, how does it change the game Going Forward . Well, i think certainly you have to treat detroit as its own entity. Dean mentioned that each city is different, and thats a point i would stress. Many states have programs to intervene with distress before going to bankruptcy. It is an end game that no one wants to find themselves playing because it means that its runthe city has run out of options and it really needs to renege on many of its promises. Knowing what you do, do you think detroit could have avoided getting here . Detroit could have avoided getting here if they had intervened earlier. No one was surprised when detroit filed for bankruptcy. The sad trust about detroit is that its been on a long steady decline and people recognized that. The local leaders kicked the can down the road by borrowing for other debt they had issued. It was a resolving door of credit and they created their own problems. This could have been avoided. Kale, dean, david, thank you all. This brings us to the end of this edition of inside story. Thanks for being with us. In washington, im ray suarez. Welcome to Al Jazeera America. Im stephanie sy. Here are the stories were following for you. Unemployment benefits at a critical point. More than a Million People will lose their aid three days after christmas if congress doesnt act. Some fastfood workers are striking across the country. Two major sites were hit by a mass hack attack
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