Money For Detroit Is Clearly a Bailout

Policymakers should stop saying otherwise

Gov. Snyder has referred to the package of bills to give Detroit a substantial amount of state money to alleviate some of its debts as a “settlement.” However, the move is clearly a bailout, even though it’s only a partial one. The way this move is discussed is important, considering that many Michigan residents are against this bail out.

The reason that this payment is a bailout and not a settlement is simple. People “settle” when one party insists that they have a claim against the other. When a homeowner sues a contractor when their roof collapses, the contractor may pay to settle their dispute.

Detroit is asking for something different. It is asking the state for assistance to pay its debts. That’s a textbook bailout.

The city is not asking for the state to pay all of its debts. That is why this deal is a partial bailout.

Gov. Snyder may want to claim that this bailout releases the state from any obligations over state constitutional pension protections. Yet the responsibility for pension obligations ultimately lies with the city. The constitution makes pension obligations contractual obligations of the city, and these responsibilities have been deemed to be subject to federal bankruptcy rules that are fundamentally about abridging contractual rights. (Besides, the constitutional language was also meant to prevent pension underfunding, and that was clearly a breach in the city’s responsibility.)

There are more issues involved in this partial bailout — the city’s holdings of artistic works, Detroit’s non-pension creditors, and whatever strings the state may attach to its money. Yet the state gets nothing direct in return for its payment of city debts. Oversight and pension reform may protect Detroit’s finances but does little for the state. Prevent the city from backsliding into insolvency after it emerges from bankruptcy is a good state policy, but it is Detroit that benefits.

Perhaps if Detroit policymakers alleged that the state didn’t follow its own bankruptcy-prevention rules, they might be right that the city has a legitimate complaint against the state. After all, the state did not start its emergency manager process when the city pulled emergency manager triggers over a decade ago.

Considering that city officials fought the state on every phase of the process, it is not likely that they will allege that they are owed something by the state. However, they want the state to assist in paying its debts.

Recent polls show that the bailout is unpopular when you call it a bailout, and more popular when you neglect calling it a bailout.

The bailout may be unpopular because it sets a bad precedent, or because Detroit has other opportunities to pay its debts, or because residents feel that bailouts are unfair. Regardless of why they do not like it, what the state is proposing is a bailout and state policymakers should stop calling it something else.