How broke is Detroit? It’ll come down to number-crunching
(AP) - State and city officials trying fix Detroit's financial mess claim that bankruptcy court is the only option left to reverse a decades-long downward spiral...
State and city officials trying fix Detroit’s financial mess claim that bankruptcy court is the only option left to reverse a decades-long downward spiral.
A witches brew of opponents to the nation’s largest-ever bankruptcy filing — including city unions, pension fund managers, bondholders, bond insurers, vendors, and a long list of other creditors — say the city can be saved without such extreme measures.
A court will decide who is right based on a parade of expert witnesses who will present conflicting accounts of the city’s financial wreckage.
Nothing about this case is simple. With more than 100,000 creditors, multiple classes of bond holders and tens of thousands of current and future retirees owed billions in pension payments, the case is already shaping up as the most complex since Congress set up municipal bankruptcy rules more than 75 years ago.
One of the most contentious questions rests on the arcane art of actuarial analysis: the mix of math and forecasting assumptions used to determine how much the city needs to set aside today to meet its obligations to future retirees decades in the future. The city says the current collection of pension funds is some $3.5 billion short of the mark; city unions and other skeptics say the city has badly overstated what it needs to make good on promised retirement benefits.
Those estimates rely on a series of assumptions about how big those payments will be years in the future, along with the investment return of the money set aside to fund those payments. Tweaking those assumptions by a fraction of a percentage point today can change future projections by hundreds of billions of dollars.
That’s why the legal case for Detroit’s insolvency will likely rest on a series of expert witnesses both sides will call to crunch the numbers for the court – even if no one can establish with certainty whether the city’s dire financial projections would come to pass without big debt write-downs.
“The city doesn’t have to show that there aren’t other arguments, just that its assumptions are reasonable,” said Andrew Gottfried, a bankruptcy lawyer with Morgan Lewis.. “That’s what judges do all the time in bankruptcy; they have to value future income. It’s a common exercise.”
There will be no shortage of arguments when Judge Steven Rhodes, who is hearing the case, gavels the opening of the trial on October 23. Those trying to block the city from moving forward had until midnight Monday to file their objections.
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