Detroit's Bankruptcy Moves Forward

Federal Judge Declares Detroit Eligible For Chapter 9 Bankruptcy Protection. On December 3, a federal judge ruled that the city of Detroit was eligible to carry out bankruptcy proceedings first filed in July. The decision opens the door for the largest municipal bankruptcy in American history as the city seeks to renegotiate more than $18 billion in outstanding debt obligations with more than 100,000 creditors and thousands of public workers and retirees:

The decision set the stage for officials to confront $18 billion in debt with a plan that might pay creditors just pennies on the dollar and is sure to include touchy negotiations over the pensions of about 23,000 retirees and 9,000 workers. [City emergency manager Kevyn] Orr says pension funds are short by $3.5 billion. [Associated Press, 12/3/13]

Fox Blames Unions, Retiree Pensions For Detroit Collapse

“Outsize, Outrageous” Union Pensions Driving Fiscal Collapse Around The Country. On the December 3 edition of Fox News' Your World, host Neil Cavuto was joined by Fox Business contributors Dave Maney and Charles Payne to discuss the broader implications of the Detroit bankruptcy. Maney claimed that Detroit's financial insolvency was the result of a “fifty-year bender” of unchecked union influence in the political process. Payne derided what he called an “unholy alliance” of worker unions and policymakers while pushing a broader argument that unfunded obligations to retired workers could spread municipal bankruptcies across the United States:

Stuart Varney: “Pensions For Retired Workers Are The Key Problem.” On the December 4 edition of Fox News' Fox & Friends, Fox Business anchor Stuart Varney claimed that existing pensions for retired public workers were the “key problem” facing financially challenged American cities. Varney argued that the Detroit bankruptcy sets a precedent to cut worker pensions in other cases going forward, claiming that public workers “should be worried:”

VARNEY: Now pensions, for retired workers, are the key problem for troubled cities across the country. Now they've got this new model; Detroit says you can cut those pensions. So you had better get pretty worried if you are in these troubled cities all across the country. [Fox News, Fox & Friends, 12/3/13]

Detroit's Financial Shortfall Is Fault Of Economy, Not Policy

Demos: Obsession With Pension Obligations Ignores Economic Drivers Of Insolvency. On November 20, the non-partisan research center Demos released a comprehensive overview of the unfolding fiscal situation in Detroit, titled “The Detroit Bankruptcy.” The study concludes that the bankruptcy is driven primarily by a sharp decline in municipal tax revenue resulting from decades of depopulation and lingering long-term unemployment. Demos' approach highlights the economic circumstances driving Detroit's municipal shortfall, namely a dramatic reduction in its tax base, which far outweigh the effects of guaranteed benefit programs. The study further concludes that the specific focus on the cost saving aspects of pension cuts is “inappropriate and, in important ways, not rooted in fact:”

Detroit's bankruptcy is, at its core, a cash flow problem caused by its inability to bring in enough revenue to pay its bills. While emergency manager Kevyn Orr has focused on cutting retiree benefits and reducing the city's long-term liabilities to address the crisis, an analysis of the city's finances reveals that his efforts are inappropriate and, in important ways, not rooted in fact. Detroit's bankruptcy was primarily caused by a severe decline in revenue and exacerbated by complicated Wall Street deals that put its ability to pay its expenses at greater risk. To address the city's cash flow shortfall and get it out of bankruptcy, the emergency manager should focus on increasing revenue and extricating the city from these toxic financial deals. [Demos, The Detroit Bankruptcy, November 2013]

EPI: Detroit Citizens, Public Employees “Victims Of Forces Beyond Their Control.” On August 5, Ross Eisenbrey of the Economic Policy Institute discussed the long-term trends that created a hollowed-out and impoverished Detroit where one of America's wealthiest and most productive cities once stood. Citing a generations-long trend in which white, middle-class families left the city for surrounding suburban sprawl, Eisenbrey argued that, rather than cutting services and targeting pensions to save money, federal and state incentives should be created to rebuild Detroit such that it could sustain its existing financial obligations [emphasis added]:

Detroit's current citizens and the public employees who serve them are not the cause of Detroit's fiscal problems. They are the victims of forces beyond their control, including globalization, capital flight and racism. No one can, with any seriousness, blame Detroit's librarians, social workers, garbage collection workers or street cleaners for the city's catastrophic loss of population and tax base, the long decline and near-collapse of the Big 3 auto companies, or the 1967 riots, which launched a frantic exodus of businesses, white residents, and money from the City of Detroit to the suburbs.

[...]

It's unrealistic to expect Detroit's remaining 700,000 residents, more than one-third of whom have incomes below the poverty level and whose per capita income is only $14,000, to support a city and an infrastructure built for 1.8 million. The state of Michigan and the federal government should be subsidizing the re-population of Detroit, paying people to move there, to buy and repair homes, and to invest in the city's future--the way we once subsidized the population of the frontier. [Economic Policy Institute, Working Economics, 8/5/13]