Next: City to tackle $1.4B to-do list

Brian J. O'Connor
Detroit News Finance Editor

Now that Judge Steven Rhodes and Emergency Manager Kevyn Orr aren't calling the shots — and holding the city's purse strings — what matters is whether the city can stick to its post-bankruptcy budget and use the breathing room reluctantly paid by its retirees, workers and bondholders to fix a broken city.

"You should never waste a crisis, and the crisis has to last until we can make major improvements," said John Hill, Detroit's new chief financial officer. "Exiting bankruptcy is just one step. The hard work is still there."

In other words: The end of Detroit's bankruptcy is just the beginning.

"Chapter 9 is merely a process of adjusting debt to what is sustainable and affordable going forward. It doesn't address the systemic problems that brought Detroit to Chapter 9," said James Spiotto, an attorney and bankruptcy expert with Chapman and Cutler in Chicago.

"The real issue is, how are you going to reinvest in Detroit, how are you going to take essential services and raise them to a level that will attract new business and stimulate the economy and create new jobs. That is the future of Detroit."

At its root, the bankruptcy was never an issue of the city's debts, said Matt Fabian, managing director of Municipal Market Advisors, an independent municipal bond research firm in Concord, Massachusetts.

"Detroit found itself in bankruptcy because of its weak revenue, not its liabilities," Fabian said. "The problem is there's been very little progress with respect to revenue. The spending has been reduced because they've reduced their debt and long-term liabilities, but the city is betting heavily on near-term economic growth that will generate additional revenue and pay for everything."

Central to Detroit's rebound is the plan to invest $1.4 billion over the next 10 years to — among other goals — reduce crime, attract new residents and businesses, improve city services, remove blight and, according to the bankruptcy's plan of adjustment, "Otherwise set the city on a path toward a better future."

At the very least, the money also goes literally to turn the lights back on. According to Orr's initial bankruptcy report, the city had more than 35,000 broken streetlamps.

Central to the effort is a plan to bring Detroit's information systems and technology from 19th century paper to 21st century cloud computing, Hall added. City requisitions are still handled on paper, and Detroit's uncoordinated departmental databases are so unreliable that Hall estimated 90 percent of overdue payments to the city are uncollectable. The original plan of adjustment goes further, completely dismissing the prospect of squeezing anything out of Detroit's past-due fees, fines and other uncollected money.

The height of Detroit's administrative dysfunction was highlighted by two trial anecdotes. The first was the revelation that one Detroit firehouse relies on an empty pop can balanced on a fax machine to alert the engine company to alarms. When the fax starts to move, the can falls, alerting the firefighter on duty.

The second came when Orr announced a plan to raise the $20 and $30 parking fines in the city to $45 — because it cost the city $32 to issue and process each parking violation. That was in addition to discovering that half of Detroit's 3,404 parking meters are broken at any given time.

Introducing the city bureaucracy — where, as recently as 2012, the water department listed a job description for "horseshoer" — to the advantages of computers over pencil and paper is the mission of Beth Niblock, the former information technology chief of Louisville, Kentucky. Niblock, who was recruited by Mayor Mike Duggan to be Detroit's first chief information officer, testified during the bankruptcy trial that the city computer systems were "atrocious."

Niblock clearly is a woman who enjoys a challenge. Of the city's information system, she told the court: "It is fundamentally broken or beyond fundamentally broken."

In some cases, she added, "fundamentally broken would be good."

Efficiency not end all

The city estimates that modernizing its technology will save $800 million over the next 10 years. But no matter how much slimming down Detroit's bureaucracy might endure, efficiency can't solve the problems by itself. All Detroit can do is to hope that a better-functioning city attracts residents and businesses who can start to push the city's population of 700,000 somewhere back toward its peak of 1.8 million, and fatten the tax base.

The city will have to do that within a balanced budget, rather than the annual $100 million deficit it was running in the years leading up to bankruptcy. Making sure that the city starts living within its means will be the job of a new nine-member Financial Review Commission, which was added as part of the "grand bargain" to protect the city-owned masterpieces at the Detroit Institute of Arts.

The commission takes effect after the city leaves bankruptcy, headed by the state treasurer, and includes the director of the state Department of Technology, Management and Budget, Duggan, Detroit City Council President Brenda Jones and five appointees of the governor.

Under the approved bankruptcy plan, the city gets some significant breathing room in its budget: cutting its long-term debt payments significantly by dumping about $7 billion in bonds, with some bondholders taking cuts of nearly 80 percent. The city also will skip hundreds of millions of dollars in pension payments until 2023.

But while the city has cut its debt payments, it's also reducing its income. A citywide reassessment of property values is expected to set fair — but lower — tax bills for residents and businesses that will lower the overall city income. The city income tax could pick up if more Detroiters find jobs and lower the city's 14.9 percent jobless rate, but some of that income is already pledged to pay loans that are part of the $1.4 billion package that finances the city's restructuring.

If Detroit was a person who'd run up too many debt and then lost his job, then the bankruptcy would mostly wipe out the credit card bills. But that wouldn't solve the problem of covering the rent and buying gas and groceries.

"You've adjusted the debt, so you have more runway but you still haven't taken off," said Spiotto, the bankruptcy expert. "What you need is a complete reinvention in Detroit, and that's going to take five, 10 or even 15 years. As you build up essential services and make the city an attractive place to live and create more jobs, that's your recovery plan."

Even the court's bankruptcy expert testified that Detroit's financial plan only pushes the city to the "skinny end of feasibility."

Martha Kopacz, of Philadelphia-based Phoenix Management Services, told the judge in late October: "There has not been, until recently, as much energy put into restructuring operations. "It's not in the budget and there's not a robust implementation plan behind it."

A working post-bankruptcy budget won't be finished for several more weeks, said Hill, the city's chief financial officer. Then Detroiters can get a detailed look at how the city's post-bankruptcy spending and income stacks up against its pre-bankruptcy budgets.

And then the real work begins: making the city safer, making services from parking meters to buses work, and making the city more attractive to new businesses and residents.

"We are not in business to produce statistics," Hill said. Unlike the flurry of memos, court filings and financial projections cranked out during the bankruptcy trial, "We have to focus on our residents."

It's the residents who will ultimately have to make sure Detroit officials don't squander the current Chapter 9 bankruptcy and turn it into "Chapter 18" — a return trip to bankruptcy court, said Ken Buckfire, president of Miller Buckfire, the city's investment bank.

"As a result of the confirmation of the plan of adjustment, the city's financial restructuring is complete," Buckfire said Friday. "However, the operational restructuring that was begun during the bankruptcy is now the responsibility of the mayor and the city council."

boconnor@detroitnews.com