Detroit, Guest Post — August 26, 2013 at 12:27 pm

GUEST POST: Finance expert says Detroit can pay pensions & bondholders and still balance its budget


There’s more to see in Detroit than meets the eye

Eclectagraphic by Anne C. Savage

The following is a guest post by Roger Kerson and is Part 1 of a 2-part series. Roger is a Michigan-based media consultant for labor unions, environmental group and non-profit organizations. He was director of public relations at the United Auto Workers during the GM and Chrysler restructuring. As an associate of the Arlington, Virginia-based firm PRWRK, he has provided strategic counsel to the Transport Workers Union of America during bankruptcy at American Airlines and to the United Mine Workers during bankruptcy at Patriot Coal.

Plan B for Detroit: Muni Finance Expert Says Detroit Can Pay Pensions and Bondholders – and Still Balance its Budget

As Detroit prepares to enter the largest bankruptcy of any city in U.S. history, municipal finance expert Richard Larkin says there’s a better way.

Larkin published “Plan B for Detroit” on the website of Bond Buyer magazine on August 8. It’s behind a paywall there now, but still available at the website of HJ Sims, an investment firm which specializes in underwriting tax-exempt bonds. Larkin a senior vice president and director of credit analysis at Sims, says his views on this topic are his own, not those of his employer.

Larkin’s “Plan B” is a ten-year, ten-point proposal which he projects would allow Detroit to honor pension and health care promises to retirees, pay off its bondholders in full, and reduce the city’s cumulative deficit by more than $3.5 billion by 2025.

Still a big deficit – but more manageable: Larkin agrees with Emergency Manager Kevyn Orr that Detroit needs to spend hundreds of millions of dollars over the next decade on blight removal and improved police, fire and other essential services. By 2025, he projects a cumulative deficit of some $561 million, or about 13 percent Orr’s current projection of a $4.1 billion shortfall if no action is taken. This more manageable deficit can be made up, Larkin says, by additional spending initiatives.

As far as Larkin is aware, he’s the only one who has crunched the numbers to come up with a detailed alternative to Orr’s controversial plan to slash pensions, eliminate city-funded health care for retirees, and drastically reduce payments to the bondholders. Larkin estimates that Orr’s approach means that city bondholders and pensioners will get just 20 cents for every dollar they are owed.

I spoke with Larkin about how Detroit could avoid a bankruptcy filing that could make it extraordinarily difficult for the city to borrow money for years to come. He’s willing to share his ideas with the city as well – but so far, no takers. “No officials have reached out,” he told me.

Plan B includes the “T” word: Unlike Orr, Larkin doesn’t think Detroit can dig out of its current hole by budget-cutting alone. His plan for Detroit includes real revenue increases. Specifically, he suggests:

  • A one percent sales tax to raise $30 million a year;
  • A return to 2011-2012 levels of state of Michigan revenue-sharing for Detroit, adding $56 million a year;
  • Regional taxes in exchange for sharing revenues from Detroit’s water and sewer system with suburban jurisdictions, for an added $50 to $52 million per year.

While he believes bankruptcy can be avoided, Larkin agrees that Detroit is in a world of hurt. The city, he writes, “has the worst economic problems of any major city that I have seen in 38 years of municipal credit analysis.”

No single approach can solve a budget mess this big, Larkin told me. “You cannot tax your way out of this. You can’t just cut spending to get out of it, that’s clear. You have to be creative, and Detroit’s emergency manager’s plan is not creative.”

Tomorrow: Part II — Does Kevyn Orr know how to manage a municipal emergency?