Monday, July 22, 2013

To No One's Surprise Detroit Declares Bankruptcy

This past Thursday (July 18, 2013) the city of Detroit, to no one’s surprise, filed for bankruptcy.  With over $18 billion worth of debts the city appears to have had no choice.

However, some bond holders and the city’s two municipal pension funds appear to be prepared to fight to prevent Detroit’s request for bankruptcy being approved.  Ironically, it was the refusal of these bondholders and pension funds to agree to the city’s haircut proposal in which the bondholders and pension funds would have been required to accept cents on the dollar for their holdings, which, according to city officials, forced it to seek bankruptcy protection.

Detroit’s bankruptcy filing is the largest municipal bankruptcy filing in history.  However, not only is the bankruptcy no surprise but it also could have been avoided as warning signs of serious fiscal problems for the city have been popping up as the city has been declining during recent decades.
While there are many factors contributing to Detroit’s decline a major, if not the major factor, is modern liberal welfare state with its emphasis on ever expanding government and its tendency to undertake every project that presents itself regardless of cost.

A March2011 Wall Street Journal article on the 2010 Census figures for Detroit.  The paper reported that the city’s population had declined by 25% between 2000 and 2010.  The 2010 population came in at 713,777.
The article quoted Mayor Bing as saying:

If we could go out and identify another 40,000 people that were missed, and it brings us over the threshold of 750,000, that would make a difference from what we can get from the federal and state government

The fact is that state and federal funding was probably at the root of many of Detroit’s problems. 
To the politicians and bureaucrats these federal and state funds were free money that they did not have to try to extract from the taxpayers.  Unfortunately, these federal and state funds were problems in two ways:

  •           First such funds usually come with strings in that they are frequently in the form of seed money to be used to start programs which the city will have to fund in the future or were for programs which the city had to share the cost with the higher level of government.

  • ·         Second, taxpaying residents tend to be less concerned with the cost of such programs since they aren’t paying for them directly with their local tax dollars.  Of course, the special interests that benefit directly from the programs love them.

If local government leaders were forced to rely on the tax paying residents of the city they would tend to be more frugal with their spending as increased spending would result in increased taxes.  

Increased taxes tend to get people upset and provide an incentive to either get out and vote the current leaders out or move and avoid the higher taxes.

For years, leaders in Detroit (and many other cities as well – Detroit is just the first big city to hit the wall of reality) have ignored costs and fiscal realities by choosing to rely on financial gimmicks to keep spending.

Borrowing, aid from the State of Michigan and the Federal government, raising taxes and deferring spending for like the maintenance of infrastructure and adequately funding pensions have all been used to enable leaders to charge ahead without regard for cost.  

With few  effective checks on their spending and, as managers lacking any equity interest in the city beyond their pensions which they are theoretically contractually entitled to receive, those who have been running Detroit have been able to ignore fiscal realities and continue business as usual.

The usual reaction of managers is to concentrate on today’s problems and ignore the long term effects of their current actions.  After all, if the predicted financial consequences aren’t expected to occur for another thirty or forty years, then they don’t have to worry as they will be retired and gone before any days of reckoning occur.

Well, the day of reckoning appears to have arrived and, just as in Greece and other failing social welfare states in Europe, many innocent victims are going to pay the price for the decades of fiscal irresponsibility of politicians and bureaucrats who have safely retired someplace else.

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