Examining the body of evidence in Detroit's bankruptcy trial
Anatomy of a takeover.
Published: April 1, 2014
Then they outline some of the forces creating the calamity.
“The crisis among the nation’s municipalities has many fathers, and every troubled municipality faces its own unique challenges,” they wrote. “Yet some common drives can be identified. Not unlike private entities, municipalities across the nation have found themselves trapped in an extended cycle of declining revenues. Plummeting real estate values and high rates of foreclosure have eroded the property tax base … Widespread unemployment and, in some cases, decreasing population have depleted revenue from sales taxes and other forms of taxation.”
They could have pasted a photo of the Spirit of Detroit alongside that summary.
The decline of the Motor City has been well-chronicled; from an industrial powerhouse with a thriving and integrated middle class, the city’s population fell from a peak of nearly 2 million in the 1950s to fewer than 700,000 residents today. Compounding the problem is Detroit’s poverty rate, which is three times the national average.
The staggering population loss, as well as the decline of the auto industry and all the businesses that depended on it, produced a decades-long disaster the city has yet to recover from. It’s easy enough to explain: As people leave and jobs disappear, the tax base begins to erode. Loss in revenue means cuts in services, which causes more people to leave, forcing more businesses to close. Meanwhile, the infrastructure of a city spanning 139-square miles remains constant: the same number of streets to pave, the same amount of water mains and sewer lines to maintain, the same vast area for police to patrol and firefighters to service. And so, in an attempt to maintain some equilibrium, debt is incurred. But it’s not enough, and so people continue their exodus, leading to …
You get the picture.
Using Emergency Manager Orr’s numbers, the city has unfunded liabilities (read: debt) of $18.5 billion. Even if you accept the claims of Orr’s critics, who contend that the number has been deliberately distorted in order to justify the bankruptcy, Detroit’s debt load is still massive.
And who’s to blame?
As attorneys Ellman and Merrett point out in their article, such crises do have many fathers. One that they fail to mention, however, is the role racism has played in the decline of cities such as Detroit. In that, they aren’t alone. It is a difficult subject, and one many people shy away from for a variety of reasons.
Whatever their past faults, municipal employees and retirees didn’t cause people and businesses to flee the city, and had nothing to do with the predatory lending and mortgage-industry Ponzi schemes and the resulting foreclosure tsunami that helped push Detroit toward insolvency.
Even so, the city and its pension system would soon become a testing ground for a legal theory that had, in the words of the Jones Day attorneys who devised it, “few if any relevant precedents for how treatment of such obligations would play out in Chapter 9.”
At the very least, they suggested, just the threat of going after pensions in bankruptcy may provide a municipality “with helpful tools to significantly improve its negotiating position with respect to its pension obligations.”
The law journal’s authors reveal no compunction about municipalities failing to fulfill what many could consider the moral obligation of following through on pension promises. The people receiving those pensions, after all, made irreversible career choices based on those promises, which they believed were etched in stone, and fulfilled their end of the bargain through decades of labor that can never be recouped.
For Ellman and Merrett, the concern wasn’t how to explore ways to keep those obligations, but rather in explaining how cash-strapped cities might evade them. After all, they reasoned, these debts were the result of “several decades of increasingly rich benefits packages, often resulting from negotiations with a municipality’s collective bargaining units, coupled with a less-than-rigid fiscal approach to paying those benefits.”
In the case of Detroit, there’s no arguing that the cost of pensions and retiree health-care benefits form a significant portion of what bureaucrats and accountants refer to as the “unfunded liabilities” that have Detroit sinking into a sea of red ink. Projected pension costs of $3.5 billion and retiree health-care costs of $5.7 billion form roughly half of Detroit’s $18.5 billion debt. (It must be noted that these numbers are both disputed, and misleading. For instance, even if you accept that the $3.5 billion in unfunded pension costs is accurate, nearly 40 percent of that is the responsibility of the Department of Water & Sewerage, which collects its revenue from users throughout southeast Michigan. What should also be kept in mind is that this money isn’t due immediately, but will be paid out over several decades.)
Looking ahead, however, Ellman and Merrett foresaw what could be a major impediment from putting their playbook into action.
“At the end of the day, wherever they have choice, municipalities very well may decide that the practical and political considerations outweigh the potential for cutting pension liabilities in Chapter 9.”
Fortunately for them, a fiscally conservative venture capitalist who billed himself as “one tough nerd” had recently become governor of Michigan.
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