Municipal bankruptcy

A judge is yet to to decide whether or not the city of Detroit can take advantage of Chapter 9 bankruptcy.  The overseer appointed by the state of Michigan's governor--not the city's elected government--has filed for municipal bankruptcy on behalf of Detroit.  Filing does not mean that bankruptcy has actually happened; it's up to a court to determine if the city is actually insolvent and--if that is so--grant the status of bankruptcy.  If that happens--I imagine it will--then the hardest work begins.  Eventually there will be clarity on the consequences of bankruptcy for the city's 700,000 or so residents, as well as for its thousands of city employees and retirees, and also for its various creditors.

This is going to be very complicated.

Detroit looms large in the American consciousness because of its civic leadership of the automobile industry from the beginning of the 20th Century until the early 1970s.  What do you think of on hearing car model names like Impala, Thunderbird, Mustang, Roadrunner, Imperial, Charger, Roadmaster, De Ville, Continental?  If you're like me, you conjure up images of sleekness and style from the '50s and the '60s.  People who lived in Detroit during its glory years have told me of its beauty, comfort, culture and dynamism.  There's only one Motor City; Detroit worked hard to earn that name.

Out of respect for such a remarkable heritage that is now being overshadowed by the unfortunate specter of bankruptcy, I think that Detroit deserves a select few observations in this space to help place current and future events into context.

Municipal bankruptcies take lots of time and are very expensive.  Stockton, here in California, filed for Chapter 9 in June 2012, and has only recently been granted that status and begun to work through the resulting processes to determine who gets paid how much.  Jefferson County in Alabama appears to be on a plan that will complete its bankruptcy late this year, which would represent about two years' worth of those proceedings.  If approved--as seems likely--Jefferson County's case will set a major precedent for municipal bondholders since they will be losing a portion of their invested principle.  All such bankruptcy cases, of course, cost the municipalities in question large sums of money; for the three mentioned here, those amounts come to millions of dollars each in legal fees and court costs.

Public employee pension obligations are only a part of the fiscal story.  How much do Detroit's retirees receive in pension payments?  According to an analysis presented by a blog in the Washington Post, most of the city's retirees receive about $1600 per month.  That's not going to make for a lavish retired lifestyle, and it doesn't seem likely that reductions to such pension amounts provide much opportunity for balancing the city's books.  Furthermore, in some states--California being one of them; I don't know about Michigan--public employee pensions substitute for Social Security payments.  In other words, those retirees receive only their pension payments, and they do not receive Social Security benefits.  Even so, there will be much said and written about retirement benefits, because for Detroit unfunded pension liabilities and unfunded retiree healthcare obligations seem to represent about half of the city's currently-known debt.

Detroit's decline is the result of more than just official monkeying-around with the numbers.  There's plenty of juicy news about how the people running Detroit and Stockton--and, for that matter, American municipalities in general--have engaged in fiscal games that I call "fun with numbers."  Of lesser renown, but probably to become more obvious to us all during the next few months and years, is the fact that having fun with numbers has been part of normal municipal governance for decades.  My guess is that we will come to realize that not only is this compelling evidence that American politics can be a bipartisan undertaking (dark humor intended) but that it has even been sanctioned by third-party independent guidance, such as actuarial and accounting "best practices."  Wherever these best practices have contributed to the current problems, they will have to be changed before the bankruptcy proceedings will produce a truly stable fiscal environment for the long term.  And that's not meant for only Detroit, either; it's for general use throughout municipalities with unfunded future liabilities. 

A successful bankruptcy outcome requires solutions that address more than just the fiscal number problems.  It's worth recognizing that a root cause of these fiscal problems is that Detroit didn't keep up with the times.  The rest of the world--that is to say, Detroit's marketplace--changed a lot faster than Detroit itself was able to change.  The Big Three auto makers--General Motors, Ford and Chrysler--lost their leadership positions sometime in the early 1970s; we all know that story well.  But the fact is that jobs, and therefore residents, started leaving Detroit in the early 1950s.  Revenues to the city declined faster than did the need to provide municipal services over a sprawling territory.  Loss of manufacturing jobs is part of the story, of course, but not all of it.  After all, there's still plenty of affluence out in those suburbs, much of which is the result of outward migration from within Detroit's city limits. Somewhere along the way during those years, the city's leadership either missed opportunities to invest in whatever new things came along with the changing times, or--and here's the really scary thought--perhaps they failed to recognize that the times were changing so much, and the city was so firmly rooted in the past, that the only hope for the future would have been some kind of radical municipal devolution.  It seems to me that Detroit--and probably many other older cities--need more than just resurgent numerical rigor to assure themselves of viability.

If you want a real economist's assessment of Detroit, then check out the essay by Joseph Stiglitz entitled  "The Wrong Lesson From Detroit's Bankruptcy."

His conclusion is that we need some type of national policy that will pump investment money for education, job training and infrastructure into our cities so as to help prevent future additional municipal bankruptcies.

Seems like a good idea, even if the devil is in the details.  At the very least, it's an idea that's worthy of consideration, and if there are any potentially better ideas out there then perhaps they will be prompted to come forth for similar consideration.

At the very least, let's not have Detroit and Stockton and others like them find that their fiscal problems are papered-over with a new type of fun-with-numbers game.  I think that would end up as a plan for obsolescence, with no plan for future growth.

And, if we treat the current crop of municipal bankruptcies in that way--with no plan for long-term growth--then I think the odds are that we will end up treating a whole bunch of new ones in the same way over the next few years.

That would be a mistake.