Felix Salmon summarizes some of the stats contained in Detroit’s “unutterably depressing” Proposal for Creditors:
Detroit’s infrastructure is crumbling: 40% of its street lights are out of order, and it has 78,000 abandoned and blighted structures, of which 38,000 are considered dangerous buildings. Those buildings account for a large proportion of the 12,000 fires Detroit has every year. At the moment, firefighters are instructed not to use the hydraulic ladders on their firetrucks unless there is an immediate threat to life, because the ladders have not received safety inspections for years. Detroit also has just 36 ambulances, of which generally no more than 14 are in operation at any given time. And in terms of the city’s IT infrastructure — well, you can probably guess; suffice to say that a recent IRS audit characterized the city’s income tax system as “catastrophic”.
He describes the effect of the city’s emergency manager Kevyn Orr’s plan to “write down some of Detroit’s debt”:
[T]he real pain here is going to be felt by two main groups.
The first is the companies who provide wraps for municipal debt — companies whose muni arms somehow managed to escape the financial crisis largely unscathed, and which had to expect some losses on all the debt they were insuring. It’s hard to feel any sympathy for them. But the second group — Detroit’s municipal retirees — had much less choice about taking on their unsecured exposure to the city’s finances. Looking at the straits Detroit is in, the bond default makes sense. But it’s not being driven by stratospheric pension costs, and the swipe at pensioners does look rather gratuitous.
Walter Russell Mead considers the broader impact if the battle over pensions goes to court:
Michigan’s state constitution specifically protects pensions and retirement benefits, but that clause is in tension with federal bankruptcy law. The unions would likely argue that the 10th Amendment “trumps the notion that federal law is supreme.”
If the Supreme Court rejected that argument, it would deal a major blow to public sector unions across the country. According to bankruptcy lawyer Michael Sweet, “The last thing (union pension funds) may want is for a judge to rule on that….Because if the judge ruled against them, it would open the floodgates.” Every public sector union in the country would then be on notice that underfunded pension programs will ultimately be welshed on by cities and states. If the unions prevailed, though, federal bankruptcy law could be called into question elsewhere. Either way, it’s a major blow to blue model government: either states’ rights get a big boost or public sector unions take it on the chin.
Doug Mataconis wonders if “negotiations are being made more difficult by the fact that the creditors don’t necessarily believe that Detroit will pull the trigger and file a Chapter 9 [bankruptcy] petition”:
[S]uch a filing would constitute the largest Chapter 9 filing in recent history. Even if the city were to emerge from court in something resembling decent financial shape, the filing alone would do immense damage to the city’s credibility with creditors, contractors, and others who have done business with the city in the past. … In general, the city may end up finding that it would not be able to successfully emerge from bankruptcy because of the financial uncertainty the bankruptcy creates. That happens all the time in the corporate world, of course, which is why many companies that emerge from Chapter 11 find themselves on the steps of the Courthouse a few years later. In the case of a municipality, though, the consequences would be far more serious as the financial crisis that led to the Chapter 9 filing reemerged at a later date in a much more painful form. In the meantime, the brain drain that has exacerbated Detroit’s problems over the decades would likely only accelerate.
But at least the art is safe … for now.
(Photo from the interior of Detroit’s Farwell Building by Lotus Carroll)
The Dish 