🚀 go-pugleaf

The City of Detroit has defaulted on a portion of its bonds, 
specifically on payments to unsecured creditors. Those who 
invested in bonds with dedicated revenue streams attached have 
been spared, for the moment, but the reorganization plan drawn 
up by emergency manager Kevyn Orr envisions a great deal of 
�shared sacrifice,� which apparently is what they�re calling it 
these days.

Typically, bondholders in the past have lost interest due them, 
but not their principals. That is not going to be the case in 
Detroit. Specifically, Detroit is expecting its creditors to 
take less than 10 cents on the dollar for having been foolish 
enough to lend money to the collection of misfits, miscreants, 
and criminals who govern that poor city. That�s step one. Step 
two is . . . borrowing more money, in order to pay for a program 
meant to rebuild the city�s institutions, reinvigorate its 
economy, and improve basic services. Who, I wonder, would be 
foolish enough to lend Detroit money hot on the heels of a 
default? The answer is likely to include the unwilling taxpayers 
of Michigan and those of the United States.

Detroit�s tax revenues are declining, and the city already is at 
or near the legal limit for the various taxes it imposes. It has 
a city income tax, but that will not do it a tremendous amount 
of good: In 2000, Detroit had 353,813 employed persons; today it 
has only 279,960. In 2000, it had an unemployment rate of 7.3 
percent; today, it has an unemployment rate of 18.6 percent. It 
is a blighted and crime-ridden city � now the second-most-
dangerous city in the country, according to the FBI, with nearby 
Flint leading the pack � which in addition to being a broader 
social problem is specifically a tax problem: Property values, 
and hence property-tax collections, are declining.

Kevyn Orr has also made it clear that reductions in pensions and 
health-care benefits for city retirees are a necessary part of 
any long-term solution for Detroit, which of course they must 
be: The city currently spends 40 percent of its revenue on so-
called legacy costs, mostly retiree benefits.

That 40 percent number jumped out at me: Under current 
Congressional Budget Office projections, the federal 
government�s spending on its legacy costs (Social Security, 
Medicare, and interest on the debt) will be more than 50 percent 
of revenue in ten years. And, though the total impact will be 
small, you probably can add to those federal totals a little bit 
to account for the fact that Detroit plans to get out from under 
its health-care costs in part by dumping its liabilities onto 
Medicare and Obamacare. Thanks, Detroit!

As has been discussed at some length here, it is not entirely 
clear that Detroit, to say nothing of fiscally moribund states 
such as California or Illinois, legally can reduce its pensions 
and retiree benefits. In Michigan as in most states, those 
payments are protected by statute and/or constitutional 
provision. Orr is making it clear that he believes Detroit can 
reduce those payments � it simply does not have the money to 
make them and cannot raise sufficient funds through taxes. There 
are federal bankruptcy protections available to cities, though 
Detroit apparently plans to try to reorganize without a formal 
bankruptcy � Orr says there is a 50/50 chance that the city will 
not enter formal bankruptcy. But there are no such bankruptcy 
protections for states, and, unless the public-sector unions 
agree to a haircut for retirees (stop laughing) the pension mess 
probably is headed for the Supreme Court.

Detroit already is looking for federal assistance. For example, 
it is planning on spinning off the city water authority as a 
quasi-autonomous entity in the hopes that it will generate a 
nice revenue stream. It will be looking for federal loans to 
help make that happen. It will be looking for more federal funds 
to address its blight problems, to fix up the Coleman A. Young 
airport, to help fund services through grants, etc. It will be 
looking for money from the state of Michigan, too.

The problem is that the same political leadership that brought 
Detroit to this sorry pass remains in power. There probably is 
not much that can be done about that, and very little, short of 
mass seppuku in front of the Spirit of Detroit statue, that 
would convince me that they have mended their ways. Detroit 
cannot be trusted with its own money, it cannot be trusted with 
its creditors� money, and it certainly cannot be trusted with 
federal taxpayers� money.

http://www.nationalreview.com/exchequer/351131/detroit-defaults-
kevin-williamson