After suffering through decades of economic decline and official mismanagement, the city of Detroit sought bankruptcy protection last week, becoming the largest American municipality to take that extreme step. The city’s debts total a staggering $18 billion, far more than it could ever afford to pay back given its shrinking population and tax base. þþThere is no doubt that bankruptcy proceedings will be very painful for Detroit’s population of 700,000. Bankruptcy cases can drag on for years, and city services, which have already been slashed, could deteriorate further. þþBut the bankruptcy case might also allow Detroit to be relieved of paying back its bondholders and banks much of estimated $9 billion they lent to Detroit on overly rosy assumptions. This group will, of course, push the city and state to also force concessions on city workers and retirees, whose pension funds are underfinanced by about $3.5 billion. þþBut city officials should resist the idea of cutting the pension payments for the city’s public workers, which averages $19,000 a year. Unlike the situation in other troubled cities where government officials made lavish pension promises and workers gamed the system to inflate their benefits, Detroit’s are quite modest. Moreover, city employees have already had their pay and benefits reduced significantly in recent years. Slashing the meager fixed incomes of retirees will also hurt the city’s weak economy because they are more likely to spend most of the money they receive in local businesses. Labor unions also argue that Michigan’s Constitution protects their pensions from cuts, which will set up a potentially long legal battle that the city can ill afford. þþThere are many causes to Detroit’s financial problems. Foreign competitors and global economic forces have battered its industrial base, particularly the Big Three automakers. Corrupt and inept government officials have squandered its wealth. And a flight to the suburbs by businesses and residents has sapped its resources and spirit. In recent years, the city has tried to respond these challenges by raising taxes and severely cutting spending on vital services like police, fire and even streetlights. But its efforts have not been sufficient to pull it out of a downward spiral that in many ways exacerbated its decline by, for instance, undermining public safety. þþIts federal bankruptcy filing, which has been challenged in state courts by city pension funds, gives Detroit a chance to hit reset and try to start over. The city is seeking to have a big chunk of its liabilities, including the pensions it owes to city employees and retirees, written down significantly. An emergency manager appointed by the State of Michigan, Kevyn Orr, also wants Detroit to spend more money to clean up blighted neighborhoods and bring down its high crime rate. þþEven if the city is able to wipe out much of its debts in bankruptcy court, officials in Detroit and at the statehouse will have to develop a much more comprehensive and far-reaching plan to deal with the city’s problems. They will have to, for instance, say how they intend to deal with neighborhoods filled with abandoned homes and businesses. Detroit’s decline is not just bad for its residents, it also hurts the surrounding suburbs. One way state officials could aid Detroit is to urge the consolidation of some public services that are currently provided separately by Detroit and other cities in Wayne County. þþDetroit once served as the engine that powered Michigan and a large chunk of the national economy. It may never regain its lost stature, but it does not have to be a symbol of failure. þ
Source: NY Times
