Crain’s Detroit Business
July 13, 2023
Sandy Baruah is insistent: Detroit’s bankruptcy was only good for the city.
A decade after the historic filing, the CEO of the Detroit Regional Chamber said he cannot think of “a single issue” that would be better if Detroit had taken another path.
“Things were really bad before, and they were headed worse,” he said. “We took advantage of the opportunity and turned a nickel into a dime.”
After 10 years of recovery, the Detroit of July 2023 is a far cry from the city mired in debt in 2013 — when streetlights were burnt out, buses didn’t run and city contractors left and right were pulling out of their contracts, or threatening to.
Still, even after so many years of improvement and change, lingering issues tied to that bankruptcy filing remain. Whether it’s unresolved pension disagreements, issues of blight or reputational dings that aren’t fully healed, the city still has some hangovers.
The biggest remaining disputes post-bankruptcy involve Detroit’s retirees.
Two pension programs took cuts as part of the Grand Bargain that would extend a lifeline to the city. Many retirees remain hopeful that some of their losses may yet be restored. At a recent community meeting, Mayor Mike Duggan said he “would like to see a 13th check” beyond the monthly payments the city is sending that could help reduce retirees’ financial burden. The city still doesn’t have the authority to make that decision, and won’t before December 2024, the mayor said.
In an interview with Crain’s on Wednesday, Duggan said conversations about the possibility of another check, which he likened to the equivalent of a cost of living increase, would take place beginning in February. A Legislative Policy Division report that said the city would have to spend more than $1 billion to be in a position to restore cuts is a nonstarter, he said, noting that is Detroit’s entire annual budget.
“That’s not something anybody’s going to consider,” he said.
An attempt by the Police and Fire Retirement System of the City of Detroit to speed up the city’s timeline for repaying its pension fund after a decadelong grace period was recently rebuffed by a federal judge. The PFRS on Monday asked that the ruling be reconsidered.
Detroit has until next July to make its first payment in 10 years to the pension funds. It has 30 years to ensure the funds are fully capitalized; the PFRS asked that it be done in 20 years.
The city for years has been socking away millions of dollars to help mitigate the shock of having to pay pension obligations for the first time in a decade. Ratings agencies say the city is well-prepared to manage the new payment schedule; they’ve been upgrading Detroit so the city is now on the cusp of an investment-grade rating. But the retirees themselves continue to have concerns, and the cuts they absorbed still resonate in their daily lives.
Paul Vela, a Canton resident who reached the Detroit Fire Department’s mandatory retirement age of 60 in 2021, said he’s now working more than he did at any other point in his career. His fire department job required two, 24-hour shifts a week; these days, he’s working five days a week for a construction company in an effort to cover health care costs and supplement his pension. Retiree health care was scrapped in the bankruptcy’s Plan of Adjustment, something that continues to be a frustration for retirees and current employees alike. In its 2023-24 budget, the state allocated $10 million to help defray the costs, but that’s far less than the $97 million the PFRS said it needed.
Vela thought he might start a company — and he did — but he wasn’t able to stay busy enough to pay the expenses he needed to cover the gaps. He’s glad to have found employment, but he still hopes for something less demanding in the future.
“I’m on ladders all the time; I’m not a big fan of being on ladders all the time,” Vela said of his new job. “I didn’t really expect that when I retired, to be working. It’s not what I envisioned.”
Vela won’t be eligible for Medicare until he’s 65, but some retirees who counted on the city’s health care promise didn’t pay in to the federal program. Matthew Gnatek, a Detroit Police Department sergeant and chairman of the PFRS board, said it’s “asking an awful lot” of first responders to sacrifice their bodies for decades and then live without access to health care.
“Everybody loves the police until you have to pay for them,” he said.
Jeffrey Pegg, a DFD lieutenant who is also a union secretary and a trustee on the PFRS board, said he knows of retirees who have put off going to the doctor or paying for health care because of the cost, including one who died of a heart attack at 63.
Health care expenses are a huge issue for retirees and those who are still working for the city, Pegg said. He estimated about 300 active fire and police employees are affected by the change, as are hundreds of retirees. Pegg also lamented a cost-of-living adjustment that, at less than 1%, doesn’t keep up with inflation.
“We need these benefits to change so members know they’ll be taken care of in retirement,” Pegg said. “Anyone who had 10 or 15 or 20 years before the bankruptcy, this is the biggest issue.”
Michael Van Overbeke, who represents the General Retirement System of the City of Detroit, said the 4.5% cut to benefits the group took continues to be a hardship. A cost-of-living adjustment was eliminated for those retirees, too. While there is a provision that would allow benefits to be restored, he said the required funding levels to do so aren’t close to being met.
“The retirees are still paying for the bankruptcy every month with the reduction of their benefits,” Van Overbeke said. “It is a significant impact over a period of time.”
On top of that, some retirees were also subject to an annuity clawback that they’re still paying.
Steve Watson, Detroit’s budget director and deputy CFO, said the city’s focus is to make sure it pays the benefits it already owes. To that end, Detroit has done a lot of work to build up a retiree protection fund that will help cover pension payments and build such payments into the normal budgeting process.
Any restoration of benefits, he said, would involve a lengthy process negotiated with unions — and only if the city can afford it. Duggan said he would expect the administration to meet with retirees before any action is taken.
Watson said the supplemental 13th checks could be on the table in addition to the restoration of other benefits. But he said restoring cuts would add to the city’s unfunded liabilities and nothing would happen before next summer.
“We would only ever fund it if the resources are in hand to fully pay it,” Watson said. “Retiree benefits remains an open discussion. It’s something we’re going to examine closely over this next budget cycle.”
Garbage, Blight, Financial Review
Detroit is still subject to a financial review commission, Watson said, though close review has been waived for six years. With another five years of waived oversight ahead, the city will be freed from that scrutiny no sooner than the summer of 2028. Currently, the commission review consists of regular financial updates from the city.
Continued work to eliminate blight in the city is another legacy of bankruptcy. While the need for demolition of Detroit buildings predates the 2013 filing, some of the city’s blight issues can be tied to bankruptcy-related cuts. Duggan said many of those, like cuts to police officer salaries that hurt the city, have been restored.
Brad Dick, Detroit’s chief operating officer, said illegal dumping continues to be an issue in the city. He thought the fact that the city reduced its bulk garbage pickup to four times a year could have led to people finding other ways to get rid of their belongings, and sticking to them. Dumping increased dramatically after the switch, he said, and though pickups are more frequent now, he suspected it might take more time to break bad habits.
Bulk pickup now happens every other week, but the city plans to restore weekly service next year, something Dick said he hoped would help combat the dumping issue. Detroit is also working on an anti-littering campaign, he said.
“I think that is a huge leap forward,” Dick said of plans to restore the weekly bulk pickup, which is out for bid. “That one’s huge; that’s my favorite thing we’re doing.”
Other beautification efforts are still ongoing, including planting more trees in the city. Dick said the city in some cases is still trying to win back the confidence of its residents, as well.
And there are sewage, sidewalk and wastewater management improvements on which the city is still playing catch-up, said Anika Goss, the president and CEO of Detroit Future City.
Development, infrastructure — “Bankrupt cities don’t do that,” she said. “There are areas that have not seen significant investment.”
Parts of the city still do not have an active mortgage market, said Ashley Williams Clark, the vice president and director of the Center for Equity, Engagement and Research for Detroit Future City. Clark said the city has made great strides — there are more market sales than distressed sales and more people are choosing to live in Detroit — but 15% of Detroit’s Census tracts still do not have any mortgage activity, according to a recent study.
“There are still limits to living in Detroit,” Goss said. “We still struggle to retain and attract Black middle-class households here.”
Goss said Detroit’s small-businesses climate is still lagging, as well. Other cities, she said, have been able to be more creative in how they meet entrepreneurs’ needs.
“While it’s not direct, bankruptcy set Detroit back in ways we’re still building from,” she said. “There’s still a heavy lift to keep up with other similarly sized cities.”
Repairing a Reputation
Detroit Future City, since 2016, has asked national business leaders questions about their view of Detroit. How did they feel about doing business in the city? Did they know it was out of bankruptcy?
That last question was removed in the 2022 reinvestment index, as it’s called — Goss said it was redundant and irrelevant. The business community has moved on. But in 2019, 21% of national respondents thought Detroit was still in bankruptcy and 34% thought the city was emerging from bankruptcy. Another 30% said it was out of bankruptcy. Locally, 9% of city residents and suburbanites alike thought the city was still in bankruptcy. About a third of each thought Detroit was still emerging from bankruptcy.
In the 2022 survey, two-thirds of the 300 national business leaders questioned said they were likely to invest in Detroit in the next two or three years and 82% said they thought the city represented a good or excellent investment opportunity, up from 71% in 2016.
But Rip Rapson, president and CEO of the Kresge Foundation, which funds the index, said he still gets questions when he speaks to community foundations around the country. They’re fascinated by Detroit, he said — they want to know if it’s still as bad as it appeared.
“People are almost in disbelief” when he tells them about city assets like the RiverWalk, Rapson said. He thinks of it as a three-step program, and by the time he’s telling people about the city’s health now, they’ve largely forgotten about the bankruptcy filing that led them to ask the question in the first place.
Still, he said, reputations can linger. It took a decade or more for New York to overcome the reputational overhang from its 1970s financial crisis, he said.
“Once you get a mental image of a city that’s about to turn its lights out, it’s hard to purge that image,” Rapson said. “The good news is they’re open to seeing it differently. We’ve got to have something to tell our story about. … What we’ve done the last 10 years is create new stories.”
Duggan, too, said the solution to Detroit’s reputational issues is to show them what the city is like now.
“The reaction of everybody is, ‘Oh my God, this wasn’t what I expected,’” he said of visitors to Detroit. “The only way to counter reputational damage is to get people here. That’s what you’ve got to do.”
The city still has plenty of work to do in its neighborhoods, Rapson said, and as long as there is still a high level of blight in the city, it may be hard for people to completely get bankruptcy out of their minds. Because a bankruptcy filing is a single news event, and the comeback is much slower, it may be hard for Detroit’s progress to capture the same national attention.
But Rapson said he has found people’s lingering beliefs about the city are “completely shakeable.”
“They are cheering for Detroit,” he said. “This is such an iconic place.”
Reputation matters, he said, because it’s a talent attraction question. It also affects private investment in the city. Improving Detroit’s image makes it less daunting for workers and businesses alike to come to town, he said. And education and transit improvements would help speed up the process, Rapson said.
He said it’s probably another four or five years before the country has really moved on. But even now, with more work to do, bankruptcy often isn’t the first thing he hears about anymore. People just want to know how it’s going in Detroit.
“It’s not like it’s this overhang that people can’t get out from under,” he said. “How long does residual memory last? The pre-bankruptcy urban neglect, those are hard images unless you put something else in front of them.”