Detroit Rising: Life after bankruptcy

The City of Detroit has more than enough cash to pay its daily bills. Thousands of busted streetlights have been replaced. City retirees still receive pension checks, and valuable paintings remain ensconced in the gilded halls of the Detroit Institute of Arts.

That's the good news. But a year after a federal judge approved a cost-cutting and reinvestment plan in the nation's largest-ever municipal bankruptcy case, Detroit's financial future still hangs in the balance.

Among the greatest concerns: a multibillion-dollar pension bill that starts coming due in less than a decade.

The city is on the hook to make a balloon pension payment estimated at more than $100 million in 2024 alone. But if the pension investments do not perform as anticipated, the bill could be significantly higher.

So far, the early returns for the investments since the bankruptcy are falling short. City officials and their watchdogs are already considering paying more into funds much sooner than prescribed by the city's bankruptcy exit plan confirmed only a year ago. It's unclear how Detroit would foot the bill.

On Nov. 7, 2014, federal bankruptcy Judge Steven Rhodes gave a green light for Detroit's government to cut more than $7 billion in unsecured liabilities and pour $1.4 billion over 10 years into basic services to rehabilitate the city reeling from a decades-long population exodus, disinvestment and cash drain. At one time, the city's liabilities were estimated at more than $18 billion before creditors and pension holders took a financial haircut.

It was officially known as a plan of adjustment. In reality, it amounted to Detroit's second chance.

Some, especially retirees, remain embittered by pension cutbacks. But those who designed and approved the plan praise the city's hard-fought decisions forged in bankruptcy as a financial reckoning years overdue.

"I think the early indicators exceeded our expectations," former Detroit emergency manager Kevyn Orr said in an interview late last month.

Orr, a seasoned corporate bankruptcy lawyer, became the city's viceroy in March 2013, ushering Detroit into a rare Chapter 9 bankruptcy and commanding the city through months of tense negotiations to clean up the balance sheet before leaving office late last year at the bankruptcy's conclusion.

Since then, trying to tear down thousands of blighted homes and commercial buildings while improving city services including public safety have been expensive and slow ordeals. Fixing the city's high poverty rate, unemployment and poorly performing schools were largely left out of the bankruptcy process despite impeding the city's revival.

Many acknowledge it's tough to come up with a complete report card on the city's bankruptcy plan after less than a year. But in an interview, Rhodes, the case's presiding judge, echoed Orr's early assessment: "My impression is that the city is actually doing better at this point in time than we had projected during the bankruptcy case."

Detroit's bond rating up, but at a cost

The city officially quit bankruptcy in December 2014, essentially capping the nation's largest Chapter 9 case, which raced through court after the city almost ran out of money, stopped paying its pension bills and filed for bankruptcy protection in July 2013.

Leading architects of the city's restructuring have been lauded with awards for their work. At least three books are in the works on the case and its 24-day trial featuring dozens of witnesses, thousands of exhibits and average Detroit residents saying no to Orr's sweeping restructuring plan. But many others, including some of the city's leading business and philanthropic leaders, cheered the end to the city's financial crisis despite the costs.

Until this summer, when Hillview, Ky., population 8,000, filed for Chapter 9 protection, no one dared follow in Detroit's costly footsteps. The city alone spent $165 million in fees for an army of lawyers and consultants.

"We certainly know many people were hurt during the bankruptcy, but what would have been the alternative and how would they have been hurt under the alternative?" said Michigan Treasurer Nick Khouri, who now chairs the city's financial oversight commission created during the bankruptcy.

Modern-day soothsayers once envisioned doomsday scenarios for Detroit: The city would be trapped in bankruptcy court for years. Defaulting on the city's debt would ripple throughout the municipal bond market. Detroit would be unable to borrow from creditors again.

None came true.

Indeed, some of the city's largest creditors and most fierce courtroom opponents took financial stakes in the city's future by taking over city parking garages and securing redevelopment rights to landmark properties such as Joe Louis Arena. A $245-million bond offering to finance reinvestment in city services this summer came at a premium for the city, but it also benefited investment grade from rating agencies for a city once seen as junk status.

Part of bankruptcy's legacy has been a turn to a more regional approach to the city's problems. Detroit is scheduled to transfer management of its water and sewerage department to a new regional authority on Jan. 1 as a byproduct of the city's bankruptcy.

Generally, most city revenue streams appear on track or better than expected, but progress on revamping and revving up city government remains a long slog with some delays in key initiatives such as hiring police officers, according to documents and interviews.

The city's dysfunctional and embarrassing street-lighting system is nearly overhauled, and the greater downtown seems to be taking off with new development. Local business titans Dan Gilbert and Mike Ilitch continue to reinvest in the city's core by spending hundreds of millions of dollars to re-create neighborhoods where their employees and others can live, work and play.

There is also palpable optimism as outside investors, including some of the nation's largest foundations and leading businesses — from the Ford Foundation to JPMorgan Chase to India-based Sakthi Automotive — flock to double down on Detroit's future.

Some residents in neighborhoods, however, wonder whether the new, good times will trickle onto their streets with new development and new jobs. Some have coined the phrase "Two Detroits" to describe a disconnect between eye-popping redevelopment in greater downtown and entrenched challenges in some of Detroit's fragile neighborhoods. Detroit remains one of the nation's most crime-ridden cities despite declining violent crime in 2014, according to FBI statistics.

Dilapidated and abandoned buildings littered across the city's 139 square miles remain just one of the city's many urban ills.

"I think the city's off to a very good start in removing blight, but it's a moving target," said John Mogk, a longtime law professor at Wayne State University who specializes in land and development issues. "As vacant buildings are removed, other vacant buildings crop up because of the rash of tax and mortgage foreclosures that are ongoing."

As a result, Mogk said, the initial expectations of eliminating blight in as little as five years were over-optimistic. More realistic, he said, is to think of ridding blight over a 10-year period.

'What we have here is a minimal city'

When the bankruptcy started, the city faced furious opposition from retirees, unions and financial creditors, making an amicable and speedy resolution appear unlikely. The city eventually reached settlements with all its major creditors, including retirees, unions, bondholders, bond insurers and banks. A fire sale of the city's art collection worth billions was prevented.

Today, the city has seen some dividends to a peaceful resolution to an urban crisis that some feared would end in unrest. Detroit continues to lose residents but at a much slower clip, with about 1% moving out between 2013 and 2014, according to estimates released by the U.S. Census Bureau in April. Some officials inside city government believe the city's population decline may have finally reached bottom this year.

Peter J. Hammer, director of the Damon J. Keith Center for Civil Rights at Wayne State University in Detroit, has doubts about a true rebound. He argues that the city has so far failed to reconcile the exuberance over the growing investment in downtown and Midtown Detroit while many in the city's neighborhoods have only seen limited gains in improved services.

"What we have here is a minimal city," he said, adding that municipal amenities across the city's borders remain far superior to city life. "A whole range of services from recreation to public health to neighborhood improvement are not available in the same ways that they are available if you just cross 8 Mile."

A better balance sheet, with challenges ahead

When asked for evaluations of the city's progress, many city and state leaders first point to the reform of the city's balance sheet.

"I think that's a strong statement right there," Michigan Gov. Rick Snyder, who authorized the city's bankruptcy, said in an interview Friday. "They show forecasts that they continue to balance budgets."

There are signs, so far, of a substantial recovery, according to Detroit Mayor Mike Duggan. Buses meet posted schedules for the first time in two decades, police and ambulance response times have been significantly reduced, according to the mayor. More than 7,000 blighted homes have been torn down in the last 18 months.

The mayor who took office when an emergency manager still ruled the city also points to significant business reinvestment in the city and major new housing developments set for the riverfront, the new Red Wings arena district and Brush Park.

"We've got jobs coming back, and we're feeling good," Duggan said in an interview last week.

Even with the city now expected to bring in more revenue than expected in its current fiscal year, Duggan said there are still significant financial challenges ahead. At the top of the list are boosting the city's income tax collections and preparing for the significant payment that the city must make nine years from now to the city's general pension fund.

Thanks to rebounding real estate prices in neighborhoods across the city, property tax revenues are up, but income tax collections are coming in below projections, Duggan said.

"We're OK for now, but if we don't deal with that, it will become an issue," he said.

Duggan is working with lawmakers in Lansing on a bill to require suburban employers to withhold Detroit city income taxes on Detroiters who work in the suburbs.

"That's the biggest threat to the plan of adjustment: the inability to collect income taxes on Detroiters who work in the suburbs," Duggan said.

'It's not only a grand bargain, but a grand bet'

The centerpiece of the bankruptcy blueprint was the so-called grand bargain, an $816-million investment by the State of Michigan, some of the nation's leading foundations and the Detroit Institute of Arts to preserve the city-owned art museum collection in exchange for helping to pay down the city's crushing employee pension debt.

After emerging from the shadow of the city's bankruptcy, the DIA hit its $100-million fund-raising goal for the grand bargain earlier this year. Housed in a beaux-arts-style building along Woodward Avenue lined with Picassos and signature Diego Rivera murals, the world-class museum is expanding its statewide programming as part of its grand-bargain obligations.

The museum has also turned its attention back to building a $400-million endowment to replace the $23 million in annual operating support provided by a tri-county property tax until the year 2023.

Despite the grand bargain's success, the future of the city's pension funds, whose investments performed below expectations in the first year after bankruptcy, remains worrisome.

"It's not only a grand bargain, but a grand bet," said James Spiotto, one of the nation's leading experts on municipal bankruptcy. The managing director of Chapman Strategic Advisors in Chicago noted that the city is largely absolved of its obligation to pay into the pension system for a 10-year period but "projecting 10 years out is quite difficult, so I think they are going to have to pay attention to that."

City retirees now 'taking on water'

At stake is the future of retirees like Sonia Moore, 71, who left her job with the city in 1989 after an illness and went on disability. Despite the underfunding in the pension system, Moore said her friend still wonders about whether she and other retirees might see cuts to their pensions restored.

"She said, 'You think they're going to give us our money back?' " Moore recalled. "I said, 'Yeah, when hell freezes over.' "

Under the plan, general pensioners were hit with 4.5% cuts on their monthly checks, the elimination of annual cost-of-living-adjustment (COLA) increases, and a clawback in excessive interest from annuity savings. Police and fire pensioners saw a reduction only in their COLA increases. Without the grand bargain, the cuts would have been much worse, city leaders said.

More than 25,000 retirees and active city workers, including police and fire, are covered by both the General Retirement System and the police and fire system, according to the pension system's latest data. Pension fund officials interviewed last week said the idea of restoring cuts to pensioners as spelled out in the city's bankruptcy plan in great detail is not likely in the near term.

Many days, retirees say they fear that they've been forgotten while they struggle to move forward after the bankruptcy forced them to make changes in their own lives. The first cuts to monthly pensions hit checks April 1. But the new added cost of health care coverage — which added another $300 a month to $600 a month for coverage for some retirees — cut even deeper into family budgets.

City retiree Dave Nelson, 64, who lives in Lowell outside of Grand Rapids, said the city's bankruptcy has moved off the radar and has been forgotten by many people who aren't connected to the city.

"It's like it never happened," Nelson said.

An EMS captain for the Fire Department, Nelson was part of the city's General Retirement System, which faced deeper cuts than police and fire retirees. He said he personally pays $700 a month more now for health care coverage. His pension check was also cut by 4.5% each month, like other retirees. He lost about $25,000 in the clawback.

Nelson says he still has a good pension of about $4,200 a month, which sounds like a lot, he says. But he has property taxes, medical expenses and other costs to cover. Too often, the family has pulled out charge cards over the year and let credit card debt build.

"I was living within my means when I retired," said Nelson, who retired in 2005. "We've got a slow leak. We're taking on water."

Going back to work after pension cuts

In some cases, retirees in their late 50s and early 60s say they went back to work to deal with higher health care costs once covered in large part by the city. The extra costs of obtaining insurance through the Affordable Care Act marketplace can eat up an extra $300 to $600 per person for a retiree under age 65, according to financial advisers.

"I went in fighting," said Shirley V. Lightsey, president of a retiree association for the general city retirees. "I was ready to go to the (U.S.) Supreme Court." She said that she went into the bankruptcy thinking that the city's retirees should never approve cuts to their pension checks at all. Two-thirds of the city's retirees are age 65 and over with an average pension $19,000 a year, she said.

But she changed her mind and turned around to support the retiree cuts because she realized the cuts were necessary. Voting yes also meant that the cuts would be smaller because of the grand bargain. And if the issue went to the U.S. Supreme Court, some retirees wouldn't live to benefit from a resolution.

"At some point, you just have to resolve the issue in your brain," Lightsey said.

Sound the alarm bells, or is it too early to tell?

Even after the cuts, city officials, including the mayor, say the remaining pension obligation looms large.

Early returns since the bankruptcy are not especially encouraging. The city's two pension funds reported rates of return on its investments of less than 4% in the first half of the year, mirroring a poorly performing market. The General Retirement System covering most city retirees, for example, posted a 2.7% return for the six months ending June 30.

Fiscal year 2015 for the General Retirement System fund with a market value today of $2 billion could be worse. It "will likely show an investment loss," leading to an expected decline in the system's funding status, according to an Oct. 27 actuarial report commissioned by the fund. The latest figures show the General Retirement System has a funding level of 62.5%.

Those funding-level figures assume city will earn 6.75% return on its investments in the coming decades. But if the return is lower — say 4.29%, or the equivalent of the current long-term municipal bond rate — the funding level drops to less than 50%, according to an analysis last month by the actuarial firm Gabriel Roeder Smith & Co. for the General Retirement System. That could also push the final bill for city taxpayers much higher.

A similar report prepared for the city's police and fire department employees and retirees is not publicly available because it has not yet been approved by the pension board, a spokesman said.

City officials and pension fund experts say one year's lagging performance is not enough to sound major alarm bells. They note that the city has time to make up ground financially in future years.

But others, including the expert assigned to assess the feasibility of Detroit's bankruptcy plan, worry that low returns, especially in the early years, could mean the payments still owed by the city will have to increase when it resumes its funding of the system. The city is already on the hook to pay its largest pension fund $118 million in 2024 even if the funds met projected investment returns, one recent pension analysis found.

"There was really no Plan B if it doesn't work," said Martha Kopacz, who analyzed the plan for Rhodes and now consults for the city's financial review commission. "People just get tired of me chirping about this, but this is a really big number."

Can Detroit grow its way out of a pension problem?

As part of the bankruptcy, the pension systems lowered their annual expected growth rate to 6.75% from 7.9%, a move that puts the system at the conservative end of expected returns at other major public pension programs, officials said. But Eric Scorsone, professor and director of the center for local government finance at Michigan State University, said even the lower city's assumed rate of return of 6.75% could be a challenge to achieve.

"To be quite frank, what they're using is still pretty high," said Scorsone, who participated in the city's revenue-estimating conference in September.

The issue of pension bills no matter the rate of return has already attracted the attention of the city's financial review commission set up during the bankruptcy as a watchdog over Detroit finances.

At a meeting late last month, financial review commission member Darrell Burks, a former senior partner at PricewaterhouseCoopers, said, "We need to be prepared — whatever the number is — to accept the reality that it's going to be a substantial amount in 2024." He estimates an adjustment in the upcoming city budget "somewhere between $100 to $200 million to accommodate this problem."

That's because original forecasts submitted in the bankruptcy case showed the city paying roughly $92 million into the pension funds between now through 2024 plus help of the grand bargain.

But in 2024, pension payments made by the city alone could explode in subsequent decades. The city's pension payments between 2024 and 2034 are expected to be roughly $1 billion, forecasts produced by Orr's staff show. The debt owed by the city remains at about $900 million between the years 2034 and 2044. Finally, between the years 2044 and 2054, the payments reduce to about $629 million, according to the 40-year projection submitted as part of the bankruptcy. No updated and comprehensive forecast has been completed by the pension funds since the bankruptcy.

City officials hope that Detroit's population and tax base will be growing by 2024, increasing its ability to pay off its pension debt without blowing a hole in its budget.

Should Detroit prepay pensions?

Still, there is already talk about trying to prepay some of that obligation well before 2024 to offset the risk of a balloon payment envisioned by the bankruptcy plan.

In an Oct. 27 report from Gabriel Roeder to the city's largest pension board of trustees, the firm's actuaries recommended "that every potential action be taken to generate contributions to the Retirement System above and beyond those provided in the" bankruptcy plan of adjustment.

The city plans to hire a consultant to examine whether the assumptions about pension payments made during the bankruptcy still hold true and could explore the idea of prepayments.

"The decisions to be made on what can be done on pensions would have to go through the budget process," Detroit Chief Financial Officer John Hill told the commission last month. "The consultant would perform actuarial work — take a detailed look at assumptions, which are appropriate for the city to consider moving forward. The time period is as soon as possible so we can start thinking about a solution."

The message is finding a receptive audience among some charged with keeping the city on track.

"The sooner you can sock away money, the more that pot will grow to meet the identified challenges down the road," Bill Martin, the financial review commission's vice chairman and the former athletic director at the University of Michigan in Ann Arbor, said in an interview last week.

Removing blight and installing streetlights

The $1.4-billion reinvestment initiative called for in the bankruptcy plan included $483 million in anticipated new revenues drawn from higher bus fares and improved tax collection. The city also projected $358 million in cost savings from establishing a more efficient city government, which could theoretically make the reinvestment plan $1.7 billion over 10 years.

But ramping up reinvestment in the city over the last year has been a massive challenge.

John Hill, Detroit's financial chief, describes the city's budgeting process as deliberately cautious, with stricter rules for each city department now to meet financial goals. So, for example, rather than simply buying new police cars, the city also budgets four years out on what it will cost to maintain and repair those vehicles so that those costs don't come back to bite the city, Hill said.

Some efforts have outpaced expectations. A $185-million project to overhaul and modernize Detroit's antiquated street-lighting system is on budget and ahead of schedule with more than 56,000 new LED streetlights installed of the planned 65,000, officials say.

The project, scheduled to conclude in late 2016, is headed up by the newly created Public Lighting Authority of Detroit. Many residents say they are pleasantly surprised to see working lights in their neighborhoods, although work crews did add several hundred extra and unplanned lights this year in response to complaints about dimness.

"The lights are coming back on," said U.S. District Judge Gerald Rosen, the Detroit-based chief judge in the state's Eastern District who appointed Rhodes to the case and then led the marathon mediation sessions that ended with agreements between the city and its major creditors. "All these new young kids moving back to Detroit, it really creates a sense of optimism and momentum."

Other efforts have remained more slow-going.

In the early days of Detroit's bankruptcy case, Orr estimated that Detroit could have as much as $500 million to battle blight over 10 years. Visions of a blight-free Detroit briefly raised expectations.

But as more realistic estimates of future revenue emerged, projections of the cash for blight removal began to shrink. By the time the city emerged from bankruptcy, it was clear that the funds for blight removal would be only what Mayor Duggan could wrangle from outsiders, particularly from the federal government.

In that Detroit proved adept: The city has snared roughly $121 million in so-called Hardest Hit funds to pay for blight removal, federal money designed to assist cities in overcoming the scourge of mortgage foreclosure.

That money has enabled the city to raze about 7,000 derelict houses since early 2014. Enough money remains from the latest batch of Hardest Hit funds to remove another 1,000 to 1,500.

Recent controversy over the price of demolitions — the city's rush to supercharge the demolition process has pushed up costs — obscures how much progress the city has made in a short time. Duggan empowered the Detroit Land Bank Authority, previously a small and mostly ineffective agency with a handful of employees and a couple hundred parcels, to lead his blight fight.

Moving aggressively, the Land Bank, now with 93 full- and part-time employees and nearly 80,000 parcels in the city, has auctioned and closed the sale of 527 houses to new owners and sold 2,655 vacant side lots to current homeowners, according to city figures provided last week. It also posted 5,133 eyesore properties with notices of coming action and filed 3,246 lawsuits against the owners of those properties, with more than half of those cases already resolved in the city's favor.

Executive Fire Commissioner Eric Jones said blight removal has been crucial to reducing the number of fires.

"If you remove 7,000 blighted, vacant structures, that is fuel that arsonists don't have to burn," Jones said. "It's gone."

But much more remains to be done.

With roughly 100,000 vacant lots in the city and tens of thousands of vacant buildings, the city could labor for years at its current stepped-up pace before ridding the city of all eyesores. And there's no guarantee the city will have anywhere near the funds it needs to keep up the blight battle beyond next spring or so.

Progress on reforms, but will they stick?

Consultants and the expert witness Rhodes hired to assess the plan's feasibility also raised questions about the ability of the city's workforce to adjust, saying large numbers of workers and even managers lack skills and education needed for their roles. Part of the city's plan of adjustment calls for spending millions on training and retraining workers, in addition to an overhaul of the city's human resources operations.

Detroit in recent decades has also been far behind the digital revolution in other places, relying on paper records and obsolete computers to handle the city's business.

Last winter, frozen and broken water hydrants plagued firefighters battling blazes in the city. An antiquated reporting-and-maintenance system, based on paper records and e-mails, caused delays and communication lapses between the Fire Department and the Detroit Water and Sewerage Department, which is supposed to fix hydrants.

Today, firefighters have smartphones to report troublesome hydrants to a system monitored by the water department.

Chief Information Officer Beth Niblock, whom Duggan hired during the bankruptcy from a similar post in Louisville, Ky., said 2,000 desktop computers have been replaced since the spring.

Perhaps most noticeable to the public, four new mobile applications were launched to assist people in reporting problems to the city, connecting to the Police Department, monitoring buses and paying for parking at meters. With the "ParkDetroit" app, users can pay for a space with a credit card, add time and set the system to sound an alert when the meter is about to expire.

Niblock said she has much to do, including implementing a new financial management system, a dispatching system for public safety, and fitting police officers with body cameras.

"We're making progress," she said. "It's never, I think, as fast as we all want it to be."

'I gave it my all,' but had to move out

Day-to-day life is now a little easier for Jerald Gossett, 33, who used to walk 10 minutes out of his way to get to a grocery store because of the dim and often broken streetlights along multiple blocks of Second Avenue, north of the New Center.

"You wouldn't want to walk down here before; it was pitch black," said Gossett, who lives on Euclid.

This year, work crews finally upgraded those streetlights, and he no longer avoids Second Avenue. It is now one of the brightest streets at night in all Detroit.

"I can walk straight down here and get home faster," he said last week, full grocery bags in hand.

In his ruling a year ago, Judge Rhodes determined the city's exit plan treats creditors fairly and gives the city a feasible chance of returning to solvency and restoring basic services for neglected residents.

Not all of them stayed, however. Toni McIlwain, who used to run the Ravendale Community Development Center on the east side, moved out of the city because her husband's city pension got cut by $400 a month.

They moved to Clinton Township, where she says they're paying $200 a month to insure two cars, as opposed to $1,000 a month in the city.

She says she "cried and cried" when they realized they had to move, but the numbers just didn't work. Also, the pension cuts for her husband "stole his dignity," McIlwain says. Her home of 16 years was lost in foreclosure when a potential buyer died after agreeing to buy the home on East Outer Drive, according to the former community activist.

"I gave it my all," McIlwain says after spending 32 years trying to keep kids out of harm's way and improving life over a 40-block section near the city airport through dozens of block clubs.

But many longtime Detroiters like McIlwain find it hard to give up on the hardscrabble city they grew to love.

"Even now, I get this feeling, I really belong in Detroit," she says. "I'm thinking, 'Is there a possibility I'll be back there someday?'"

Contact Matthew Dolan: 313-223-4743 or msdolan@freepress.com. Follow him on Twitter @matthewsdolan. Free Press staff writers Jim Schaefer, John Wisely, JC Reindl, Matt Helms, Joe Guillen, Mark Stryker and Gina Damron contributed to this report.