Is Detroit doomed? This is the question America has been asking even before it entered bankruptcy proceedings in July of last year, and an answer may be coming soon. Last month, the city revealed its debt adjustment plan, which must be approved by the U.S. bankruptcy judge overseeing the process to take effect.
The long-awaited proposal details how the city will restructure under bankruptcy; if the plan is allowed to proceed, it will be the framework by which the epic of Detroit is either fortune or tragedy.
If the plan the city unveiled takes effect, it indicates the Motor City’s story will be the latter.
The plan shows little courage when it comes to taking on the unions that played a large role in the city’s downfall. Instead, it preserves nearly all of the pension obligations it has incurred – first responders retain 90 percent of their benefits, while other public employees maintain three-fourths of their generous compensation plans.
If the pension boards agree to the outline, the cuts would be further reduced, and the immensely valuable assets held at the Detroit Institute of the Arts would not be leveraged to shore up the city’s financial situation, but “saved” for pennies on the dollar. The proposed art deal benefits pensioners at the expense of the city as a whole. It encourages the city’s patricians to collude with its public workers, mobilizing a powerful constituency for a plan that spells disaster for the city’s future.
Despite the fact that retirement obligations and most bonded debt are both considered unsecured obligations, the plan treats investors much less generously. Most general obligation bondholders – a critical source of municipal investment – will be making 20 cents to the dollar off their initial contribution. A few investors holding more complex contracts with the city will be rewarded with 30 percent of their initial investment; still just a whisper of the offers being made to pensioners.
It is not difficult to portend the problems with this kind of settlement. Making creditors the scapegoats for Big Labor and the city’s erudite gentry will destroy Detroit’s ability to invest in its future. The plan pledges big pots of money to restore public services, but ignores reforms that would allow these operations to survive.
The problem, generally, in government and in particular when it comes to capital investment is the notion that spending more means getting more. At this point, the one thing for certain is that whatever the outcome of the bankruptcy proceedings, the city will not be left with “more.” Detroit, perhaps more than anywhere else, will need to learn how to do more with less, and the learning curve is steep.
The bankruptcy blueprint should empower the city to pioneer municipal innovation. If this is the make or break moment for the Motor City, it had best abandon the practices that have served it so poorly in the past. Perhaps no other city has illustrated the deficiencies of big government practices more than Detroit.
If investors lose confidence in Detroit, municipal bond rates across the state will skyrocket, increasing the cost of infrastructure and other capital projects for years to come. Entrusting the city’s prosperity once again to bureaucrats more concerned with growing their power than the city ensures past will become precedent for not only Detroit, but other municipalities struggling with heavy debt.
Detroit has an opportunity to become a vanguard in municipal collaboration with free enterprise. One way the federal government and many states, not to mention most developed countries, have leveraged finite resources for greater results is through public-private partnerships (P3s), agreements that inject free-market incentives into public works.
Government lacks the incentives to spend wisely and efficiently; a point duly evidenced by the adjustment plan, which prioritizes a luxury art collection over substantial operational reform. Private business, on the other hand, is motivated by profit margins and financial reward. Harnessing these incentives for public investment will be the difference between defeat and triumph for Detroit.
Projects such as the Capital Beltway, which encircles Washington DC – the radial point of centralized planning – have benefited from public-private support. Private companies invest where they will be successful; with this kind of free market influence at work in Detroit, it is more likely precious resources would go to deserving projects rather than funneled to politically beneficial but low-priority schemes.
The difficulty for Detroit is that the risk-averse private sector is unable to invest in unstable ventures. Public financing in P3s is usually offered through bonds – the kind that would be ravaged by the adjustment plan. The framework will toxify Detroit, forcing the private sector partners who have the means and desire to pursue the city’s revival to take their resources elsewhere.
Destabilizing Detroit’s municipal debt as the proposal does is a death warrant. While the inertia of poor policy usually prevents governments from exploring innovation, this is Detroit’s opportunity to start anew. Forcing creditors to take the fall for the largest municipal bankruptcy in history will paralyze the Motor City and have a cascading effect on other debt-strapped municipalities. Detroit’s story is not being written in a vacuum; whether the current debt adjustment plan is its prologue or epilogue remains to be seen.
Mattie Duppler is a proud Midwesterner serving as the Director of Budget & Regulatory Policy at Americans for Tax Reform in Washington, DC. You can follow her on Twitter @Mduppler
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