Yesterday, the federal judge hearing arguments over whether Detroit could legitimately file for bankruptcy ruled that it could indeed do so. This ruling is bound to be appealed but it has a fair chance of standing. The potential consequences for the city of entering a Chapter 9 bankruptcy are serious and profound: The pensions of thousands of municipal workers are at risk; the holdings of the Detroit Institute of Art might be sold off; the city's water system, which serves most of metropolitan Detroit and is a steady source of revenue, might be auctioned to the highest (likely private) bidder. Protecting the claims of big-bank creditors appear to be higher priority than all of these other more vulnerable stakeholders and citizens. Detroit and its citizens are most immediately threatened, but they are merely among the first and most vulnerable to this kind of depredation.
Most local officials and media seem at this point to be sighing and resigning themselves to the inevitable. But local grassroots activists appear to be gaining momentum with their resistance efforts. For a statement of opposition drafted before the ruling, please see Detroit State of Emergency. Here is part of their statement of grievances:
We know who did this. Michigan Governor Snyder and Wall Street have joined to strip the people of their homes, their pensions and their democratic rights as citizens. In imposing the illegal and unconstitutional Emergency Manager, they have preempted the leadership of the duly elected representatives of the people, leaving the citizens without Constitutional or democratic safeguards. These same powers are accelerating the robbery of the City’s assets through privatization and other unethical financial and banking schemes. The model of dispossession being fashioned here in Detroit began in the third world with structural adjustment, and is being imported to communities of working class and poor people throughout the United States. The African American communities in Michigan have been particularly targeted.
The solutions they suggest at the end of the statement would protect the most vulnerable residents of the city while permitting a more sustainable remediation for the cash-flow shortfall that the city is currently experiencing. Those in solidarity with their approach are welcome to put their names on this document at that website.
Additional, background information about the organizational effort to oppose the takeover and looting of the city can be found at Detroiters Resisting Emergency Management, or d-rem.org.
Given this context, it is important to keep alive the counter-narrative about the city's financial situation promoted by Demos, a progressive think tank which has just published an extensive, 56-page analysis called The Detroit Bankruptcy. The author of that report, Wallace Turbeville, was interviewed yesterday by Democracy Now. The video of that interview plus a first-draft transcript is available here.
What other bloggers and reporters have noted, including our own xaxnar and Laura Clawson, is that this ruling is likely to set a dangerous precedent in multiple directions. First, there is the Emergency Manager "Law" that enabled this process to be initiated.
As John Nichols of the Nation reported yesterday, "Detroit Bankruptcy Bankrupts Democracy." Nichols quotes outgoing City Council member Joann Watson at length, then provides additional commentary:
“The emergency manager (EM) filed the bankruptcy petition, and he is an appointee of the governor of the state of Michigan based on Act 436—a law formerly known as PA 4—which was repealed by 2.3 million Michigan citizens statewide on Nov. 6, 2012,” explains Watson. “The EM is only accountable to the governor, the EM only answers to the governor, and the EM can only be ‘checked and balanced’ by the governor.”
The new mayor and the new city council will not have the essential democratic authority to “check and balance” the emergency manager—or to guide the process that Watson argues “has clearly been crafted in a right-wing playbook to seize assets, dismember electorate voting powers, dismantle unions and the families/neighborhoods supported by union jobs, disable local elected officials, smear and tarnish the image and viability of Black elected leadership, and broadly claim that the legacy costs related to retiree pensions are largely to blame for the city’s debt crisis.” [emphasis added by diarist]
Watson’s frustration is real. And appropriate.
Detroit’s greatest challenge has not been municipal governance. It has been deindustrialization, which has shuttered hundreds of factories and left hundreds of thousands of city residents unemployed or underemployed. And that great challenge extends beyond Detroit.
Second, there are other serious implications for the financial stability of thousands, if not millions, of middle-class public sector workers across the country. Today, David Cay Johnston notes in Newsweek that there is
"A Hard Lesson from Motown: They Will Steal Your Pension." The threat starts in Detroit, but others are likely to be affected.
Judge Steven W. Rhodes went beyond asserting the supremacy of federal law over state regulations, ruling that the pensions workers earned were a mere “contractual obligation,” no different from any other bill the city owes but lacks the money to pay.
The result will mean even worse poverty in the sputtering Motown, where a once robust industrial tax base has withered away, the starkest example of the economic devastation wrought by government policies that for decades have encouraged companies to move manufacturing offshore.
Financial mismanagement in Detroit under every mayor in the past six decades also contributed to the disaster, except for the honorable exception of Coleman Young in the mid-1970s. [Diarist's note: It is worth your while to read this extensive report on the financial history of the city prepared by two Detroit Free Press reporters earlier this fall, "How Detroit Went Broke: The Answers May Surprise You--and Don't Blame Coleman Young."] The result: Public worker pensions averaging $19,000 a year will be cut to the bone. That is sure to increase demands for federally funded food stamps, a program which Congress has just cut, and other welfare to make up for some of pensions workers earned but will not collect.
Norman Stein, a Drexel University law professor who is an expert on pensions, said that if the Detroit order stands it will become standard practice to slash benefits.
“It would be a human catastrophe of the first order if pensions of vulnerable older workers can be cut whenever a local government goes to bankruptcy court,” Stein said. “We will be consigning firemen and policemen, who did nothing wrong other than protecting the city and depending on the city's promise, into old-age poverty.”
Apparently, bond traders are already gloating about Rhodes' decision and the action in Illinois just taken to reduce pensions to state workers. The Street
reported today:
Detroit's Chapter 9 bankruptcy petition and an Illinois State House of Representatives decision to approve a sweeping pension reform bill "capped off a day that surely warmed the hearts of the bond insurers' risk managers," [BTIG (a market research firm) analyst Mark] Palmer said in a Wednesday note to clients. ...
"The real takeaway from Judge Rhodes' ruling, we believe, is that pensions can no longer count on getting 100 cents on the dollar in every municipal bankruptcy due to their recognized super-senior status as they have in the past," Palmer wrote.
"Now, they may be subject to cuts or to being treated as unsecured creditors in the same claim pool as the bond insurers. This new state of affairs could translate into significantly improved recoveries for MBI, AGO and AMBC going forward," he added.
Supporting and defending Detroit against the predatory actions of the administration of the state of Michigan (Gov. Snyder and the Republican-dominated legislature) is an urgent matter in and of itself. But the fate of the city must also be considered a cautionary tale for every big U.S. city in tough financial straits. Similar depredation may indeed be coming soon to a city or a town near and dear to you.
Diarist's note: Special thanks are due to TS for providing many of these sources.