Opinionated @ CFE

A Creditor By Any Other Name


The only surprising thing about the city of Detroit declaring bankruptcy is that it took so darn long to happen. An icon of urban decay for the last four decades, Detroit shed businesses and population both to suburbs and other metro areas at a rate that undercut their ability to serve even the most basic of functions. Even as the city fails to respond to police calls in under an hour, or stop the infamous tide of arson, or even have a single major chain grocery store willing to serve the 713K poor souls who still call the city home, former city employees are demanding that the promises made during better times be honored. Unfortunately for them, they aren’t in any better position than other creditors.

We all know J. Wellington Wimpy’s famous line “I’d gladly pay you Tuesday for a hamburger today.” Pensions are just that. Employees go to the employer to ask for a raise. The employer, eager to avoid any liabilities now, makes a proposal: how about we pay you later? Much, much later. It’s a gamble for the employee that the employer will be in a better position decades down the road to pay that money than they are now. For government employees, it seems much less risky since their employers is backed by the taxpayers. This isn’t to say that steps aren’t taken to mitigate said risks. Pensions have investment funds used to fulfill those future liabilities. They are supposed to seek  a specified rate of return to accomplish this.

But it’s still a risk. Accepting a pension is a gamble that your employer will be able to fulfill those promises later at much more generous terms than they can do today. A reasonable person would accept that working for 20-30 years to get a guaranteed salary for life is too good to be true and will not last. But as with anyone taken in with a too good to be true proposition, many have become irrational and demand satisfaction. Just like any other creditor, they made their gamble. Now they have to live with the results.

5 Responses to A Creditor By Any Other Name

  1. Ronald D. Hunt

    “Unfortunately for them, they aren’t in any better position than other creditors.”

    Michigan State constitution has a provision that protects the pensioners who already have earned benefits.

    Right now the fight is over whether or not a city in Michigan can legally go into bankruptcy because it would endanger pension benefits.

    This likely will take years and years to sort out.

    Because this bankruptcy is being filed by an Governor appointed Emergency manager and not the elected officials of the city, this may be the case that finely ask the question of rather of the Emergency manager law is constitutional or not as it allows the governor to dismiss elected officials and replace them by executive fiat.

    And remember there is a shot clock on this, if the count proceedings last passed the next election, the bankruptcy will be withdrawn as the new governor fires the emergency manager and returns local rule back to the citizens it belongs to.

    Currently the EM, is attempting to file under chapter 9, an attempt to allow the city to give around 10cents on the dollar for pension benefits, rather then allow the pension to be taken over by the federal pension guarantee corporation.

    Detroit needs to go through court liquidation, not managed restructuring, both because it is unlike that chapter 9 managed restructuring will prevent re-entering bankruptcy in the future, or that managed restructuring would solve the problem of the 70,000 abandoned properties, or the cost in maintaining to infrastructure to that abandoned properties, or the cost in disconnected the infrastructure to those abandoned properties, but also because the restructuring they have request does not cut city expenses to below the cities income.

    The whole thing stinks to high heaven, Michigan is being ran into the ground on purpose by a bunch of proto-facsist dictators who’s slash and burn government policy is pushing more and more of the State into Emergency managers.

    • If I’m reading Michigan’s constitution correctly, it only appears to prevent raiding existing assets to plug budget gaps. It doesn’t seem to do anything to force any government to continue to fund it.

      Is there even a precedent for liquidation of a municipal government? I can only imagine that’s a very messy process. You’d end up dissolving the incorporated city of Detroit after which residents are going to have to re-incorporate brand-new communities for themselves. With no assets. My bet is that the downtown area (which seems to be doing a lot better than the rest of the city) is going to leave everything else out to dry.

  2. Ronald D. Hunt

    ” it only appears to prevent raiding existing assets to plug budget gap”

    Mostly true,… bankruptcy however falls under federal rules/law, and the EFM is hoping to use that to get around the State law.

    “Is there even a precedent for liquidation of a municipal government?”

    Not as far as I know, but this begs the greater question, if those 70,000 abandoned properties are left in unincorporated area’s, who gets maintain basic services to them, such as say fire protection?

    It is questionable rather they can legally file under chapter 9 even ignoring State law, as they have to show that the restructuring has a reasonable chance of avoiding a future chapter 7 filing.

    It also brings up the question as to what city properties can or can’t be liquidated, as many properties are only partly owned by the city, such as the city’s art collection and museums, or whether water rights can be sold out from under the citizens without a vote.

    The State may face lawsuits of its own, given the grossly corrupt way the republicans their have rigged road maintenance financing in the State. The State doesn’t maintain most roads the local municipalities do, they bond for the roads and are paid a stipend from the State to pay said bonds, However the State recently cut that stipend by 60%. No one has sued yet because non of those bonds have been hit yet…, But bond holders very likely could pursue the State once injury has occurred.

    • Do I detect some ironic hints of nullification and overriding the supremacy clause?! 😉

      I’d agree that the city is likely beyond restructuring. It’s been in a funk for too long to reasonably change course, and their long-term pension liabilities are likely to grow to over half the city budget. They’ve been able to make some modest improvements in the downtown area, but the rest of the city is a loss.

      I find it bizarre that you’re blaming Republicans for decades of mismanagement by Democratic mayors of the city. The state didn’t put a gun to the city’s head and demand that they offer generous retirement benefits. They didn’t chase businesses out of the city with high rates of violent crime. They didn’t fail time and time again to shift away from heavy dependence on a single industry. That’s all on the city. Trying to claim that a recent change in road funding is what killed the city is loony.

  3. Ronald D. Hunt

    “Do I detect some ironic hints of nullification and overriding the supremacy clause?!”

    No, State law limits the options the city can take in pursuing a bankruptcy action, If the city does in fact enter bankruptcy under any chapter then State law is moot, as it should be.

    “their long-term pension liabilities are likely to grow to over half the city budget.”

    Depends on what numbers you use, yes if you use the delusional numbers from the Governors office that is the case, remember that they invented a new formula in 2011 for calculating this to make the situation look worse, Similar to how Dan Liljenquist here in Utah use overly pessimistic returns to make holes look bigger then they really are.

    “I find it bizarre that you’re blaming Republicans for decades of mismanagement by Democratic mayors of the city.”

    The whole State is mismanaged, Detroit is only the latest situation in that State. And given what happened over the years with Red lining, white flight from the urban area’s, collapse of the US Steel industry(Detroit had that to!), massive increase of outsourcing through the 90’s(NAFTA).

    Detroit should have been aloud to incorporate adjacent communities whose population primary commutes into Detroit; New York has done this, The State should have started a urban renewal fund to tear down abandoned buildings like Illinois did for Chicago.

    The State should have and still needs to pass legislation allowing cities to remove infrastructure from area’s that don’t have the population to sustain the infrastructure from the collected taxes. This hasn’t been done anywhere else that I know of, but it is something Detroit needs to do.

    Most large cities in the US over the passed 40 years have shrunk, and the suburbs surrounding them have grown. Albeit, few to the extreme that Detroit has, however In all other cases, the States have either helped or at the very least didn’t tie the hands of the city.

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