Post Municipal Bakruptcy Sustainability

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January 5, 2014
Visit the project blog: The Municipal Sustainability Project

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Don’t Let it Happen Again. In his end of the year 213-page ruling approving Detroit’s plan of debt adjustment, determining that the plan was fair and feasible—and negotiated in good faith, U.S. Bankruptcy Judge Steven Rhodes wrote that the extraordinary swap of $195 million for a $3 billion liability was “reasonable, although perhaps at the lowest end of the range of reasonable settlements.” Addressing the complex federalism issue that had pitted Michigan’s constitutional guarantee of pensions versus his own, written opinion that federal municipal bankruptcy law trumped the state’s constitution, Judge Rhodes wrote that “The court has found that the state contribution of $194.8 million in exchange for a release of liability on the pensioners’ constitutional claims is a reasonable settlement…History will judge the correctness of this finding. It will judge that this finding was correct only if what happened here in Detroit never happens again. The state can sustain that finding in history only by fulfilling its constitutional, legal, and moral obligations to assure that the municipalities in this state adequately fund their pension obligations. If the state fails, history will judge that this court’s approval of that settlement was a massive mistake.” Judge Rhodes federalism ruminations—focused on his perceptions that states have a vital role, especially with regard to municipal fiscal sustainability―warned that Michigan needs to ensure its cities can pay their pension obligations to avoid other municipal bankruptcies―a clear warning that the fiscal health of Michigan’s municipalities is not independent from the role of the state. Or, as the exceptional Caitlin Devitt of the Bond Buyer this morning wrote: “Michigan needs to assure that its local governments in the future are able to adequately fund their pensions…A repeat of Detroit’s bankruptcy in the city or elsewhere in Michigan would show that the court’s approval of the grand bargain was a ‘massive mistake.’” Seemingly reflecting on last January’s noteworthy paper by Boston Federal Reserve writers Bo Zhao and David Coyne that states and local governments need to define a new measure of state and local fiscal sustainability—wherein they defined the “trend gap” to be “the long-term ability of state and local governments to provide public services that the public demands and is willing to pay for,” Judge Rhodes wrote that retirees and unions too must share in that responsibility by taking what he called a “longer-term and broader view of the best interests of their members and retirees” with the goal of helping revitalize the city while protecting pensions. In his prescriptive list, the noted electronic guitarist warned that neither the state nor Detroit’s unions would be able to adhere to his prescriptions absent Detroit providing honest and accurate financial information, going so far as to prescribe the city adopt a series of annual reporting requirements suggested by an independent municipal finance expert hired by the court. But he saved his most enduring message for last, writing that our country “holds dear the values of a fresh start and of second chances….The city will have the fresh start that it needs and deserves under our federal bankruptcy laws…The court urges the people of the city of Detroit not to forget [their] anger. Their enduring and collective memory of what happened here, and their memory of their anger about it, will be exactly what will prevent this from ever happening again. It must never happen again.”

Violent crimes. An inherent component of sustainability, as we noted in the remarkable turnaround in Compton, Ca. last week, is crime—especially violent crime. In the Motor City, then, the year is off to a safer start: 2014 saw significant drops: the decline in homicides likely fell to the lowest total in the city since 1967, according to preliminary Detroit police data. Robbery dropped some 34%; carjacking 32%: key data, as Detroit Police Chief James Craig yesterday noted: “Robberies and carjackings — those are the crimes that strike fear into most citizens.” Nevertheless, according to FBI statistics, Detroit still ranks among the most violent cities in the country. Nevertheless, the homicide rate per 100,000 residents dropped for the third straight year, from 55 in 2012, to 47.5 in 2013, to 42.9 last year. Chief Craig attributed the gains in safety to two key factors: holding people accountable, and building a strong relationship with the community—especially after, last year, expanding the Neighborhood Police Officers program to each precinct in an effort to build relationships with residents: “Those relationships absolutely have an effect on crime, because it lets residents become part of the solution, and they feel empowered.”

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