There is a crisis afoot: Puerto Rico’s economy is collapsing. The territory owes about $73 billion in bond debt and $49 billion in unfunded pensions. In May, the Governor of Puerto Rico, Ricardo Rosello, filed for a protection ‘similar’ to bankruptcy hoping to restructure the territory’s massive debt.

However, since filing for the protection, things have only gone downhill.

The territory’s budget has still not been approved by the Federal Oversight Board, it’s attempting to sell its ports to private contractors in order to raise capital, and its power utility (the Puerto Rico Electric Power Authority) just filed for bankruptcy after it was unable to restructure its $9 billion debt.

It is still unclear at this moment how this economic crisis will be solved. But here’s what you need to know about Puerto Rico as it makes its way into the national debate.

How Puerto Rico Got To This point?

Puerto Rico’s economic status has always been in limbo. Its precarious situation as a U.S. territory made it the island with the highest per capita income in the Caribbean.

However, in 1996, President Bill Clinton decided to phase out longstanding tax incentives for companies located on the island, which helped stimulate economic growth for decades. Once the rollback of those exemptions ended in 2006, corporations and jobs left the island and economic growth stagnated while unemployment rose.

This is compounded by two unique aspects of Puerto Rico’s situation as a territory. For one, tax rates are incredibly low–exempt from federal income taxes, residents only need to pay a 4 percent tax on income earned on the island. Additionally, citizens of Puerto Rico are also U.S. citizens, granting them the ability to freely move to the mainland. When it became clear that jobs were no longer coming to Puerto Rico, many residents left the island, depleting workforce and leaving smaller tax base to draw from.

With a lack of tax revenue, Puerto Rico’s government needed revenue to balance its budget. Instead of raising taxes or cutting spending it issued government bonds to raise money for much of the difference. The bonds are incredibly valuable to investors from outside Puerto Rico. Its status as a territory means the bonds are exempt from local, state, and federal taxes. But due to the long recession, the government could not generate enough the revenue to pay the bonds back, and in 2014, its bonds were downgraded to “junk” status.

Furthermore, island’s government is incredibly inefficient. For example, the island’s main power company has accrued a debt worth more than $9 billion, partly by providing free electricity to municipal building and projects that barely generate any profit for the government. For instance, the utility company provided free electricity to an ice-skating rink built in the city of Aguadilla (it’s expensive to keep ice cold in the tropics!).

Falling corporate interest in investing in the island, low tax rates, attractive government bonds, and an inefficient government all led the territory to accumulate a massive debt that it couldn’t escape.

Pension Problems

Not only does Puerto Rico owe billions to its creditors, but it also owes a large sum to its own people in the form of unfunded public pension programs. In addition to Puerto Rico’s bond debt, it has about $49 billion worth of unfunded pension commitments.

Since the 1990s, Puerto Rico has slowly but surely reduced payments to its employee retirement program, to the point where its public pensions became significantly underfunded. Furthermore, the population in Puerto Rico is getting older, with 14.2 percent of its residents above the age of 65. As the local workforce shrinks and the population ages, the territory’s unfunded pension commitments will become an even larger issue.

But the owners of Puerto Rico’s bonds are demanding that they are paid their debts first even if that means further cuts to public programs such as education and healthcare.

Is A Solution Possible?

The situation is dire for the citizens of Puerto Rico, they are almost completely out of money and President Trump has stated that he will not bail out the island.

One solution that could enhance the government’s financial situation is for the territory to seek statehood. Gov. Rosello recently held a referendum to gauge public interest in statehood. If Puerto Rico becomes a state, the economic recovery from the debt crisis could be a lot quicker with the backing of the federal government. The result of the referendum was an overwhelming 97 percent in favor of statehood, but only 23 percent of voters participated. Critics have said that despite the vote’s margin, the plan is not favored among the entire population.

Experts have pointed to debt forgiveness as the best possible solution to solving Puerto Rico’s debt. If austerity measures are put in place, Puerto Rico will need to pay off its debts to creditors first, which would mean the people who rely on the publicly funded programs such as schools, health care, and pension payments suffer. Furthermore, cutting back on public spending will only make for a longer and more painful economic recovery.

James Levinson

James Levinson is an Editorial intern at Law Street Media and a native of the greater New York City Region. He is currently a rising junior at George Washington University where he is pursuing a B.A in Political Communications and Economics. Contact James at staff@LawStreetMedia.com

The post What You Need to Know About Puerto Rico’s Debt Crisis appeared first on Law Street.

On Tuesday, May 3, teachers across Detroit called in sick. Enough, in fact, that 94 of the district’s 97 schools had to close for the day. This was not the result of Zika or some other new super virus; the teachers weren’t actually sick at all and everybody knew it. So what is exactly was happening? A sick-out. In Detroit and in other places in the past, teachers have been resorting to this desperate tactic in order to protest the shabby state of schools. Read on to find out more about the “sick-outs,” why they are happening in Detroit and other places and whether or not they are doing anything to inspire the changes they are meant to incite.

What’s happening in Detroit?

A sick-out is defined as exactly what is sounds like: “An organized absence from work by workers in the pretext of sickness.” The sick-out that occurred in Detroit earlier this month was a two-day, school district-wide protest that involved over half of the area’s 3,000 teachers. After fears that the school district would not be able to pay all of its teachers for the full year heightened, many teachers began protesting.

Specifically, there are two ways teachers can be paid–with paychecks spread out over a full calendar year or only during the school year. Due to serious budgeting shortfalls, the school system is set to run out of money for teacher salaries some time in the summer. As a result, those paid year round will end up with less than those who get paid only during the school year itself. If the budget was in good shape, teachers on both pay schedules would get the full amount, just paid out over a different period of time. Teachers in Detroit already held a mass sick-out in January to protest the deteriorating conditions in many Detroit public schools, which include pest infestations, mold, and damaged infrastructure. They have so far opted for sick-outs because other traditional means of protest, namely strikes, are against the law for teachers in Michigan.

The video below looks at the most recent sick-out:

A stop-gap measure has already been in place since March in the form of a $48.7 million agreement passed by the legislature to keep schools operating until the end of June. While this temporary fix is already in place, Michigan legislators have been debating whether or not to pass an additional $700 million dollar solution. This plan would create a new school district to educate students and leave the debt to be paid off with the old district. Essentially, it would leave one district to handle the task of paying the debt and the other would only be concerned with educating students. However, even if this plan makes it through the state legislature, there is no guarantee that it will work.

These budgeting issues are largely products of Detroit’s much-publicized bankruptcy back in 2013. When Detroit declared bankruptcy, city leaders estimated it had as much as $18 billion in debts that it could not pay, ranging from pensions to bond obligations. The amount of debt was ultimately reduced to $7 billion, which included a grand bargain in which private entities agreed to donate approximately $816 million to not only reduce cuts to pensions but also to ensure the survival of other important aspects of Detroit’s culture, such as its art museum. Even with Detroit emerging from bankruptcy and early returns showing the city doing better, it is still a long path to full recovery.

The following video looks at the totality of the Detroit bankruptcy:

Where else are sick-outs happening?

This was not the first time Detroit’s teachers have fought back. In 2006, they held a strike and earlier this year held another sick-out. However, this most recent sick-out was the largest. Detroit’s teachers are also not alone in using tactics such as these to protest pay and working conditions. In 2014, teachers in Colorado staged sick-outs of their own. In that case, the dispute was partly over the collective bargaining agreement, but also over attempts to prevent changes to history courses, which conservatives within the school districts thought would reflect poorly on American history.

A closer comparison, though, may be what is happening in Chicago. While there have not been any actual sick-outs in Chicago yet, the situation certainly seems ripe for that type of action. Much like Detroit, the governor of Illinois has called for the school district in Chicago to declare bankruptcy, which would, among other things, free the district from its obligations to many of its teachers and employees.

This situation is not new to Chicago either; teachers protested in 2012 over many of these same issues and the situation was only averted through concessions from both sides. However, movements to strip state employee rights as cost cutting measures have been growing lately, as displayed by events like these as well as developments like the anti-union legislation of Wisconsin Governor Scott Walker. Chicago has already forced teachers to take unpaid days off and has laid off employees, including some teachers, to cut costs. This is also the impetus for getting the school district to declare bankruptcy–if that happens the state is no longer beholden to union agreements and may be able to reduce its pension obligations.

In order for the Chicago Public School System to declare bankruptcy, the city itself would have to declare bankruptcy. In the case of Chicago at least, it is not able to file for bankruptcy under current laws, though a proposal may be making its way through the state legislature. In 2015, Illinois Republicans proposed a bill that would make bankruptcies legal for municipalities, but it failed to pass. While it would certainly be a major embarrassment if Chicago, the third largest and a very affluent city, was forced to declared bankruptcy, many state leaders support the option.

Is any of this making a difference?

The battle in Detroit has drawn the usual criticisms from both sides. The teachers are critical of the government’s handling of the city’s finances, claiming they just want to be paid the money owed to them and be provided with acceptable conditions to teach in. Conversely, politicians called the teachers’ actions political, claiming that they are jeopardizing the futures of the students they teach. While the two sides hurl accusations at each other, it is fair to ask if what they are doing is actually improving the situation.

On the Wednesday following the recent sick-outs, teachers agreed to return to work after the state legislature moved forward on a $500 million measure to address the district’s fiscal issues. However, this deal must still be reconciled with a similar piece of legislation passed by the state’s senate before a solution can be finalized. If the two sides are unable to agree, another stop-gap measure may be used, but that would risk more sick-outs and further erode the confidence in the state government.

The video below looks at the cumulative problems plaguing Detroit Public Schools:

Conclusion

Can Detroit right the ship when it comes to its schools?  This is a question and a problem that is only compounded by the many complicated issues facing the city. Detroit Public Schools have lost over 100,000 students in roughly 13 years to charter schools, private academies, and attrition. That is a lot of lost revenue for any city, but it is especially taxing for one that just emerged from the largest municipal bankruptcy in U.S. history.

Detroit isn’t the only city with public schools in poor fiscal shape. Chicago is probably the most comparable example, which may soon face many of the same issues and has already taken some drastic measures to cut costs. In light of Detroit’s bankruptcy, teachers and city officials have become increasingly concerned with how the school district will meet its long-term pension obligations and even its regular teacher salaries. The same issues play important parts in the debate over whether bankruptcy is the appropriate tool to deal with the city of Chicago and its public school system.

In light of Detroit’s bankruptcy, several difficult decisions were made yet the city’s schools are still in a particularly difficult situation. If the city is unable to find a solution beyond paying off one debt by accruing another, while at the same time offering fewer services, this may not be the last time its teachers call in sick.

Resources

CNN: Most Detroit Schools Closed Again Due to Teacher ‘Sickouts’

Merriam-Webster: Definition of Sick-out

Detroit Free Press: DPS Sick-outs a Symptom of Lansing’s Ill Behavior

Think Progress: Everything You Need To Know About Detroit’s Bankruptcy Settlement

The Bond Buyer: Detroit, A Year Out Of Bankruptcy, Still Faces Long Road Back

In These Times: Why Chicago Won’t Go Bankrupt-And Detroit Didn’t Have To

The Guardian: Colorado Teachers Stage Mass Sick-out to Protest U.S. History Curriculum Changes

Fortune: Why Chicago’s Fight With Teachers Is the Sign of a Much Bigger Problem

Chicago Business: GOP Plan Would Allow State Takeover of CPS and Bankruptcy

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Calling in Sick: The Problems with Detroit Public Schools appeared first on Law Street.

Curtis J. Jackson III, also known as “50 Cent” is, quite ironically, having some problems with money. In July, he filed for bankruptcy. But despite that fact, he has consistently been posting pictures on Instagram and other social media sites that feature him posing with stacks of money. Some even poke fun at his financial situation–in one he arranged the stacks of cash to spell the word “broke.” But in light of those pictures, U.S. Bankruptcy Judge Ann M. Nevins is calling him back in to bankruptcy court to explain himself.

Check out some of the pictures in question for yourself:

Bankrupt @50cent has to explain these stacks-of-cash Instagrams to a judge https://t.co/75ucD5txT0 pic.twitter.com/b5HmNF7ov6

— Esquire Magazine (@esquire) February 21, 2016

50 Cent declared bankruptcy. Then posted pictures of himself bathed in money. Big mistake. https://t.co/MChlKmtSUr pic.twitter.com/dqGqpwXXoB — Mashable (@mashable) February 21, 2016

50 cent ordered back into bankruptcy court after flashing cash on Instagram https://t.co/wf5y8VNufS pic.twitter.com/7WC2NvprWH

— Business Insider (@businessinsider) February 20, 2016

A judge thinks 50 Cent might not be bankrupt because of this picture https://t.co/r1MV63v0Gtpic.twitter.com/OnuEf7Wy3g — The Independent (@Independent) February 21, 2016

Based on those photos, Nevins stated at a hearing on Thursday her concerns over the photos, saying: 

I’m concerned about allegations of nondisclosure and a lack of transparency in the case. There’s a purpose of having a bankruptcy process be transparent, and part of that purpose is to inspire confidence in the process.

She also told 50 Cent’s lawyer: “When that process becomes very public, the need for transparency, I believe, is even higher.” 

50 Cent’s finances are so contentious because he owes a significant hunk of cash–$7 million–to his ex-girlfriend Lastonia Leviston over a sex tape dispute. He also owes about $18 million total to a former business partner and to his mortgage lender. Leviston was actually the person who brought the judge’s attention to the posts. The many people to whom 50 Cent owes money also pointed out that he has had a few large performances since declaring bankruptcy, and hasn’t disclosed the amounts he made as a result.

50 Cent’s lawyers claim that all of the rapper’s income has been reported, and that the pictures are just to keep up his public image on social media. But 50 Cent is going to have to explain himself in court–this is just another lesson that what you put on social media can come back to hurt you.   

Anneliese Mahoney

Anneliese Mahoney is Managing Editor at Law Street and a Connecticut transplant to Washington D.C. She has a Bachelor’s degree in International Affairs from the George Washington University, and a passion for law, politics, and social issues. Contact Anneliese at amahoney@LawStreetMedia.com.

The post 50 Cent’s Instagram Posts Create Questions for Bankruptcy Court appeared first on Law Street.

Puerto Rico received a rather unwelcome and tightly wrapped Christmas gift this year from the United States as it was reminded, in a brief filed by Solicitor General Donald B. Verrilli Jr., that it is not a sovereign state regardless of the fact that it has its own Constitution and is much more independent than a colony or territory.

The United States, taking a substantial interest in the outcome of the two cases reaching the Supreme Court in January 2016 regarding Puerto Rico’s political status and future, just planted its feet firmly in the argument that Puerto Rico does not self-govern and is actually a territory with a limited ability and authority to govern over its own interests, disputes, and affairs. The brief has created a media frenzy in Puerto Rico and has even involved the United Nations through an appeal highlighting human rights issues pertaining to self-determination.

Image Courtesy Of [Vxla via Flickr]

Historically speaking, Puerto Rico was ceded to the United States by Spain in 1898 following the conclusion of the Spanish-American War pursuant to the Treaty of Paris signed on December 10, 1898. Following several years of constructing Puerto Rico’s government, legislature, and judiciary, it was finally provided a bill of rights by Congress in 1917, and the people of Puerto Rico were granted U.S. citizenship. In 1950, Congress gave Puerto Rico the right to create its own Constitution to be adopted by its government so long as it “provided a republican form of government” and “include[d] a bill of rights.” Puerto Rico’s Constitution was approved by Congress in 1952 following several changes and revisions. Since then, Puerto Rico has enjoyed a level of autonomy and sovereignty similar to that of the states. Constitutionally speaking however, Congress has directly managed and overseen Puerto Rico’s affairs under the Territory Clause of Article IV of the Constitution.

The cases to be heard by the Supreme Court, while narrow in focus, will directly address the debate over Puerto Rico’s constitutional and political future–a bigger picture effect, if you will. One case addresses whether the United States and Puerto Rico are separate sovereign nations for the purposes of Double Jeopardy under the Fifth Amendment of the U.S. Constitution. Due to the fact that the Double Jeopardy Clause prohibits individuals from being tried for the same offense twice, Puerto Rico would have to have sovereignty and operate in an autonomous fashion to charge individuals for the same crimes they were convicted of in federal court. While the federal U.S. government and the states are considered separate sovereigns for the purposes of Double Jeopardy, in its brief, the U.S., who is not a party to the case, submitted support for the Respondents in Commonwealth of Puerto Rico v. Luis M. Sanchez Valle, concluding that Puerto Rico is not a separate sovereign entity and therefore, Puerto Rico’s individual and independent prosecution of the individuals convicted in federal court violates the Double Jeopardy Clause of the Fifth Amendment.

The second case to be heard by the Supreme Court centers around Puerto Rico’s catastrophic public debt of approximately $72 billion, which it wants to be able to control and restructure in the same way each individual state can, but is not able to under the Bankruptcy Code of U.S. law. The debt incorporates $20 billion for public utilities, used by the people of Puerto Rico including 3.5 million Americans, which Puerto Rico is unable to pay. It is urging the Supreme Court to grant Puerto Rico the right to enact laws allowing for restructuring. This desperate measure comes on the heels of a 2014 decision by the U.S. Court of Appeals for the First Circuit that struck down Puerto Rico’s Recovery Act, which allowed for Puerto Rico to fill the gaps of Chapter 9 of the Bankruptcy Code that had excluded any part of Puerto Rico’s government to take part in restructuring. As such, the Recovery Act was found to be in direct opposition to U.S. law and deemed unconstitutional. The financial crisis in Puerto Rico has brought the small island to the brink of an economic meltdown.

Puerto Rico’s Governor, Alejandro García Padilla, issued an impassioned and assertive statement following Verrilli’s brief filing, stating that the Solicitor General’s stance is “contrary to all Supreme Court jurisprudence” and that Verrilli’s position is “at odds with prior postures by his office with regards to the sovereignty of the Commonwealth.” As far as Padilla is concerned, using the term “colony” to describe Puerto Rico’s current political status, well, those were fighting words.

While the upcoming Supreme Court cases both carry the answer to a long-lasting debate about Puerto Rico’s constitutional and political future, it appears that both sides want their cake and to eat it too. Padilla does not support either statehood or independence for Puerto Rico and wants U.S. financial and legal support on his own terms. The U.S. has received many benefits from its relationship with Puerto Rico, yet it fails to address the major pitfalls threatening the territory and is unwilling to be flexible in order to address dire concerns that only it can to date. Nothing is for certain except this–come early 2016, the Supreme Court will tackle the issue as to whether Puerto Rico is separate and sovereign from the United States. Until then, all we can do is wait and hope that Puerto Rico works with the United States to come up with additional solutions to the major problems at hand.

Ajla Glavasevic

Ajla Glavasevic is a first-generation Bosnian full of spunk, sass, and humor. She graduated from SUNY Buffalo with a Bachelor of Science in Finance and received her J.D. from the University of Cincinnati College of Law. Ajla is currently a licensed attorney in Pennsylvania and when she isn’t lawyering and writing, the former Team USA Women’s Bobsled athlete (2014-2015 National Team) likes to stay active and travel. Contact Ajla at Staff@LawStreetMedia.com.

The post Puerto Rico: A Sovereign State or Still a U.S. Colony? appeared first on Law Street.

The clock is counting down to the day Teresa Giudice must report to federal prison, but she isn’t going down without a fight. As Allison Dawson explained in October, the original Real Housewives of New Jersey cast member was sentenced to 15 months in prison for wire and bankruptcy fraud. This week, however, she filed suit against her former bankruptcy attorney, Jim Kridel, for malpractice.

U.S. District Judge Esther Salas, who also sentenced Giudice’s husband Joe to 41 months in prison, made a point of reprimanding the couple for not disclosing all their assets to the court during their bankruptcy and related proceedings.

It feels as if things have been hidden or concealed…It’s as if you thumb your nose at this court…If [Teresa] had put something down [on the financial disclosure forms], anything, I think [probation] would have been fine…She put nothing down, nothing.

It certainly seems from Salas’ statement that had Teresa’s disclosure forms been complete and accurate, it’s unlikely that she would be serving a 15-month sentence at the Danbury federal prison beginning January 5, 2015. Teresa has now filed suit against her former bankruptcy lawyer, claiming that his actions are why she is going to prison. According to the Bravo personality and best-selling cookbook author, James Kridel was responsible for accurately and completely filling out the family’s bankruptcy filings and that he is the one who didn’t disclose her salary from the Real Housewives, the family’s rental property income, and various other assets such as ATVs and jewelry. The $5 million malpractice suit was filed Wednesday, December 3, 2014 in Manhattan District Court.

Chelsey D. Goff

Chelsey D. Goff was formerly Chief People Officer at Law Street. She is a Granite State Native who holds a Master of Public Policy in Urban Policy from the George Washington University. She’s passionate about social justice issues, politics — especially those in First in the Nation New Hampshire — and all things Bravo. Contact Chelsey at staff@LawStreetMedia.com.

The post UPDATE: Teresa Giudice Suing Lawyer Before Heading to Jail appeared first on Law Street.

I am wearing all black as I write this because it might as well be a funeral.

Sadly, Aereo is dead. The startup–which I had once believed to be a potential comeback kid has reached the end of its long and arduous battle; however, in a desperate attempt to retain hope, I am consoled by the revolutionary impact the small company seems to have made on the television industry. Aereo, a service provider that utilized small antennas to transmit broadcast signals to individual subscribers, filed for bankruptcy protection last week. Founder and CEO Chet Kanojia wrote in a letter to consumers:

We have traveled a long and challenging road. We stayed true to our mission and we believe that we have played a significant part in pushing the conversation forward, helping force positive change in the industry for consumers.

Despite valiant efforts, Aereo just could not overcome the legal and regulatory opposition that came after the Supreme Court decided Aereo’s business model was illegally violating copyright.

Shortly after the decision was released, Aereofiled for a cable license necessary for continued operation; however, the “Plan B” approach did not prove to be lucrative as the recent bankruptcy decision is Aereo’s best hope for maximizing its remaining value. With the filing for Chapter 11 reorganization proceedings, Aereo can put its legal woes behind it and sell any remaining assets that exist in the company. Lawton Bloom of Argus was appointed to serve as Chief Restructuring Officer.

William Baldiga, Aereo’s lawyer, announced that an auction of assets should occur on February 17, 2015, pending an approval hearing. “The company is now highly focused on devoting all its energy and limited resources to a transaction that will produce the highest and best return for our creditors and shareholders.”

U.S. Bankruptcy Judge Sean Lane granted various requests submitted by Aereo to allow what is left of the company to remain active during the liquidation period. Aereo has fired 75 of its 88 employees and greatly decreased remaining employee pay. Kanojia’s salary was cut in half.

While Aereo barely gained footing before its huge legal battle, the service forced major broadcasters to play offense instead of defense, recognizing a definitive hole in the cable market. Cord-cutters need programming too and Aereo may be the catalyst for a new business trend. Current broadcsting companies have already begun recognizing the internet television demand. CBS recently announced CBS All Access, a streaming service available by subscription for a $5.99 monthly fee. HBO also recently announced a streaming service independent of a cable subscription.

Although only existing content companies are dominating internet television by way of new services, it’s only a matter of time before new startups, supported by cloud technology, appear. The FCC is bracing itself for such an occurance. Last month, FCC chairman Tom Wheeler proposed a new rule that would allow internet television providers to license programming in an identical way to current cable and satellite companies. In an official FCC Blog post, Wheeler wrote:

Aereo recently visited the Commission to make exactly this point – that updating the definition of an MVPD [multichannel video programming distributor] will provide consumers with new choices. And perhaps consumers will not be forced to pay for channels they never watch.

So, although we are in a state of bereavement, heartbroken to see Aereo go, it will forever be the internet TV martyr that paved the way for the future of subscription streaming services.

Thank you, Aereo, for such innovation. You will be missed.

The post Aereo: The Martyr Files for Bankruptcy appeared first on Law Street.

The once-thriving Motor City now stands as a collection of vacant lots, unused industrial sites, and abandoned homes–the poster child for the decline of the Rust Belt. Detroit’s population peaked in 1950 at 1.8 million but has since dropped to a mere 700,000. Poverty, crime, and unemployment plague the city. 911 response times hover around 58 minutes. Detroit’s residents blame the woes on corrupt mayors and years of mismanagement. The question is now how to move forward. The city is undergoing the painful bankruptcy process, but what will this mean for the future of Detroit?

How can a city declare bankruptcy?

Declaring bankruptcy is a last resort for any indebted entity. The case of a city going bankrupt is no different from a person: expenditures exceed revenue to a point that is beyond repair. Chapter 9 bankruptcy allows municipalities to declare bankruptcy, and in many ways it is similar to bankruptcy by a person or company. Unlike a company, however,  a city cannot be broken up and sold for its parts. Municipal bankruptcies are rare because 23 states do not allow cities to file for Chapter 9. Further, it is difficult for a city to convince courts it cannot pay debts since cities have the power to tax. When a city cannot repay its debts, it has to find new ways to negotiate and restructure its debt. Watch this video for greater explanation of Chapter 9 bankruptcy:

In 2011, Jefferson County, Ala. became the largest municipality to declare bankruptcy until it was surpassed by the city of Detroit declaring bankruptcy on July 18, 2013. Detroit’s liabilities have been estimated at a whopping $18 billion. Problems with poverty, crime, and blight still plague the city. A recent report claimed there were 84,641 vacant structures and lots in the city, all of which require significant money for the city to fix. Despite increases in recent cases, municipal bankruptcies are nothing new. There have been fewer than 700 cases since the Chapter 9 provision was added in 1937. What is unprecedented is the size of the cities now declaring bankruptcy.

There are four main criteria for Chapter 9 bankruptcy that must be proven in court:

1. The state must approve the city’s motion to file for bankruptcy.
2. The city must be insolvent.
3. The city must desire a plan to adjust its debts.
4. The city must attain an agreement with the majority of creditors or at least attempt to negotiate with creditors.
   

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How does bankruptcy impact the city?

Declaring bankruptcy allows a city to find ways to cut costs and increase revenue that would otherwise be off limits. Before the filing, Detroit’s hands were tied. The city had almost completely lost the ability to borrow due to its bad credit rating and had difficulty increasing tax revenue as its population plummeted. Municipal bankruptcy brings all affected parties to the table to negotiate while allowing a judge to preside. Unlike a person or business declaring bankruptcy, a municipality declaring bankruptcy gives courts a less active role in determining the restructuring plan. A court can only approve a plan set before them. Detroit’s bankruptcy has allowed the city to reduce pensions that would otherwise be protected under the state constitution, which is significant since nearly half of the city’s debt comes from pensions and retiree healthcare costs. Watch for some of the implications of municipal bankruptcy:

Beyond the physical effects on a city, declaring bankruptcy can have a significant psychological effect. People come to see the city as dysfunctional and problem-ridden, even if bankruptcy may prove more beneficial in the long run. This impacts the city’s population, attractiveness, and future ability to borrow.

Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University, recognizes the necessity of bankruptcy. “Everyone thinks it’s so terrible, but if a violent storm or flood or tornado happens, we understand something outside the control of politicians happened to the city. If you have a financial storm that does the same to a city, you have to find a way to recover to ensure that essential services are provided.”

What is Detroit’s restructuring plan?

On March 14, 2013, Michigan Governor Rick Snyder appointed bankruptcy lawyer Kevyn Orr as emergency manager of Detroit. On December 3, 2013, Detroit was determined legally eligible for bankruptcy. Listen to Orr discuss the process below:

Orr, in conjunction with various other groups, has outlined a plan to slash Detroit’s liabilities and increase future revenue, mainly through deep pension cuts and cuts to bond insurers. Thirty-two thousand people are entitled to a pension from the city, 22,000 of whom are retired. Another major problem addressed includes what to do with massive swaths of uninhabited land. The plan includes:

• A 4.5 percent cut to pensions of general retirees if they accept the plan, and a 27 percent cut if they reject the plan.
• Elimination of cost-of-living adjustments for the pensions of general retirees and a lesser cost-of-living adjustment for police and fire department retirees.
• Up to 20 percent repayment from employees who received excess interest.
• Providing $1.25 billion over ten years to improve safety and remove blight.
• Paying 74 cents on a dollar for unlimited tax bonds.
• $25 million for a Department of Transportation security force.
• $90.6 million to improve outdated software and servers.
• New structure for the General Retirement System and Police and Fire System pension boards.

Until recently, plans involved deeper cuts that would force Detroit to auction works from the Detroit Institute of the Arts (DIA). The recently-appraised city-owned pieces of art were valued at $454-$867 million. Instead, a “grand bargain” was struck where foundations, the State of Michigan, and the DIA will collectively provide $816 million to reduce pension cuts and to allow the art to be transferred to an independent nonprofit. Auto companies General Motors, Ford, and Chrysler have already pledged $26 million for the deal. Michigan’s legislature passed a measure to provide $195 million to Detroit upfront.

A yes vote by July 11, 2014 is needed to secure the $816 million in state aid and private funding to prevent further cuts. Even If pensioners reject the deal, Bankruptcy Judge Steven Rhodes could still decide to force deeper benefit reductions. So far Orr has the bankruptcy process moving with unprecedented speed and bipartisanship in the hope of wrapping up the deal without further appeals before his term ends September 30, 2014.

 Why do people reject Detroit’s plan?

1. Severe cuts outlined in the bankruptcy plan have left many unhappy. Many reject the negotiations on principle, simply refusing to take any cut to pensions that were rightfully earned. Others across Michigan reject the state’s provision of almost $200 million in taxpayer money to provide a “bailout” to Detroit. They instead argue that Detroit should be forced to sell its assets.
2. What should be done with the water and sewage system? The city hopes to privatize the system, which serves more than four million people in Southeast Michigan. The plan has pitted the city of Detroit against its suburbs where residents fear their rates will increase. However, the plan could be a huge boost for the city since the new provider would pay for improvements to the system and provide additional cash flow to Detroit.
3. Other groups take issue with the cuts proposed for bondholders, claiming the plan improperly treats pension holders better than investors. Bond insurers are still searching for what options may be available to protect themselves. The insurers have forced the city to provide millions of pages of documents and in doing so managed to push back the trial to August 14, 2014.

How will this affect Detroit in the future?

With the approval and implementation of a plan, cuts to pensions and bonds can put Detroit on more stable footing in the future. This was the case with Orange County, Calif., which had a triple-A bond rating nine years after its 1994 bankruptcy. However, bankruptcy may lead public employees to rethink their approach to retirement benefits and their decision to work in the public sector. This results in highly educated workers no longer being attracted to public-sector jobs in the city, even in areas like teaching. The scale of the latest municipal bankruptcies has led to greater calls for disclosure and transparency in cities across the country, especially with regard to negotiated contracts.

The severe cuts to bondholders in Detroit will have strong effects on the future of the city and on other cities in the state with regard to the riskiness associated with municipal bonds. The cuts to bondholders makes these usually safe general obligation bonds less attractive to bondholders in the future. As a result, Detroit may have to offer higher interest rates to attract investors when their bonds have lower ratings. This could also negatively impact other cities and investors across Michigan who have seen the insecurity of municipal bonds firsthand.

Will more cities be forced to declare bankruptcy?

The case of Detroit has set legal precedent that through bankruptcy cities can renegotiate pension contracts and even cut bond liabilities. Most bonds had previously been protected in bankruptcy due to their legal classification. If the city does emerge stronger it may be used as a blueprint for other struggling cities. Even the threat of bankruptcies in other cities can be a catalyst for serious financial discussions. Cities have been reviewing their assets and moving to protect them, such as museum art, that they do not want to be forced to sell. If anything, the case of Detroit highlights issues with grossly underfunded pensions that exist across America. Money spent on pensions leaves little for spending on education or infrastructure. Listen to a discussion of bankruptcy and pension cuts in Central Falls, RI below:

Several California cities in the process of filing for bankruptcy haven’t been allowed to cut pensions since they are considered an arm of the state and exempt from the bankruptcy restrictions. The truth is that bankruptcy is not easy. Legal fees are expected to cost Detroit more than $100 million. The city of Vallejo, Calif. escaped $32 million of debt through bankruptcy; however, it cost the city more than $13 million in legal fees, and a potential second bankruptcy looms on the horizon.

Municipal bankruptcies will likely lead to more state involvement in local government. Despite the increasing size of cities now declaring bankruptcy, there is not an epidemic of cities failing to meet financial obligations. Frank Shafroth points out that bankruptcy does not have to be contagious, but cities have to be cautious. States have a proactive role to play in ensuring the success of their largest cities. Shafroth states, “What we are beginning to see in Michigan is an absolutely bipartisan effort of overcoming opposition from conservatives who said ‘Let Detroit burn in hell.’ The future of Michigan will very much depend on Detroit’s recovery.”

The case of Detroit has illustrated what options cities have in declaring bankruptcy, but cities will still use all measures available to avoid the unknown fate of Detroit.

Resources

Primary

U.S. Courts: Chapter 9 Municipal Bankruptcy

U.S. Bankruptcy Court: Detroit Bankruptcy Disclosure Statement

Additional

USA Today: Detroit Becomes Largest U.S. City to Enter Bankruptcy

Economist: Detroit’s Bankruptcy–Revenge of the 99 Percent

Huffington Post: Detroit Bankruptcy Could Set Legal Precedent for Bankrupt Cities With Pension Obligations

Fox News: Detroit Bankruptcy Case, the Largest at $18 Billion, is Moving Quickly Less Than a Year Later

Washington Post: Here’s How Detroit’s Bankruptcy Will Actually Work

Economist: Retirement Benefits–Who Pays the Bill?

Michigan Radio: Will Detroit’s Bankruptcy Affect Your Hometown?

The New York Times: Michigan Senate Passes Plan to Ease Detroit Pension Cuts

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

The post Municipal Bankruptcy: The Steps, Scope, and Consequences appeared first on Law Street.

Detroit filed for bankruptcy last July with over $18 billion in debt, the biggest municipal collapse in the history of the United States. The city also has the highest crime rate among all large cities in the country, which exacerbates its economic hardships even more. Our report, Crime in America: Top 10 Most Dangerous Cities Over 200,000 notes that unemployment, population reduction, slow police responses and a vast amount of abandoned buildings may be correlated with high crime rates in the city. According to Time Magazine, “Detroit is in particularly bad shape, many of its underlying issues — crushing debt and unfunded and unsustainable retiree benefits — are not unique.”

The country’s industrialization brought not only economic advancements and prosperity to the United States, but income inequality and multi-ethnicity problems to its cities. Detroit became known during the late 1950-60s as the “Motor City” or “Motown” due to the large concentration of automobile companies in its metropolitan area. Its freeway system was also constructed during industrial revolution, and facilitated the development of the city and its rapid industrialization.

However, instead of simply discussing the unfortunate economic and social hardships within the city, we should focus on what options Detroit really has for recovery!

Any suggestions?

Detroit is a city with a rich history and vibrant atmosphere, but high crime rates spoil all odds for its residents. Former Detroit Chief of Police and current Wayne County Sheriff, Benny Napoleon, reaffirmed this in his article in the Huffington Post, claiming that Detroit lost more than half of its population due to disorganized neighborhoods and high crime rates. He also proposed a Five Point Crime Reduction Plan, that should include but not be limited to the following:

– Data-driven approach

– Crime prevention

– Directed enforcement

– Problem-oriented policing

– Community policing

Sounds like a solid plan to me if staff training and implementation procedures are utilized systematically and correctly.

What has Detroit already done?!

There is a plethora of existing initiatives that have been adopted by the Detroit Police Department. Neighborhood Watch, for example provides the main line of communication between police and the community. Another useful crime prevention strategy is Citizen Observer, which is, in essence, a mobile platform that “provides updates of crimes trends, description of wanted suspects, missing persons, crime prevention tips, and other pertinent information pertaining to businesses and the community safety.” Other notable programs include Detroit’s Most Wanted and the Community and Police Advocacy (CAPPA) group, both of which equip the community with useful information and work directly with the public on a range of safety issues.

As we can see, the Detroit Police are vigorously trying to bring city crime down through community-oriented policing strategies, but one practice looks quite alarming to me: the Offender Tracking Information System (OTIC), which, according to its website, will “provide information about any offender who is, or was, in a Michigan prison, on parole or probation under the supervision of the MDOC, has transferred in or out of Michigan under the Michigan Interstate Compact, or who has escaped or absconded from their sentence.” The practice is disturbing because it can be easily misused by people to label and harass ex-offenders. It undoubtedly raises many ethical concerns.

Besides police initiatives, the Detroit community is trying to revitalize its neighborhoods to create a safe environment for all residents. The Helping Ourselves Overcome Disparities Project (Osborn HOOD) uses efforts from different city and neighborhood organizations to engage youth in community building and provide more mobility and safety to the Osborn area residents of Detroit. Osborne HOOD is an excellent example of community leadership and progressive thinking. Detroit should welcome similar initiatives in its backyard that can provide positive spillover effects and facilitate such projects on a larger scale.

Data and Necessary Surroundings

I strongly agree with the Five Point Crime Reduction Plan proposed by Benny Napoleon. Napoleon served as Detroit’s youngest Chief of Police and later became a prominent Assistant Wayne County Executive. As a longtime resident of Detroit with a 38-year public service career, he knows what is best for the city. Another important notion that he supports is the idea that comprehensive data collection is paramount in combating crime. The data-driven approach focuses on collecting and using data so we can understand patterns and try to reduce incidents of crime across neighborhoods. It’s truly a starting point for any preventive actions as well as for adequate respons times.

However, in addition to data gathering and analysis, Detroit needs systematic research on ecology of crime to understand where crime incidents are located to find the so-called “hot spots.” Crime Prevention Through Environmental Design (CPTED) can be utilized to make the public spaces safer. Some changes can be quite pricey, but Detroit can start with the small pieces of the puzzle that are relatively inexpensive, effective, and easy to incorporate. Small adjustments of neighborhood spaces like the replacement of blind spots with safer architectural designs, or changing the layout of streets to bolster neighbors’ interactions and provide a greater sense of community. Neighborhood watch groups should be also utilized in every community to better understand needs and the most pressing problems. The above examples are just the tip of the iceberg among the many innovative ways that CPTED can offer to transform criminogenic spaces into safe communities.

Detroit can learn a great deal about CPTED by looking at Irvine, California, which was rated the number one safest city over 200,000 population in 2012 according to our methodology. The city was carefully planned by Irvine Company in the 1960s utilizing some notions of CPTED. Omar Masry, an associate planner in the City of Irvine, California claims that implementation of CPTED in Irvine “enhances the sense of safety and security for new occupants and the surrounding neighborhood.” Using the same strategy for Detroit can render significant results in reducing its crime rates and reorganizing its communities.

So, Can We Rebuild, or Can’t We?

If we want crime reduction strategies to work in Detroit, strong police cooperation not only with communities, but with other sectors of local government, should be implemented. To eradicate “hot spots” of crime in Detroit we will need to “rebuild” the city by changing existing environments and providing safer opportunities for its residents. Communities should come together without having to wait for government and police to magically alter existing realities. The real change will happen when all human resources are pulled together including local government officials, police officers, community leaders, young professionals and educators.

It has been long proven that alone we can do so little, while together we can do so much.

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Valeriya Metla is a young professional, passionate about international relations, immigration issues, and social and criminal justice. She holds two Bachelor Degrees in regional studies and international criminal justice. Contact Valeriya at staff@LawStreetMedia.com.

Featured image courtesy of [Gwert38 via Wikipedia]

Valeriya Metla

Valeriya Metla is a young professional, passionate about international relations, immigration issues, and social and criminal justice. She holds two Bachelor Degrees in regional studies and international criminal justice. Contact Valeriya at staff@LawStreetMedia.com.

The post Can We Rebuild Detroit? Affirmative Thoughts appeared first on Law Street.

Detroit’s bankruptcy case will continue without legal challenges. The decision by Judge Steven Rhodes of the U.S. Bankruptcy Court halts all litigation against the city, its emergency manager and Gov. Rick Snyder.

Protests by retired city employees over potential pension cuts and a potential challenge to the city’s Chapter 9 filings will be addressed in upcoming hearings. Judge Rhodes said the Federal Bankruptcy Court has “exclusive jurisdiction” over this case.

Protesters gathered around the downtown Detroit courthouse while the Judge reviewed arguments on whether or not Mr. Snyder had crossed his authoritative boundaries when forcing the city into the largest municipal bankruptcy case in American History.

[NYTimes]

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Featured image courtesy of [Ian Freimuth via Flickr]

Davis Truslow

Davis Truslow is a founding member of Law Street Media and a graduate of The George Washington University. Contact Davis at staff@LawStreetMedia.com.

The post Federal Judge Clears Way for Detroit Bankruptcy Case appeared first on Law Street.

The Detroit bankruptcy filing will arrive in court Wednesday despite several attempts to block the massive $18 billion debt restructuring.  U.S. Bankruptcy Court Judge Steven Rhodes agreed to an expedited hearing shortly after Emergency Manager Kevin Orr filed for Chapter 9 municipal bankruptcy last Friday.  The main opponents of the bankruptcy are retirees and workers who are primarily concerned with their ability to receive retirement benefits.

On Monday Ingham County Circuit Court Judge Rosemarie Aquilina claimed that the law allowing Michigan Governor Rick Snyder to approve the emergency manager’s bankruptcy filing is unconstitutional.  This ruling was based on the grounds that the governor would be violating the state’s constitutional protections for public workers’ retirement benefits.  In response, State Attorney General Bill Schute has filed an appeal on behalf of the governor to the state appeals court.

[NBC News]

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Featured image courtesy of [Ian Freimuth via Flickr]

Kevin Rizzo

Kevin Rizzo is the Crime in America Editor at Law Street Media. An Ohio Native, the George Washington University graduate is a founding member of the company. Contact Kevin at krizzo@LawStreetMedia.com.

The post Detroit Files Largest U.S. Municipal Bankruptcy appeared first on Law Street.