The Detroit Dilemma

Detroit is a mess — financially, socially, and otherwise.  It has filed for bankruptcy in what is the biggest municipal bankruptcy in history.

Detroit owes billions of dollars.  Its listing of creditors in its bankruptcy case is more 3,500 pages long.  Among other debts, it has huge, unfunded pension obligations to active and retired public workers.  In its bankruptcy Detroit will attempt to obtain significant cuts in those obligations.  Today, in an effort to forestall such cuts, Detroit’s two public employee pension funds are expected to file objections to the bankruptcy, arguing that the bankruptcy proceedings and the attempts to cut pension obligations violate the Michigan Constitution.  The city’s condition is so dire that it has hired Christie’s, the auction house, to value the city-owned items in the Detroit Institute of Art and advise the city on how it could “realize value” from those items.

Much of the focus has been on how Detroit got to its current state.  There is value in that process, because understanding the bad decisions and mismanagement — as well as the failure to recognize the impact of broad economic trends such as the departure of manufacturing jobs — may help other cities to avoid Detroit’s fate.  But it is equally important to think carefully about what happens now, and how America should handle the Detroits of the future.

At present, there doesn’t seem to be any appetite in Congress or in the Obama Administration for using federal money to bail out Detroit.  That’s a relief.  The prevailing view about Detroit may mean that we have moved beyond the notion of bailing out mismanaged entities, be they private or public.  (Speaking of prevailing views, advocates of governmental thrift will grind their teeth when they read the article linked in this paragraph, in which a spokesman for Detroit laments the city’s prior failure to take advantage of federal funds, which he describes as “free money.”  It wasn’t “free” to taxpayers, but local and state governments have long looked at the federal government as an endless source of money.)

It’s important that we set the right precedent with Detroit — because there will be other municipal bankruptcies, and with the massive unfunded public pension and health care obligations in states like California and Illinois, there could well be state bankruptcies, too.  I think the President and Congress are right to resist calls to bail out Detroit, and should similarly resist the the temptation to assume the obligations of badly managed states.  In the meantime, we can hope that the failure to bail out Detroit will cause mayors and governors of other troubled governmental bodies to get serious about getting their fiscal houses in order.

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