Government’s Structure Made Detroit’s Bankruptcy Inevitable

It was sad recently to read that a Federal Court in Michigan approved the proposal of the city of Detroit to file for bankruptcy. How could this happen to one of America’s great cities?

The causes of bankruptcy didn’t come overnight. Planners, financial experts and good government groups had been warning for years that the city was living beyond its means, so the outcome was really not a surprise. But, eventually, the money supply ran out. When the money runs out, even in government, things change.

There are really no villains here. Everyone who benefitted from what the city did -managers, employees, vendors, bankers, union leaders, elected officials-all saw it coming. They just couldn’t agree on what to do about it. Most likely, their “Achilles heel” was that none of them wanted to take the cost cutting measures necessary to save the city. My father would have probably said: “They milked the cow until it went dry.”

Perhaps one of the reasons that nothing was done to head off bankruptcy is related to the way government is structured. Elected officials have relatively short terms and thus tend to have short-term planning horizons. Union leaders want regular pay raises and benefit increases for their members. Bankers are willing to make one more loan or float a bond with higher spreads and rates in the hope that business as normal can continue. For city councils, budgets are an annual exercise -“if I can get through one more year, maybe someone else can solve the problem.” But, finally, at the end, when the money runs out, the buck stops at a judge’s door in a courthouse.

In the case of Detroit, there is one over-riding issue that has not been litigated before at the governmental level. According to a report in the Washington Post: “this is the first opinion of its kind where a bankruptcy court has directly expressed the view that the supremacy of the U.S. bankruptcy laws trumps state constitutional protections of public pension holders.” Municipal pension systems have always been sacrosanct -no one could touch them. This could change in Detroit.

The tough thing about bankruptcy is that it operates on a “one-size-fits-all” approach. There are usually “secured” creditors who receive a priority. But, most are thrown into a common hopper and take their “licks”, so-to-speak, on where the available money will go. It will not be an easy time to be an employee, retiree, vendor, or general creditor in the city of Detroit.

The sad lesson is that there was probably no alternative to the bankruptcy filing. There wasn’t the political will to change until it was too late. Now the judge is in charge.

A Chautauqua County resident interested in analyzing public policy from a long term perspective writes these views under the name Hall Elliot.