Detroit’s fiscal opera will end with bankruptcy aria

Same song, second verse.

That's my reaction to the news last week that the state team charged with reviewing Detroit's financial condition has unanimously concluded a financial emergency exists in the city.

The exact wording: "… a financial emergency exists because no satisfactory plan exists within the city of Detroit to resolve a severe financial problem."

That's putting it mildly. The city's cash shortfall is likely to hit $100 million by June. The deficit accumulated since 2005 mounts up to $936 million. Detroit's unfunded long-term debt (mostly pension and other retirement benefits) is $14.9 billion. That comes to around $20,000 per city resident.

The city's debt to asset ratio (a key indicator of financial health) is 33:1. By contrast, when General Motors went into bankruptcy in 2009, its debt to asset ratio was 20:1.

Virtually everybody thinks the stage is now set for Gov. Rick Snyder to appoint an emergency financial manager. He technically has as long as 30 days to make up his mind, but, as State Treasurer Andy Dillon pointed out, the city is bleeding cash and doesn't have much time.

It looked much the same back on April 4, 2012, when the Detroit City Council voted 5-4 to adopt the consent decree with the state that provided the state "the lightest possible touch" to get the city to sort out its financial problems and avoid the (then) dreaded emergency financial manager.

At that time, I wrote that, "under the consent agreement as written, there is an awful lot of diffusion of power. ... The long record of bad blood between Mayor Dave Bing and the Council doesn't encourage optimism that reaching agreement on anything will be easy. When you add the racial politics that have pervaded the relationships between Detroit, the suburbs and the state for decades, you have to worry the whole thing could come apart at the seams."

Well, it did, but it sure took a long time and a ton of wordy political posturing to do it. It's fascinating that the whole Detroit situation today is exhibiting the same strange slow-motion stumble that General Motors displayed just before it went bust in 2009.

I'm sure that's because nobody -- back then or now -- really wants to face a bankruptcy. But, think, in the case of GM, it turned out a bankruptcy was exactly what the doctor ordered.

I'd guess that's the same song they'll be singing for Detroit's financial future -- but it's going to require a second and a third verse.

The second verse will showcase an emergency financial manager to sort out the operating deficit and cash flow problems. That means the EFM will have to deal in a very tough way with the city's various very powerful unions and woefully inadequate tax collection system. Financial experts tell me the issues here are more those of rigid and antiquated work rules, jurisdictional tangles and bad management than mere wages.

However, resolving the city's operating deficit and cash flow problems isn't going to deal with the enormous accumulated debt or the structural rigidity in the city charter that practically guarantees the expensive structure of city bureaucracy. And I doubt even an empowered emergency financial manager is going to have the clout to get the city's bond holders to take a haircut and force a rewrite of the city charter.

That will take a third verse of the song: The largest municipal bankruptcy in American history.

That sounds terrible. But if you look at the precedents set by GM and Chrysler, a structured bankruptcy is conceptually possible, financially sensible and politically acceptable. What exactly will be required to make manageable the city's nearly $15 billion in unfunded long-term liabilities will only gradually become clear as the emergency financial manager plows through his or her work.

An EFM is a necessary solution to Detroit's problems, but it isn't sufficient. If we're really going to make a thriving Detroit an essential part of a thriving state -- everybody wants that -- we'd better make sure we take a full dose of the bitter medicine and get the entire job done completely and not stop part way through.

That's why this song, like most good ones, will wind up with three verses: 1. Consent agreement; 2. Emergency financial manager; and 3. Structured bankruptcy.

Editor’s note: Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics. He is also the founder and chairman of the Center for Michigan, a nonprofit, bipartisan centrist think–and–do tank, designed to cure Michigan’s dysfunctional political culture; the Center also publishes Bridge Magazine. The opinions expressed here are Power’s own and do not represent the official views of the Center. He welcomes your comments via email.

About The Author

Phil Power

Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics. He is also the founder and chairman of the Center for Michigan, a nonprofit, non-partisan centrist think–and–do tank, designed to cure Michigan’s dysfunctional political culture; the Center publishes Bridge Magazine. The opinions expressed here are Power’s own and do not represent the official views of the Center. He welcomes your comments at ppower@hcn.net.

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Comments

Louis Smith
Tue, 02/26/2013 - 10:51am
Phil: I agree, its time for New Detroit to rise from the ashes of old Detroit, smaller, more efficient, and effective for the residents and businesses that still call it home.
Duane
Tue, 02/26/2013 - 7:53pm
If it were only as simple as Mr. Power portrays it, just spend other people's money on Detroit and that will make Detroit te 'jewel' of Michigan's properity. The reality is that Detroit has create a culture of wasteful spending over the past 50 years that simply giving them more money will not change what got them into this state. Detroit is about the people and the politics and unless those changes nothing else will except Mr. Power will want more and more of other people's money given to Detroit, oh that isn't a change either. Mr. Power simply likes the song of one note, money, money, more money, no matter what the problem. Until people (including Mr. Power) decide what they want the City to provide at a minimum and are will to sacrifice to have that delivered then there is no hope for the City of Detroit accept to turn into a sinkhole of other people's money and the lives of those who try to live in Detroit.
Anonymous
Wed, 02/27/2013 - 8:30am
I don't understand Duane's comment - Mr. Powers is talking about bankruptcy, not more money, i.e. about process, not policy or implementation. It is all about money in the end. The availability of money will dictate what services can be provided. And the sacrifices will be made whether people like it or not - because there is no alternative. No politician can say those things, let alone take action to implement them - so that is why an impartial bankruptcy process is required. The problem will be when the bankruptcy is over and the city is turned back over to the politicians, the cycle will begin again. Long term, the solution to Detroit is to heal the wounds of the past and merge the city and the suburbs together, which will have the natural effect of focusing the largest institutions back in the city, creating security, jobs and viable neighborhoods, following the successful model of many other similarly situated cities in the country. But that can't happen in a crisis environment, hence the need for the bankruptcy.
Duane
Wed, 02/27/2013 - 3:50pm
Anonymous, You seem to presume that people associate with Detroit financial sistuation will be rational and make decisions based on limited money. They haven't been for over 50 years so I am not clear on why you make that assumption. Mr. Power doesn't seem to make that assumption, he doesn't seem to have any interest in it (didn't mention it in his article). My incoherent post was to suggest that there are other issues to address before even beginning the first verse of Mr. Power's song. If the culture of spending doesn't change what is the point of any of the steps Mr. Power's song describes. You and Mr. Power seem to think Detroit is only about money. You claim, "And the sacrifices will be made whether people like it or not – because there is no alternative ". You and Mr. Power don't seem to feel that there is any other problem but money. Why has Detroit been spending and spending to get into this situation? If you don;t know that and don't change it, why do you think Mr. Power's song will work? Mr. Power's song at least in the 2nd verse will require more and more of other people's money and will that solve the problem? Mr. Power doesn't indicate how. You only believe it will because you expect people to act rationally, and yet if they were your kind of rational why would they have gotten into this situation. It would surely be easier if it were only about the money, but it is about people and their habits with money that Mr. Power's song ignores. "Mr. Powers is talking about bankruptcy, not more money, i.e. about process, not policy or implementation." The policy Mr. Power describes in his song is about more money. What State appointed emergency financial manager did not get money from the State to spend on the organization they were managing? You and Mr. Power talk as if Bankruptcy is a solution, it is not, it is only a means to give people who want to change breathing room to make the change. Neither you nor Mr. Power seem to feel that the people matter and their habits need to be addressed.
Mike Gillman
Sun, 03/03/2013 - 8:09am
Phil is correct that bankruptcy for Detroit is inevitable and needed. But troubling is the attempt to make the GM/Chrysler bankruptcies a parallel. Those were successful ONLY because of a vast infusion of public dollars. If anyone thinks the voters and legislators of this state will step up with a huge financial bailout of the boobs who have run Detroit for decades, they have not taken the public temperature north of Eight Mile Road.
Big D
Sun, 03/03/2013 - 8:49am
@Mike Gillman: Spot on, stole my refrain! Ok, I can elaborate: In addition, the GM bankruptcy illegally favored unions over bond and stock holders, which is the sort of problem that Detroit is IN, not what will solve it. ...and We The People got a (small) share of the equity of GM that will somewhat diminish our losses in the bailout. Detroit doesn't have "stock" to trade. It all does come back to MONEY, like Duane says...Phil assumes that in bankruptcy Detroit will get a huge infusion of money from somewhere (and, by implication, that it won't be squandered like all that in the past). Where does the money come from? Lansing? D.C.? Beijing? Perhaps Detroit would be better off being dismantled and absorbed into its surroundings.
SBR
Sun, 03/03/2013 - 11:40pm
Yes, Mike (and Big D in reply)! I, too, and stunned that Mr. Powers held up the so-called "successful" GM bankruptcy as something to emulate. GM was BAILED OUT by the taxpayers. The US Treasury department is starting to sell off its ownership stake a small bit at a time to prevent the stock price from collapsing. The most probable scenario that I've seen reported is this: the taxpayers will suffer a $20 BILLION loss when all is settled. GM bankruptcy could have been executed in a normal fashion without any taxpayer involvement. How many thousands of business bankruptcies have been settled in US courts without the government stepping in and taking over? Now,....about the City of Detroit: Unless Obama steps in (illegally), there will be no bailout for Detroit. Not all of Detroit's fiscal problems can be laid at the feet of Detroit's long line of incompetent and/or corrupt political leaders, but a large portion can be. Any city that goes from 1.5 million residents to 700,000 is going to have major problems. But, like our federal government, Detroit leaders waited years before recognizing the train wreck coming. Bankrupcy may be the best option now, if it results in cancelling city employee pension plans and healthcare plans. I predicted 2 years ago that the public sector unions in Detroit would rue the day they refused to give concessions. They are now faced with losing far more than they would have lost had they worked with Mayor Bing. When the public union employees see that they will not be bailed out like GM and Delphi hourly union members were bailed out, there will be howls. Howls of racism. But who will be screwing them? Why, Obama, of course. One point of disagreement with Big D: Detroit should not be merged into the surrounding governments. It would be grossly unfair to saddle those communities with Detroit's legacy costs and grossly mismanaged government culture. The time for Detroit and suburbs to be merged was 5 decades ago. It can never happen now.
Karla
Sun, 03/03/2013 - 12:35pm
Detroit might stand a chance of success if the entire city government is terminated and replaced with new people. That isn't really a viable option without Federal and State troops insuring smooth transitions (sounds very drastic but black racist-based reactions will be swift and reactionary). The process would also take a couple of years to complete. Distrust, racism, exploitation of the citizenry is prevalent in the very fiber of city government. It's very say, but true. Don't count on Detroit to help itself. The city government will stop that nonsense. (snark).