That's the way it is in movies of course. Film often imitates real life. I haven't written about it for a while but my home city of Detroit is pretty much at that point. If you hadn't heard Detroit is under the control of Michigan Governor Rick Snyder appointee Emergency Manager Kevyn Orr, who over the last week released his reports on Detroit's dire financial situation as well as some of his plans to potentially avoid bankruptcy, which he is publicly willing to state is a 50/50 proposition. Looking at some of the numbers I think that if Orr is okay with revealing that bankruptcy is that likely, I think it's even likelier than that.
There is much more to come in future detailed breakout meetings with union leadership, pension boards and creditors but the major takeaways from Mr. Orr's plan included:
- Immediate cessation of debt payments, starting with a $39 million payment that was due Friday. (This already happened)
- Some unsecured creditors receiving as little as 10 cents on the dollar after all is said and done.
- Unspecified reductions in pension payments for current retirees and reductions in planned future pension payments for current workers.
- Reductions and/or eliminations of health care benefits for current workers and retirees.
- Removal of the city water department (which serves much of SE Michigan) from city authority and transfer to a regional (suburban) authority which would make unspecified payments to the city.
- Lower income and property taxes (which are generally already at the statutory maximum) in order to try to attract people back to the city
- Lease Belle Isle (a roughly 1000 acre park in the Detroit River) to the state. City Council previously refused to do this.
Additionally the Michigan Constitution doesn't appear to allow for municipalities to unilaterally reduce pension payments or benefits to retirees. Federal bankruptcy might allow for that but who knows? It might take a while to reach that point. In any event as a union leader or pension board representative your incentives might tend towards those of Samson in this case. That is, if you're going down anyway you might as well destroy the temple and take everyone with you. Why should you cut your throat if bankruptcy is coming regardless of what you do?
Lastly the banks, bondholders and other investors are hardly going to want to set the precedent in Michigan that if a municipality owes them money and doesn't want to pay all they must do is threaten bankruptcy, stop making payments and bogart the creditors into accepting a fraction of what you're owed. Again, some of the creditors may decide that they can get more than 10% of what's owed by refusing to accept any haircut deal and instead going to bankruptcy.
So as you can see there are no good answers here for anyone, least of all the people of Detroit. I don't envy Orr his job. The devil is in the details but if I were him I would be doing everything I could to limit the harm to current retirees and the working class population of the city. I would instead try to shift as much damage as possible to the banks. It's not that the banks deserve it per se, but it's just in a choice between hurting citizens who have already been harmed by high taxes, stagnant wages, high unemployment and poor city services and banks I would choose to hurt the banks. We'll have to see how this turns out. I still think bankruptcy is the most logical outcome but time will tell. The bottom line is that there is no more money. The political aspects of the available choices are as least as important if not more so than the economic outcomes. It may be more palatable for those representing city stakeholders to go back to their constituents and say a federal bankruptcy judge imposed these conditions instead of saying the emergency manager proposed them and I accepted. Can you really save people from themselves, still make a deal with the banks and protect the interests of those that would be harmed by bankruptcy but had little or nothing to do with the decisions and circumstances that led Detroit to this precipice?
How would you handle this?