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.
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