Could bankruptcy be the answer?
Published: August 8, 2012
Among those who disagree with that position is attorney Kenneth M. Schneider. A lifelong resident of the city whose firm Schneider Miller has a downtown office, Schneider laid out his feelings in a letter to Metro Times.
He points out that Detroit's financial crisis has many causes, including suffering "more than our fair share of crooks and incompetents in local government."
But there's much more to it than that. Spurred by federal policies, the city's residents began making an exodus to the suburbs in the 1950s, when the population reached a peak of nearly 2 million. By the time of the 2010 census, that figure had fallen to 713,000. And the hemorrhaging continues unabated. According to the most recent estimate from the Southeast Michigan Council of Governments (SEMCOG), slightly more than 685,000 people remained in the city as of December 2011.
That drastic drop, coupled with the loss of high-paying manufacturing jobs, put the city in a seemingly intractable downward spiral. Even the best of politicians would have been hard-pressed to avert the crisis now facing the city, Schneider asserts.
He likewise thinks Detroit will be unable to cut is way to solvency.
"The state's emergency financial managers, advisory boards, and other measures are politically offensive and ultimately ineffectual," he contends.
Part of the reason they're ineffectual, he explains, is that the severe austerity measures being imposed will only serve to drive even more people away as services decline even further, continuing the spin downward.
"We have to maintain our basic services, but we can't do that and sustain all the debt we have," he asserts. "We're going to chase the rest of the taxpayers out of the city. We have to let the bondholders share in the pain."
Chris Michalakis, president of the Metro Detroit AFL-CIO, see things similarly.
He points to the series of bonds issued between 2005 and 2011— totaling more than $600 million — that the city used to plug short-term deficit holes in an attempt to remain solvent.
"Those municipal bonds that were used to patch holes in the city's budget were like sub-prime loans," he says. "They carried a high reward for the bondholders because they were supposed to come with a risk. But the way it has worked out, they're getting their high rate of interest but assuming zero risk because of the way they are being shielded. That's the opposite of how free-market capitalism is supposed to work. I see it as another way of bailing out Wall Street. The banks made bad decisions, bad investments, and they should have to suffer the consequences of those decisions."
When it's pointed out that the former union members now receiving pensions and medical benefits from the city — one of the primary costs proving to be an overwhelming burden — would also have their fate in the hands of a federal judge, and could be hit hard if the city were to declare bankruptcy, Michalakis doesn't waver.
He admits that, from the viewpoint of labor, bankruptcy harbors both pros and cons. In the end, though, he says it comes down to a matter of fairness. And what's not fair is for workers, retirees and residents to bear the brunt of the crisis while the banks are allowed to skate.
On the other side of the issue is John Llewellyn, vice president of government relations at the Michigan Bankers Association.
In his view, allowing Detroit to enter into bankruptcy would be a terrible mistake.
As with the Snyder and Bing administrations, a primary concern for Llewellyn is the potential for collateral damage bankruptcy could cause — not just for Detroit, but also for other municipalities and the state as a whole.
The concern is that once one city, especially one as big as Detroit, defaults on debt, other dominoes will tumble, and the cost of borrowing will go up for everyone, including the state itself.
It is a legitimate fear, says Robert W. Doty, a Sacramento-based financial adviser to bond issuers and the author of a primer on municipal bonds.
The way he sees it, any city that enters into bankruptcy and seeks to cause losses for the bondholders who invested in it, runs the risk of "dooming their future.'
"If you attack lenders, you can't expect them to come back and loan you money in the future. You put a curse on your name."
"You can't willy-nilly attack the confidence of the markets," he says. "People need to know they have a safe place to invest their money."
And then there's the matter of image. For people outside of the state, Detroit and Michigan are largely perceived as one and the same. The stigma of bankruptcy would attach itself to the whole state.
As for all the positive images generated by efforts such as the Pure Michigan campaign, well, you can just kiss that goodbye, goes the thinking.
All of which is part of the reason he helped form Citizens for Fiscal Responsibility, the business-oriented group that has challenged the proposed emergency manager referendum based on the claim that the heading on petitions that were circulated had an inadequate font size.
As for the fairness issue, Llewellyn, who points out that he was born in Highland Park and says that the feeling of distress seen in Detroit on his visits now is "palpable," says there's no guarantee everyone's going to walk away from bankruptcy happy with the decisions handed down by a judge.
"Everything is very cloudy going in, and there's no guarantee everybody is going to love the options when they come out," is the way he puts it.
But for Frank Joyce — a communications specialist who advises the Sugar Law Center and a longtime community activist who has been studying the effects of PA 4 — the key word is "everybody."
"A bankruptcy judge is required to bring everybody to the table" and spread the pain fairly. Among those sitting at the table, he says, would be duly elected city officials.
Joyce and attorney Schneider both also make the point that, rather that scaring investors away, its possible that the type of restructuring that can occur in bankruptcy would result in a city that is on a much more stable financial footing, making it more attractive in the long run.
Don't get the wrong idea, says Joyce.
"It's not that I think bankruptcy is some panacea," he says.
But neither is PA 4. Look, he says, using Detroit Public Schools as Exhibit A. On its second emergency manager, the district continued to go deeper into debt because the underlying problems of funding and student flight haven't been solved.
There's also the issue of disenfranchisement felt when authority is stripped from elected officials, Joyce says.
Detroit City Councilman Kenneth V. Cockrel Jr., in an interview with Metro Times, says he's reluctant to talk at all about the possibility of bankruptcy, explaining that the financial markets carefully follow the views of public officials and could end up downgrading the city's credit rating based on some stray comment.
He did caution proponents of bankruptcy to be wary, making the point that there are no guarantees of debt relief if the issue ever did end up in front of a judge.
Interviewed by phone on Friday, hours after the state Supreme Court ordered that a referendum on the emergency manager law be put on the ballot for November, Cockrel pointed out that another level of uncertainty has been added to the whole issue.
There is another factor at play as well. As Joyce observed, there's no guarantee that even an emergency manger could lead Detroit into financial solvency. Which would mean that the city could still end up declaring bankruptcy.
After all, many of the problems that brought it to this point remain unresolved. People continue to flee a city struggling to provide services while dealing with the crush of overwhelming debt.
Just because there are a lot of people who fear even uttering the "B" word, it may still be unavoidable.
Curt Guyette is Metro Times news editor. Contact him at firstname.lastname@example.org
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