Detroit 'Openly and Notoriously' Went Bankrupt

Its reward? Maybe a state bailout

Detroit Emergency Manager Kevyn Orr visited Lansing last week trying to persuade hesitant state lawmakers to ante up $350 million toward a partial bailout for the city.

It’s a tough sell for reasons Orr himself expressed with regard to a group that is getting no love from current policymakers — those who lent money to the city and would like to get repaid. Here is how he characterized the actions of some of these lenders:

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If you lent money to an insolvent city that has been going insolvent as openly and notoriously [emphasis added] as possible since 2000, and you don't have as security interest, then you are an unsecured creditor.

In other words, Orr contends the city's fiscal malpractice was so flagrant that these lenders knew or should have known trouble was coming, and so today have little ground to complain about proposals to give them disproportionately large financial "haircuts" compared to others.

But hang on, there's a big contradiction in this. The lenders weren't the only ones who "knew or should have known." Both city and state officials were well aware of Detroit's looming fiscal problems, and in general they chose a business-as-usual approach to its "open and notorious" mismanagement, spending and debt. For years, they themselves ignored countless warnings about the city's growing financial house of cards.

Among many who issued such warnings was the Mackinac Center for Public Policy, which in 2000 published a Detroit-specific, full-color edition of the Michigan Privatization Report that gave explicit warnings about the city's underfunded pension system (including its retiree health care promises).

The city's health insurance plan for retirees, on the other hand, is not actuarially sound. It is funded on a pay-as-you-go basis … the liability that has accrued to the city for Detroit's current and future retirees for health care lies between $1.75 billion and $3 billion.

A few months later this author warned the state's Treasury Department that Detroit had violated the Uniform Budget and Accounting Act. The violations should have triggered an emergency financial review by the state. The warning letter stated:

I bring this to your attention for two reasons. First, I believe the law may have been violated and feel obligated to bring this to your attention for a remedy. Second, Detroit's fiscal health is poor and eroding further still.

I spent the last five months poring over the city's budget and Comprehensive Annual Financial Report and have been mortified by my discoveries. I believe that a state investigation into the city's fiscal health may be just what Detroit officials need to get them to make real changes for the city and its citizens.

In 2005 I published an op-ed in The Detroit News titled, "Detroit Can't Postpone Reforms" with the following warning:

Real reform can't be postponed. If Detroit's decline persists and the city's financial problems continue, the state may be forced to appoint an "emergency financial manager" to run the city under Public Act 72 — an ignominious end for the mayor and Detroit itself.

In the same year, then-Mayor Kwame Kilpatrick warned of a possible receivership while a New York Times headline blared: "Shrinking, Detroit Faces Fiscal Nightmare."

Given the massive failure of state and local officials to address the city's problems when there was still time to avoid what has now occurred, it is rich indeed that their successors (some of whom are the same people in different elective offices) are now trying to force Michigan taxpayers to bailout a Detroit political class and citizenry who for decades have been "openly and notoriously" hostile to real reform.

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