The City of Detroit’s application for bankruptcy is, in a grim way, welcome. Nothing less could turn around the city’s hapless finances. Its debts are likely to be more than the US$18.5-billion often stated, and certainly too great for its revenues to carry. The taxpayers can do no more; they have already lost many services – with far fewer street lights, parks, police officers, ambulances and so on.
Tax increases would only contribute to the city’s depopulation, to the vicious cycle that has brought Detroit to this point. The people of Detroit already pay more in property and income taxes than people in the rest of Michigan – many of whom are better off.
Both the bond-holders and the employee pension funds will have to accept significant losses. Indeed, quite a few well-informed bond-holders foresaw such a crisis, and sold at a discount. As for the pension funds, the payments per retiree do not appear to be lavish, but the city’s revenue simply does not suffice.
Understandably, a municipal employee’s union has gone to court to set aside the bankruptcy application, pointing out that the Constitution of Michigan protects state and municipal pension plans from being “diminished or impaired.” But the U.S. Bankruptcy Code is a federal statute and should have paramountcy above the clauses of a characteristically overstuffed state constitution.
What Detroit needs is not legal arguments but rather a root-and-branch redesign of its finances to accord with the city’s actual circumstances.
The Obama administration is right not to be offering any bailout money. At most, it should consider funding for new infrastructure that could be realistically expected to yield a real return.
Detroit has managed to accumulate most of the troubles that have afflicted numerous North American cities in the past half-century. It is an extreme case, but no city should consider itself immune from some of these woes.