Rising from the Ashes–Good news from Detroit! UPDATED: Judge throws out!

Posted on July 18, 2013 by

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Late this afternoon Gov. Snyder of Michigan authorized Detroit’s emergency manager moving Detroit into Ch. 9 bankruptcy.  I have not seen the details of this proposal (and much more is coming out tomorrow), yet what we do know is encouraging from the perspective of the people of Detroit.  Detroit is an utter disaster in many dimensions:  the city has hemorrhaged a majority of its population, its debts hopelessly outweigh any possibility of repayment, its entrenched bureaucracy is resistant to change, and the corrupt public unions seem to think things can just go on in the future as they always have.

Bankruptcy is not intended to be a gift for anybody, but it has always been in part a social program for second chances.  In many ways, bankruptcy is a declaration of truth; bankruptcy is declared when the lies are no longer possible.  The lie being, “we don’t have to change the behavior that caused this problem.”  But the truth is that major changes must take place, and bankruptcy is the forcing function that drives change. Detroit’s dire financial situation resulted in Gov. Snyder assigning an emergency manager to review the city’s fiscal house and present a plan to fix it.  The basic problem is no different than any other bankruptcy situation; they’ve spent far more than they can ever repay.  And like every other government these days, a large part of what they’ve spent is in obligations that are unfunded liabilities in the future.  Retired workers and bondholders were promised by long-dead (or out of office) politicians that future citizens would be made to pay them generous pensions and benefits.  There is only one problem of course.  What if there are no citizens to be made to pay?  We can all feel bad for the current retirees who believed the politicians promises years ago.  Just as we can all feel compassion for those in the private sector whose employers have likewise went bankrupt and now receive 30-50 cents on the dollar in retirement (such as former United Airlines employees).

The reasons this is encouraging are multiple.  First, this problem awaits major parts of the United States, both municipalities and states.  The public sector unions believe they can force citizens to pay for their generous benefits even when its driving government finances to ruin, and significantly preventing the delivery of current services (such as Detroit’s inability to light all of its streets).  If this gets through the legal challenges, it may encourage other public sector retirees’ organizations to bargain more to help resolve the crisis.  Second, there are some people still stuck in Detroit–their only hope is for the city to grow its way out of this, and yet the punishing taxes that would be necessary to service prior promises will keep out any hope and opportunity.  We need to have at least as much compassion to the citizens of Detroit as we do its retirees and bondholders.   Third, Detroit’s indebtedness is a microcosm of our nation’s problems in the recent financial crisis–people and governments being lent money they had no capability to pay back.  While its true that in most of the Wall Street banks collapse in 2007/8 the shareholders were basically wiped out, in most cases the bondholders were spared any pain–receiving 100 cents on the dollar.  We need discipline to return to the bond market.  Detroit and others are in major problems because bondholders believe they’ll be bailed out, and thus lend far beyond prudence.  Until bondholders suffer serious pain they’ll continue to privatize the gains, and socialize the losses.

I’m hopeful.  Kudo’s to the emergency manager Kevyn Orr and Governor Snyder.  Leadership demands hard choices; I’m encouraged when some of our leaders are willing to step up and lead and not continue to bury their heads in the sand.

MAJOR EDIT 7/19

Critics are coming out in force this a.m.; wanting to continue the lie:  problem, what problem?  Just raise taxes on those that can well afford to pay them.  Consider this disconnect from reality:

Krystal Crittendon, an attorney for the city, is criticizing the math in Orr’s latest financial report. She said the Washington-based bankruptcy attorney’s numbers do not add up.  “The whole foundation that brings him here is false,” Crittendon said. “We do not have a $15 [billion] or a $20 billion debt problem. We have less than a $2 billion short-term debt problem that we could manage if we just went out and collected revenues that are owed to the city; stop giving, you know, tax abatement to people who can actually afford to pay taxes.”

Sure, the unfunded pension liabilities of the future that we cannot afford–they don’t count!  The fact that trying to pay what we cannot afford is forcing the total decay of the city is simply a problem of not raising taxes more.  Unbelievable.  And Ms. Crittendon’s salary is paid by the very people she says need to pay more.

The WSJ also seems to criticize the bankruptcy here, but fails to identify any superior route forward given the intractability of the public unions and the bondholders.

MAJOR UPDATE:  Ingham County Circuit judge Rosemary Aquilina, ruled that the bankruptcy filing violated the state constitution (which does say public servants retirement benefits cannot be cut, and that almost certainly would happen in bankruptcy court).  The interesting aspect is that she says the action disrespected President Obama, since he bailed out Detroit.  It is not clear to me what factor disrespect (real or imagined) has in the legality of this issue.  But this is just round one.

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