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Tue July 23, 2013
What Detroit Can Learn From Other Cities
Originally published on Mon July 22, 2013 6:40 pm
As officials in Detroit move forward with the city’s bankruptcy filing, what can they learn from other cities across the country that have gone down this path?
Harrisburg, Pennsylvania, filed for bankruptcy in October of 2011. There’s also San Bernadino, California; Jefferson County, Alabama; and Central Falls, Rhode Island, among others.
David Shepardson, Washington bureau chief for The Detroit News, joins us to explain how other cities have handled tough issues such as whether pensions will be paid.
- Detroit News: Bankrupt cities offer lessons to Detroit
JEREMY HOBSON, HOST:
From NPR and WBUR Boston, I'm Jeremy Hobson.
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I'm Robin Young. It's HERE AND NOW. In a minute, a South African reflects on his dear friend Nelson Mandela, who is reportedly able to smile and watch TV today.
HOBSON: But first to Detroit, where some officials are saying they want the bankruptcy process to be over and done with as quickly as possible, maybe by next September, others saying the city shouldn't be filing for bankruptcy to begin with. Detroit is the biggest American city to file, but it is not the first. Harrisburg, Pennsylvania, filed in October 2011. There's also San Bernardino, California; Jefferson County, Alabama; and Central Falls, Rhode Island; among others.
So what can the Motor City learn from what happened elsewhere? David Shepardson, Washington bureau chief for The Detroit News, has been looking into that, and he joins us now. And David first, let's talk about the idea of selling off assets. Detroit is expected to sell off some stuff, including some art. Is that a good idea?
DAVID SHEPARDSON: That is probably the key lesson. Every city that we've looked at that filed for bankruptcy - and county - has sold assets. Jefferson County, Alabama, sold a county-owned nursing home. Harrisburg, Pennsylvania, which briefly was in bankruptcy but was kicked out because state law didn't allow, just this week finished selling about 8,000 items that a former mayor had acquired for a Wild West museum that never opened.
So the city certainly has a lot of assets. It has an estimated $2.5 billion worth of city-owned art at the Detroit Institute of Art. It has half of its share of the Detroit-Windsor tunnel, which collects toll revenue. It has parks. It has the Detroit Historical Museum with the original Howdy Doody puppet. So there's going to be a lot of effort by these creditors to go after all these assets.
Now will they get some or all of them? Most likely at the end of the day the city will have to make some offer to say hey, this is what we're willing to sell, this is what the creditors will get, because otherwise it could drag on for years and years.
HOBSON: There are, as we said, a lot of examples to look at. And I wonder if we can focus for a second on Stockton, California, which filed about a year ago. What has happened since then in Stockton?
SHEPARDSON: Another perfect example of really what not to do. And it's really a lesson that Detroit has taken to heart. The very first hurdle you have to pass in a Chapter 9 bankruptcy is eligibility. You have to prove to the court that you are eligible to be in bankruptcy.
HOBSON: And there are questions even right now in Detroit about whether it is eligible.
SHEPARDSON: Well that's true because the city is not - it has not run out of money. In fact it is going to run a budget surplus this year. But it has $18.5 billion in long-term debt. So there is a real question about how much long-term obligations should be classified as sort of immediate debt. So - and that's something that the pension recipients are going to say.
They're going to argue hey, you're overstating how much the pensions need to pay now, and these other payments, but in the case of Stockton, they really got bogged down immediately with the creditors and with the California state pension system over whether they're eligible. And so a year later, they're still fighting over this, and they have to come up with a plan of restructuring, and that can take years to win approval from the creditors and the court.
So Detroit, day one they filed, immediately said we want to set a 30-day window, you know, start as fast as you can because it's going to be a long, complicate process.
HOBSON: And all along I imagine the city's economy does not do very well when it is in bankruptcy, and it has to deal with the brand of bankruptcy.
SHEPARDSON: Exactly. I mean, getting, you know, conventions and tourists to come. And I think there's also a morale issue for the city, for the workers, for the pension recipients. I think everybody agrees that faster is better, but if you're creditors, some of them are going to have an incentive to try to throw wrenches in the process, sort of make Detroit feel the pain in an effort to convince the city to be a little more generous with a settlement, as opposed to just pushing it through.
HOBSON: David, is there any city that has done a good job that Detroit should learn from?
SHEPARDSON: Central Falls is a good example as they got in and out very fast. I mean, that was in record time. And if that's your benchmark, that's one of the good ones. And Jefferson County, Alabama, is also getting in and out in about 18 months.
They did something a little bit innovative and controversial in that they have agreed to use these capital appreciation bonds, which is a 40-year repayment plan, which starts out low and goes up high. And so in the case of Jefferson County, they're going to repay about $1.9 billion, but over the term of the 40 years, they're going to pay about $6 billion in total interest payments.
So it's good they got out fast. There's a question about, long term, can they pay all that debt.
HOBSON: And I know that Kevin Orr in Detroit, the emergency manager, has said that he's hoping to get out bankruptcy by September of 2014. So we shall see. David Shepardson, Washington bureau chief for the Detroit News, thanks so much.
SHEPARDSON: Thanks, Jeremy. Transcript provided by NPR, Copyright NPR.