Ideological Prisons: Detroit

I am back, after a brief respite. The unfolding story in Detroit has been of great interest to me, and although there is far to go before the final resolution the chorus of those on both sides of the political divide are filling the airwaves up with ideological drivel. It should be clear to anyone that is not trying to make a political point that Detroit, in light of its crushing debt, needed a Chapter 9 filing. It was not realistic, in light of the limitations of the Emergency Manager’s power, to expect a successful negotiation to be completed with the “creditors” of Detroit.

There is plenty to talk about in this filing, with issues of pensions, bond holder haircuts, potential asset sales, and the future of the City itself mixed into a volatile stew. Some of my prior posts have dealt with the financial conditions of the City, with Emergency Manager Kevyn Orr finding even more of a financial calamity than most thought existed. There are plenty of Chapter 9 experts out there that can get us into the weeds, and those weeds will be highly interesting for those who like such things. I want to take a look at the political reaction that the Chapter 9 filing has brought, and see how even a Chapter 9 filing brings out the usual political divide.

Republicans have pointed to the City as an example of the failure of liberalism, and launched a series of political attacks designed to show that the long Democratic stewardship of the City and its finances led to calamity. Democrats have not been very eager to participate in this debate, but have downplayed such a narrative, and pointed to the failure to provide adequate funding to the City, and to the severe demographic and globalization challenges that have hurt the City so much. Paul Krugman put forward this view in his Times column:

The important thing is not to let the discussion get hijacked, Greek-style. There are influential people out there who would like you to believe that Detroit’s demise is fundamentally a tale of fiscal irresponsibility and/or greedy public employees. It isn’t. For the most part, it’s just one of those things that happens now and then in an ever-changing economy.

The left/right argument has (of course) slipped into the cultural/racial, with George Will arguing with Steve Rattner and Katrina Vanden Heuvel on “This Week” that Detroit’s problems are due to “cultural collapse”. That clip is below. And Politico has weighed in on how Detroit has become the “pinata” of the right. Despite Krugman’s admonition not to compare Detroit to Greece Charles Krauthammer does exactly that in the Politico story:

Charles Krauthammer in his column: “It doesn’t take a genius to see what happens when the entitlement state outgrows the economy upon which it rests. The time of Greece, Cyprus, Portugal, Spain, the rest of insolvent social-democratic Europe — and now Detroit — is the time for conservatives to raise the banner of Stein’s Law and yell, ‘Stop.’ You can kick the can down the road, but at some point it disappears over a cliff.”

Republicans, for once, have the advantage. Although they are driving the argument so that conclusions are reached that are not all correct it is not a matter of dispute that Detroit governance has been a continual disaster for decades. The weight of the incompetence is staggering without even a mention of the corruption that has brought us to this point. Plenty of examples of both, but let us look at some that are relatively easy to understand. The first is the financial concept that if you cannot balance a budget you should borrow hundreds of millions of dollars to pay for everyday operating expenses. Nope, no matter what excuses are given I am here to tell you that it is really not a matter of opinion, but rather is established fact, that such financial policies lead to ruin. The second example is just as silly, and unfortunately lends some credence to the Republican case against Detroit. Between 1985-2008 the Detroit Pension system gave out over $1 billion in pension “bonuses” by way of 13th checks to Detroit pensioners. From the Detroit Free Press:

One of Detroit’s two pension funds handed out nearly $1 billion in bonus cash payments over two decades to retirees and active employees’ retirement accounts instead of reinvesting the extra earnings for the future, according to a Free Press review of city records.

The payments, often referred to as a “13th check,” contributed to Detroit’s financial crisis and its historic Chapter 9 bankruptcy filing by increasing the amount the city needed to contribute each year to keep the pension fund solvent.

Had the city’s General Retirement System held on to the excess cash, the city might not have felt the need to borrow $1.44 billion in 2005 to plug the city’s unfunded pension liabilities gap, the Free Press found. That debt has ballooned to nearly one-fifth of the city’s total debt today and played a role in pushing the city into filing the largest municipal bankruptcy in the nation’s history in July.

So these folks gave out $1 billion in extra payments, but then borrowed almost $1.5 billion to plug a “gap” in pension funding???? For those wondering these financial geniuses are actually defending the practice:

Sandra Studzinski, who served on the General Retirement System board from 1996 to 2004, said the payments were appropriate to help employees and retirees pay their bills.

“Things were always bad for employees,” she said. “It was a way to make up for lots of the years that there were no pension increases.”

Guess what Sandra? Give out all the extra payments you want, but pay for them as you give them out.

So where does the ideological prison come in? Nobody can just seem to say that the locals, by virtue of their own actions, do not deserve home rule at this point. Democrats want to ignore it, or just have us all move along without comment, and Republicans feel the need to score broader ideological points. Just go in and manage, and stop financial practices that a fourth grader would understand must lead to disaster. Mayor Menino got in trouble for saying Detroit should be blown up, and his words were indeed less than diplomatic. But his outrage is spurred by understanding that we are in this to serve the public, and Detroit’s dysfunction means that first and foremost the citizens of Detroit are the ones being shortchanged. Public officials who have shown incompetence and or corruption? Cashier them for outside help. Wall Street bankers who lent to Detroit under these circumstances? Haircut them at pennies on the dollar. And never be afraid to tell the truth, even if you are a Democrat talking about Detroit.

Finally I do believe that federal “help” should be provided, but not to prop up the existing system. Any help should be to give the City working systems (information technology for starters) so that professional managers can execute a cogent plan to at least get some of the fundamentals right. It is not possible to address the big issues facing the City if you cannot do the “little” things properly.

This entry was posted in Municipal Finance, National News and tagged , . Bookmark the permalink.

One Response to Ideological Prisons: Detroit

  1. Manzi in the Morning. when am I going to talk to Manzi in the Afternoon at the MVGC.

    Jim

    Like

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