Pension Liability: How Did It Get So Big? - WSJ.com

Pension Liability: How Did It Get So Big? - WSJ.com

Michael Moran talks about how companies got into this mess—and how they might get out of it

By VIPAL MONGA

The growing weight of pension obligations is forcing more corporations to take dramatic steps to lighten the load.

WSJ: What are some strategies companies are using to shrink these pension deficits?
MR. MORAN: We've seen a number of strategies undertaken by plan sponsors. Some have shifted asset allocation to more of a dynamic framework, where asset allocation changes as funded status changes. Simplistically, this involves increasing allocations to fixed income as funded levels rise as a way to lock in that funded status.
More recently, we have seen plans instituting lump-sum options to their participants as a way to shrink their gross pension obligations. We've also seen some plans enter into annuity contracts with some insurance providers as another way of moving the liability off their books.
Finally, we've also seen a number of plan sponsors making voluntary contributions, taking advantage of the record amount of cash that's on corporate balance sheets, as a way to help improve funded levels.

Small management risks that make a big difference | SmartBlogs SmartBlogs

Small management risks that make a big difference | SmartBlogs SmartBlogs
By Mary Jo Asmus on November 7th, 2012

A few other small personal risks come to mind that make a big difference to your leadership:
Including others. You are creating a vision, mission or strategy for moving your organization forward. Or maybe you have some decisions to make about the customers you need to focus on. Perhaps you want to decide on organizational values or change the culture. Don’t do it in a vacuum! Invite your team into the conversation so that they have a say and feel ownership for the end product. The perceived risk here is that you might not get exactly what you want. The benefit is a sense of community and team ownership for outcomes.

Admitting your mistakes. Everyone makes mistakes. Admitting yours and apologizing when appropriate shows that you are human. People want to see your humanity; it helps them to know that you are more like them than different, thus creating a relationship bridge. The perceived risk is that you may believe they will think less of you. The benefit to admitting your mistakes includes creating an open, safe environment for others to make mistakes and admit them, too.

Asking for feedback. If you aren’t in an organization with a culture of feedback — or even if you are — it can feel uncomfortable to ask for it. However, all leaders have blind spots, and getting feedback is one of the best ways to conquer those. Ask for specifics (not just “How am I doing?”) in order to get specifics (“Was the information I gave about X in our meeting today enough so that you can do Y?”). The perceived risk is that you may feel you are showing weakness by asking for feedback. The benefit is that what you hear provides a roadmap for your improvement.

Listening when you want to talk. Something happens sometimes when individuals become leaders; they talk and talk trying to prove that they know everything. Try more listening instead. Deep listening (mouth shut, ears wide open, attention on the speaker) is rare, and you’ll stand out. The perceived risk is that you might think that listening to others signifies agreement with what they say or that you have nothing to add to the discussion. The benefit to listening is that you learn more and develop deeper relationships with others.

Leaders are supposed to take risks, but sometimes the personal ones are the hardest. However, they can also be the most effective.


What risks have you taken that made a difference in your leadership?

Mini Debate Between Fred Leeb and the Attorney for the Opposition

Debate Over Proposal #1  The Emergency Manager Law   Spotlight on the News-Channel 7 WXYZ

Please Click on the Picture Above to See the Debate Video Proposal #1, the Michigan Emergency Manager Referendum, is on the ballot in Michigan for the November 6th election.  If the referendum passes (by voting "Yes", Public Act 4 (which was passed by the Michigan legislature in 2011 as the Local Government and School District Fiscal Accountability Act) will be adopted but if the proposal is defeated (by voting "No"), the law will not take effect.  I strongly recommend that you vote YES on Proposal #1. A mini-debate on Proposal #1 was held and aired Sunday, October 28, 2012 on WXYZ Channel 7's Spotlight on the News program hosted by Chuck Stokes.  The participants were Herb Sanders, attorney for Stand Up for Democracy (the coalition that sought to place the referendum on the ballot) and me (the former Emergency Financial Manager of the City of Pontiac).  The video of this debate can be seen by clicking on the picture above.  [The portion related to Proposition #1 is from the beginning of the clip until 13:16, sorry about the initial advertisement.] I believe that there are many reasons to vote yes on Proposal #1, as follows: The law has been used very rarely and only when it has been absolutely necessary to try to save a local governmental unit from a financial disaster.  I do not believe the State has any desire to take over the responsibility for managing many governmental entities.  There are currently only 5 cities (Flint, Pontiac, Ecorse, Benton Harbor and Allen Park) out of about 2,900 local governmental units in Michigan and 3 school districts (Muskegon Heights, Detroit and Highland Park) out of 579 school districts that have an Emergency Financial Manager.  In addition, there are three cities working with a consent agreement (Detroit, River Rouge and Inkster). If the law is defeated, it is likely to cause additional lengthy delays in the process of helping cities to get back on track financially as the parties argue about what should be done instead.  The biggest loser is likely to be the City of Detroit because it already has "hit the wall" and is only able to operate with the State providing managerial assistance and financial resources.  On December 21, 2011, Andy Dillon, the State Treasurer, said that Detroit had total liabilities estimated at more than $12 billion and that the deficits in the General Fund  have fluctuated between over $155 million and over $300 million each year from 2005 through 2011.  Total General Fund debt and other liability proceeds have been over $600 million for 2005 through 2010. Under Public Act 4, the local governmental entity has many opportunities to avoid the need for an Emergency Manager, even after what may be decades of poor financial management.   There also are a number of checks and balances.  First, the State has to conduct a preliminary review of the level of financial stress.  Second, if necessary, there must be a more formal review including representatives or nominees from the State Treasurer, the State House, the State Senate, the State budget office and others appointed by the Governor.  Third, there is an opportunity for a consent agreement for continuing operations.  There also is the potential for a recovery plan in which additional powers can be granted to the local officials to help them in their efforts to correct the situation.  Fourth, if the Governor decides an Emergency Manager is necessary, the local unit can request a hearing.  Fifth and finally. the local governmental unit can appeal the decision to the Ingham County Court. Public Act 4 requires communication and disclosure of the Emergency Manager's decisions to the State and to the public.  For example, the Emergency Manager must have a financial plan in 45 days and conduct a public information meeting.  The Emergency Manager also must report all details of expenditures, hiring, transactions, etc. every three months.  In addition, the Emergency Manager may retain a local inspector or auditor (from an approved list provided by the State Treasurer) to oversee and report on the local governmental unit. Property tax revenues will not increase significantly and help local governments for many years even if the economy experiences an economic boom.  Michigan's Proposal A already limits increases in property taxes per year to the lesser of 5% or the rate of inflation (which has been recently at only 2-3%/year). Chapter 9 municipal bankruptcy (one of the alternatives) has been used very rarely by local governmental units anywhere in the country.  Its provisions are very different from Chapter 7 or Chapter 11 bankruptcy.  Chapter 9 generally leaves the local administration in place running the local governmental unit without a trustee and without court oversight.  It is unclear to me how any major operating changes would be considered or implemented.  Even if there was a plan approved by the bankruptcy court to reduce the local government's liabilities, it is likely that new deficits would continue to be generated since the underlying operating structure and processes wouldn't necessarily change.  Chapter 9 is a debt adjustment plan without a reorganization function.  A couple of the cities in California, however, have used it primarily to reject collective bargaining agreements quickly and to significantly reduce or try to eliminate retiree healthcare.   I strongly believe it is time to get past arguing about who is in charge and get into developing and implementing good ideas for sorely needed major changes.  There are many other cities that already have had great success for years in working to improve their communities.  We should spend our time examining places like New York City (with one-eighth the murders per capita of Detroit), Colorado Springs, Turin, Italy, downtown Las Vegas, Atlantic City and many others.  Let's get on with making Detroit's turnaround a huge success.    [Please note that, contrary to current TV ads from Stand Up for Democracy regarding Prop #1, I have never been a partner of the person who bought the Silverdome.  Two years after the sale I did begin to supply limited consulting services to him to help improve the property to try to again encourage business growth in Pontiac.]

 


http://myemail.constantcontact.com/Interesting-Mini-Debate-Between-Fred-Leeb-and-the-Attorney-for-the-Opposition.html?soid=1101086242761&aid=cp3gkeA8YVU

Campaign 2012: Meet the Candidates, Audio On Demand « CBS Detroit

Audio On Demand « CBS Detroit

Recorded Live, Talk Radio 1270 WXYT afternoon host Doc Thompson and WWJ Tech Editor Matt Roush hosted this special election forum at Lawrence Technological University. Those in attendance had a chance to ask local candidates questions and learn more about the six statewide ballot proposals.

I participated in a very interesting discussion in presenting the case in support of Proposal #1, the Emergency Manager Law. Please vote Yes on this proposal in the November 6th election.  My comments start at about 5:20 into the audio recording.

Rolling the Dice with Taxpayer Money

Rolling the Dice with Taxpayer Money

Posted In Governing By Charles Chieppo | October 25, 2012

The recent bankruptcy filing by A123 Systems, a maker of batteries for electric and hybrid cars, once again shines a spotlight on the use of government subsidies to aid individual companies. In A123's case, it was the federal government that awarded the company nearly $250 million in stimulus money, but states don't exactly have an admirable track record when it comes to this issue.

Massachusetts loaned money--$5 million--to A123, but that's just the tip of the states-as-venture-capitalist iceberg. State investments in private companies generally come in two forms. The first is grants or loan guarantees, such as the $75 million that Rhode Island taxpayers lost when the state invested in former star pitcher Curt Schilling's failed video-game company, 38 Studios. The other is tax breaks and other tax incentives. Massachusetts provided a combination of grants and tax breaks that added up to more than $30 million for Evergreen Solar, a clean-energy company that declared bankruptcy last year.

Either way, it's a bad deal for taxpayers. States aren't very good at venture capitalism because it's a skill very few public officials have. For them to roll the dice on a specific company is like me joining a high-stakes Las Vegas poker game. The difference is that I'd lose my own money in Vegas. When states play venture capitalist, they play with taxpayer money.

States don't do much better when they use tax breaks to try to lure specific companies. In the wake of the Evergreen fiasco, Massachusetts officials formed a Tax Expenditure Commission to review the Bay State's web of tax breaks, also known as "tax expenditures."

The commission pegged overall foregone state revenue from tax breaks (not just those for businesses and economic development) at an estimated $26 billion this year, more than the total amount of tax revenue the commonwealth expects to collect during the fiscal year. And a 2011 analysis by the state auditor of 91 business tax breaks offered that year found that only a few came with mechanisms for reviewing their effectiveness or recovering lost revenue if the breaks failed to produce the hoped-for economic benefits.

In addition to being ill-suited to investing in individual companies, states also shouldn't subsidize specific industries, as with the federal oil-industry subsidies that, along with investments in companies like A123, have become an issue in the presidential campaign. What state governments can do is create opportunities by funding research through public universities or other outlets. Companies can then compete to put the fruits of that research to the most lucrative use.

A123 reminds us that the federal government isn't so good at picking winners and losers. But the evidence is clear that states are no better. Both taxpayers and state revenues would be best-served if state officials realize their limitations, focus on creating an environment of economic opportunity and let the market sort out the details.

******************************************

Fred Leeb: I agree that it makes a lot more sense for government to support research rather than trying to pick a specific business or individual company to subsidize to guarantee its success.

How to Get High Returns on Your Hidden Assets

The summer is over and it is the perfect time to take a fresh look at all of your assets, bring in new perspectives, and get the resources you need to improve your business now.  This is the time to focus on your most important, highest return projects.  Don't wait until you clean up all your other loose ends.  Stay out of the trap of working on your lowest priority projects before getting to your highest priority projects.

This newsletter is designed to give you some tangible and valuable ideas on how to break out of this trap, focus and move ahead on your high payback projects today.

During our 20+ years of consulting with many small, medium and large businesses we have been able to identify and take advantage of many significant opportunities to help CEO's bring their major projects to fruition.  We are often the turbo-charger to get more out of all of your assets to help you realize your goals.  For example, many times we find that our clients have unrecognized and underutilized assets that they already have paid for and we help them to increase their returns significantly, as follows:

• Fully utilizing your employees' knowledge:  the employees frequently know more about the business, on a collective basis, than the CEO and are a tremendous untapped source of valuable information.  But it is extremely difficult for a CEO to find out what the employees are really thinking or to get past barriers built up over the years.  By  bringing in a consultant to team with employees, the CEO is telling the employees that: he/she respects their expertise, is serious about wanting their input, there are new opportunities for employee advancement and visibility (by providing new ideas) and that the employees can speak confidentially, if desired, for the benefit of the company and themselves.  Tremendous value can be generated in many areas because:

1) Employees will provide their knowledge on issues that go beyond their current role.  They frequently have a storehouse of untapped information from having many face-to-face/first-hand meetings with your customers and vendors.  During these meetings and discussions, they get valuable feedback on product pricing, quality, delivery timing, product features, packaging and potential add-ons.

2) Employers working in teams can take some of the burden of innovation and implementation off of the CEO.  They will pull together and commit to achieving success instead of pulling in different directions.    

3) Employees don't like to use a suggestion box.  They want someone to discuss  their ideas with them to try to implement them in a practical manner.  With a demonstration from the CEO that each idea will be taken seriously, they will often come forward with great ideas for potential innovations, cost reductions, new efficiencies, decreases in "shrinkage", better usage of inventory and methods of collecting receivables.  

• Breaking through your managerial constraints: your company now may be limited more by the lack of middle management resources than a lack of cash, but this constraint often can be broken quickly. CEO's frequently are afraid to give much more responsibility and authority to their management team.  On the other hand, with the help of an experienced consultant, these managers could succeed more easily and free-up more management time.  They will be able to take on more work and help you complete your high-return special projects.  This also would cause the rest of the business to be managed much more effectively.  Without this boost, however, it will continue to be very difficult to get more out of your existing management team.  

• Increasing your return on professional expertise: Your company probably already has paid for at least four outside advisers (your banker, accountant, attorney and insurance broker) to go up the learning curve on the intricacies of your business.  After working on your company's investments, business plans, financial projections, acquisitions, divestitures, real estate, financial statements, tax returns, audits, employee disputes, benefit plans, collections, etc., these professionals are a tremendous storehouse of knowledge and ideas about potential business improvements.  With a small amount of guidance from an experienced management consultant experienced in working with other professionals, a CEO could use these professionals judiciously but much more effectively, rather than try to keep them at bay.  This could significantly improve your return on your investment in these professionals.  Your already have paid them to go up the learning curve--these professionals are often-overlooked assets.

Paradoxically, CEO's sometimes try not to involve these professionals in their business in an effort to reduce cost.  This is the equivalent of buying a large, expensive and flexible piece of equipment for one application and then purposely trying to never use it again.   

• Strengthening knowledge of your competition:  Salesmen, engineers and others in your company have a substantial body of knowledge about competitors' product features, pricing and upcoming new developments.  They also  have many contacts outside the company through which they could get highly valuable additional information.  If you seek out this intelligence and communicate it across departmental boundaries as an integral part of your business planning process, your management will be much better informed and your investments will generate much greater returns.

• Tapping your customer and vendor relationships:  CEO's frequently miss opportunities to gain assistance from two of their most important stakeholder groups, their customers and vendors.  This is because CEO's jump to the conclusion that customers and vendors will abandon them in a heartbeat at the first hint of trouble.  The reality is that this is not the case--customers and vendors also have developed a strong reliance on you because you, in turn, are one of their stakeholders too.    

Vendors know that many other customers, particularly in this economy, also are having great difficulty and they know that it would be hard for them to replace you.  They also may have tailored their company to meet your needs and it might take a long time before they can replace you and collect from their new customers.   

Your customers also have come to rely on you and trust your processes and quality. Their personnel may have built strong relationships with your employees and they may not want to change.  

Momentum is on your side with both your customers and vendors.  They generally want to help you.  For example, they can slow their collections of receivables from your company and can speed up payments of payables to your company, etc.  This additional credit may not be available to you anywhere else. But, you must communicate with your customers and vendors properly and build their confidence and trust.  If they think that you are taking advantage of them they will run the other direction as fast as they can.  

• Freeing up wasted resources in your underutilized buildings and equipment:  Buildings and equipment often are much larger and more sophisticated than needed now because they were sized and priced based on your needs before the economic downturn.  They are likely to remain too large and more expensive than needed for years.  This represents your sorely needed cash that is trapped in these assets.  Through effective planning and negotiation, you often can eliminate this cause of waste and free up valuable resources.

Innovation Delivery Teams Tackle Cities' Problems Through Bloomberg Philanthropies Grants

Innovation Delivery Teams Tackle Cities' Problems Through Bloomberg Philanthropies Grants
The Bridgespan Group, October 15, 2012

Overcoming common barriers to innovation

America’s largest cities face increasing demands from their constituents, even as their resources diminish. Given the prevailing social, demographic, economic, and environmental trends, these challenges are unlikely to abate any time soon. While state and federal governments use policy to effect change, city governments are on the front lines, directly responsible for executing change efforts. Ultimately, many of society’s problems, from handgun violence to homelessness and climate change, will be solved—or not—in our cities.
But innovation is a tremendous challenge, due to three particular barriers: silos that prevent collaboration on cross-cutting issues; limited funding for new initiatives; and the blend of talent in government itself, with longstanding civil servants working alongside relatively short-lived political administrators. The last challenge is particularly cumbersome, and can exacerbate the others. Civil servants have few incentives to rally for change, and more incentive to wait out the current administration to minimize offending longstanding constituencies and relationships. Because change efforts are typically a risk until there is a positive effect to show for them, it’s not surprising that civil servants are slow to embrace the flavor of the month coming from the mayor’s office, when history has shown that they may just be asked to undo it when the next mayor arrives.
To spur change, the Innovation Delivery Team Initiative funds a group of people who sit outside of all municipal departments and report directly to the mayor. These teams look across agencies and functions of government in their cities to address critical priorities. The Initiative borrows from successful models used around the world, including Sir Michael Barber’s approach to change in the United Kingdom, which championed a relentless focus on results. The Initiative also incorporates lessons from New York City, Malaysia, Maryland, Louisiana, and other areas. The result? A detailed “playbook” with tactical advice on how teams can generate solutions and deliver results.

Local governments cut costs via efficiency; steps include computers that shut themselves off - The Washington Post

Local governments cut costs via efficiency; steps include computers that shut themselves off - The Washington Post

By Associated Press, Published: September 24

"Around the country, governments big and small are embracing cooperation, consolidation and efficiency to wring a few more dollars out of the budget as the effects of the Great Recession linger....

During the worst of the downturn, many local governments resorted to layoffs and other blunt means of cutting spending. Now, with the economy still shaky, they are looking in less obvious places for ways to save money."

Bloomberg News: German City Needing Aid Shows Debt-Crisis Tentacles By Annette Weisbach on September 18, 2012

The house of cards is falling.  Will Greece now have to provide aid to Germany?

"Offenbach, a city of about 120,000 people neighboring Germany’s financial capital Frankfurt, is so mired in debt it had to ask the state of Hesse for a 211 million-euro ($277 million) bailout in June.  In so doing, it became one of the largest of 102 municipalities to tap 3.2 billion euros of aid Hesse is making available as the first of Germany’s 16 federal states to introduce a formal rescue fund for struggling towns and cities."

For entire article: http://www.businessweek.com/news/2012-09-18/german-city-needing-aid-shows-debt-crisis-tentacles-euro-credit

Fiscal stress continues for hundreds of Michigan jurisdictions, but conditions trend in positive direction overall (mpps-fiscal-health-2012.pdf (application/pdf Object))

mpps-fiscal-health-2012.pdf (application/pdf Object)

The Center for Local, State, and Urban Policy
Gerald R. Ford School of Public Policy, University of Michigan
Michigan Public Policy Survey September 2012

"For the first time since the MPPS began in 2009, fewer than half of local leaders expect their jurisdiction will be less able to meet its fiscal needs next year, as compared to this year. This may reflect a “new normal,” based on cuts in services and staffing that have been made by local governments over the last few years, thereby allowing them to get by with fewer resources.

Still, the overall improvement masks ongoing fiscal distress for hundreds of jurisdictions, for which the worst may be yet to come.  Further, even for those jurisdictions that may have turned the corner toward better times, other factors on the horizon could send them back on a negative path. In recent months, for instance, the U.S. economy appears to have been slowing once again, and should this continue or worsen, it could be expected that local governments would quickly experience negative effects.

In addition, state policymakers in Lansing are expected to re-start efforts to reform the Personal Property Tax, another significant source of funding for local governments. Any significant cuts in revenue from this source could also potentially threaten the nascent improvement in fiscal health for local governments statewide.

While conditions appear to be improving overall, there is no doubt this is still a challenging time for local government in Michigan."

How to Reform Pensions at the Ballot Box

How to Reform Pensions at the Ballot Box

Posted By Stephen Goldsmith | June 27, 2012 in Governing the States and Localities

Please explain the budget and service context that led you to pursue the recently enacted pension reforms in San Jose.

San Jose Mayor Chuck Reed

Leading up to the passage of Measure B earlier this month, the city had been forced to deal with quickly growing budget shortfalls for 10 years in a row. By 2011, the gap had reached $115 million, with much of the increase coming from increases in pension costs. For example, the city's annual pension contribution grew from $73 million in 2001 to $245 million this year. The reductions in basic services the city could provide were dramatic, and the consequences of corresponding cuts were falling on the backs of the very workers that pensions are intended to serve. In the years leading up to this month's ballot measure, for instance, we cut our workforce from 7,400 to 5,400 workers.

With independent analysis showing another 12 years of increases in pension costs, we feared we were driving the city toward essential-service insolvency. We knew we needed to take action both on behalf of taxpayers, as well as that of the city's public servants.

The Rise of the Supertemp - Harvard Business Review

The Rise of the Supertemp - Harvard Business Review
 by Jody Greenstone Miller and Matt Miller

Trevisani is a Wharton MBA and GE alum who now manages high-powered projects for Fortune 500 companies and advises executives on operational issues, change management, and potential mergers. He does all these assignments on a temporary basis, working as an independent contractor.
 
Let’s call Trevisani a supertemp. He and others like him belong to the “free agent nation” popularized a decade ago by the author and workplace guru Daniel Pink, but they inhabit its most rarefied precincts. Supertemps are top managers and professionals—from lawyers to CFOs to consultants—who’ve been trained at top schools and companies and choose to pursue project-based careers independent of any major firm. They’re increasingly trusted by corporations to do mission-critical work that in the past would have been done by permanent employees or established outside firms. New intermediaries have sprung up to create a market for such marquee talent. Supertemps are growing in number, and we think they’re on the verge of changing how business works.

How the Stimulus Fell Short - NYTimes.com

How the Stimulus Fell Short - NYTimes.com

By MICHAEL GRABELL

Published: February 11, 2012

"... The stimulus — a historic package of tax cuts, safety-net spending, infrastructure projects and green-energy investments — certainly did a lot of good. As the economists Alan S. Blinder and Mark Zandi have noted, it’s one of the key reasons the unemployment rate isn’t in double digits now.

But the stimulus ultimately failed to bring about a strong, sustainable recovery. Money was spread far and wide rather than dedicated to programs with the most bang for the buck. “Shovel-ready” projects, those that would put people to work right away, took too long to break ground. Investments in worthwhile long-term projects, on the other hand, were often rushed to meet arbitrary deadlines, and the resulting shoddy outcomes tarnished the projects’ image...."

****************************************************

Fred Leeb: I find it ironic that after spending $840 billion we now may be concerned about whether these programs accomplished anything. I also find it interesting that it takes the NYT Sunday Review to consider the concept newsworthy that the government should generate a significant return on its investments.

I think one of the biggest failures of government is that this simple business concept (return on investment) is barely an afterthought. It is a tragedy that the US government collected and spent almost a trillion tax dollars, generated by millions of people working very efficiently and very hard to provide, without a clear idea of the projected benefits.

People need to ask what it means in the first place for the government to create jobs. There is a big difference between jobs for government employees and jobs that are created due to a nurturing environment for the private sector. For example, some of this money could have been spent on improving government decision-making, developing multiple-year growth plans, consolidating and rationalizing government entities, making government more efficient, providing venture capital, jobs training, adding funding for community colleges and public schools, etc. Programs like cash for clunkers did bring forward car sales, causing lower car sales immediately thereafter. Temporary jobs repaving roads were just that, temporary jobs. We must make the government much more accountable before the dollars are spent.

Commentary: Detroit faces worse fate than an EM | The Detroit News | detroitnews.com

Commentary: Detroit faces worse fate than an EM | The Detroit News | detroitnews.com

The article from February 10, 2012 by John E. Mogk, a law professor at Wayne State University, states, "... municipal bankruptcy under Chapter 9 of the Federal Bankruptcy Act, which could be more damaging to the city and the state and take much longer to complete.

Seeking bankruptcy relief would downgrade the city's credit rating, reduce its ability to borrow funds, and drive up the city's interest rates. The credit standing of other municipalities in Michigan and the state will also be affected. Bankruptcy requires substantial additional management responsibilities, leaving staffers less time to actually govern.
Perhaps the most damaging aspect of bankruptcy is that it will place a stigma on the city, causing new businesses to avoid locating in Detroit."
*********************************************************

Fred Leeb: My own question is, how do we know that this conventional wisdom is true? The business world lived in fear of the bankruptcy stigma but this has changed over the last 35 years and bankruptcy is now virtually just another tool in the toolbox to enable lasting structural change. Are GM's borrowing rates higher or lower now than prior to their bankruptcy? In addition, I believe there have been a number of studies showing that publicly traded stocks rise after there is an announcement of a major cost reduction program. This is because the action is an indicator that the management has finally recognized the depth of the problem and is willing to do something constructive rather than just cover it up.

Everybody already knows that Detroit is in terrible financial shape. It will remain that way until people believe that the city's leadership is willing to bite the bullet and implement a realistic multiple-year turnaround plan. As far as the city's bond rating goes, the only reason it is able to sell bonds at all now is because they are backed by other entities such as the state. This has only enabled the problem to fester and get worse. If people knew that other entities would not stand behind the city's bonds, they probably could not be sold at all, even now, before a bankruptcy has been filed. The only people we are kidding about Detroit is ourselves.

Fred Leeb: Detroit's Old Games Are Over

Fred Leeb: Detroit's Old Games Are Over

Detroit Has "Hit the Wall"

Those of us in the turnaround world have been waiting for decades for the City of Detroit to be in its current dismal financial condition with no easy way out. This is called "hitting the wall" when there is no cash available any longer to continue business as usual. We have been waiting for this because it is finally the time when people must step up and take positive actions -- there are no alternatives. When you are about to hit the wall, the old games are over. People are not impressed any longer with:

• Speeches full of promises,
• Macho tough-guy tactics,
• Elaborate analytical studies,
• Infinite variations of blaming others,
• Fancy job titles and sound bites from celebrities, or
• Refusing to compromise and being negative without proposing workable solutions.

Leaders must make drastic cuts in costs now but they also must develop and implement new far-reaching but practical strategies. They must take the personal risks necessary to take action or they must get out of the way. Turnaround professionals know this is the most critical and precious time to bring forward new ideas, settle on new short and long term strategies, organize teams, and implement change. A tremendous amount can be accomplished when all the stakeholders finally recognize that they are in the same boat, that the boat is in a severe storm, and that they all most row in the same direction if they are to have any chance of success in saving themselves.

Fred Leeb: Detroit Can Be Great Again

Fred Leeb: Detroit Can Be Great Again

Fred Leeb

Former emergency financial manager for the City of Ponitac

Detroit Can Be Great Again

Posted: 12/14/11 03:31 PM ET

Detroit City Finances , Detroit Economy , Detroit Emergency Financial Manager , Detroit Emergency Manager , Detroit Finances , Detroit Financial Crisis , Detroit News

 

I was the first emergency financial manager in Pontiac from March 19, 2009 through June 30, 2010 and I believe my experiences could be very applicable to Detroit. I know that, even though I have been a turnaround consultant for over 20 years, I learned a tremendous amount from actually going through the process.

We made some mistakes but we also achieved many successes as a result of listening to the city's staff personnel, respecting their expertise, encouraging new ideas and then enlisting their support to take action and implement the changes.

We didn't just create more reports or studies that went on someone's shelf. We were able to generate, even under the old Public Act 72, over $115 million in multi-year benefits for the city, upgrade the city's bond rating and generate two years of surpluses in a row after many years of deficits.

Virtually all the recent discussions about Detroit have focused on how much power either the mayor, the city council or an emergency manager could bring to bear to cut costs immediately. It is true that in a financial emergency the only controllable factor initially is expense so that must be addressed first. But cutting expense alone is overly simplistic and shortsighted. To be successful, Detroit must cut expense and increase its revenues. The major sources of city revenues are from property taxes and income taxes. These will increase only if more people and businesses, who are able to pay taxes, live or work in the city.

Detroit must have a plan to cut expense without drastically reducing services and to attract taxpayers to the city. Creativity and teamwork on the part of all stakeholders involved will be absolutely essential if Detroit is to both cut expense and attract major new taxpayers who are being courted by virtually every other community in the country. Detroit must compete for these taxpayers with a clear-cut turnaround plan.

The first step in the turnaround planning process is to stop all forms of denial. This is not to criticize or blame, but to understand the depth of what must be done. [Nobody should assume that any one person will be given a magic wand to cure-all Detroit's problems quickly.] Just a few statistics can help to begin the process to understand Detroit's competitive position and that its resources already are severely limited. For example, Detroit is now only the 18th largest city in the country based on 2010 data from the U.S. Census Bureau.

It is no longer in the top 10. Detroit also was ranked 522, of 540 cities listed by the U.S. Census Bureau based on per capita income of $14,213 (based on 2009 data). For comparison purposes, per capita income of Dallas, the 200th highest city, was $25,941, 82 percent above the level of Detroit. Detroit also had the lowest per capita income and the second highest level of individuals in poverty (at 36.4 percent, only better than San Juan, Puerto Rico) of the 50 largest cities in the U.S. (based on 2009 data). Despite these statistics, Detroit needs at least tens of thousands of additional people and/or businesses who can pay taxes.

We are now very late in the timeline to be able to be successful. Detroit cannot wait any longer to pull together and implement programs such as Detroit Works in order to increase the quality of services at a lower cost to a more concentrated community. If additional precious time is lost through continued infighting and tax revenues continue to decrease, the city's downward spiral will speed up and the city will never be able to cut its way to success. On the other hand, if the city, the county, the region, the state and the federal government have a workable and attractive plan for the future and pull together, Detroit can be great again.