Detroit on the Ropes

Perhaps ranking as the least surprising revelation of the year, the Detroit emergency manager has reported that the city is bankrupt.

“The City of Detroit continues to incur expenditures in excess of revenues despite cost reductions and proceeds from long-term debt issuances,” Mr. Orr wrote. “In other words, Detroit spends more than it takes in — it is clearly insolvent on a cash flow basis.”

Whether the city, in fact, pursues relief through a Chapter 9 bankruptcy proceeding is still an open question. Kevyn Orr, the emergency manager, has not put forth such a recommendation though he has made it quite plain that the city’s current mode of operation is unsustainable. The only way out, as he sees it, is through a thorough restructuring of finances and operations. Though he has not so far offered details any restructuring is no doubt going to require haircuts for all – employees, unions and creditors.

If any such plan is going to work it is going to take a big buy-in on the part of all concerned. Not all seem ready to roll up their sleeves.

“It’s not as bad as what they’re trying to make it out to be,” Edward L. McNeil, a local official for the American Federation of State, County and Municipal Employees, said on Sunday. Mr. McNeil had not viewed a copy of Mr. Orr’s report, which was not made public until late Sunday, but he said he had grown accustomed to overly negative assessments of Detroit by the state and its representatives.

“All of this was a cooked deal for them to take control of the city and take the assets,” Mr. McNeil said. “This has been a sham.”

Now to be fair, Mr. McNeil is charged with getting the best deal he can from this mess for his constituency, so there is certainly a bit of negotiation posturing going on here. At the same time, characterizing things as a “cooked deal” meant to disenfranchise the citizens of Detroit wouldn’t seem to represent anywhere near a rational view of reality. One can hope that it’s only theater.

Detroit in one way or another will work through this. Megan McArdle thinks it could be a perfectly nice smaller city. Good luck getting there. Rather than Chapter 9, there will probably be some sort of accommodation that at least affords the city muddle room. And muddle along it will, probably into some sort of eventual oblivion.

If there is a takeaway from all of this it might be how far into crisis government seems to be required to go before hard choices begin to even get laid on the table. Detroit has after all known for years that it was in a death spiral. Allowing a city, state or national government to reach this point inflicts much more pain than ever was necessary. Sorry but here comes that word, a  little bit of austerity, a little pain, could have averted all of this. But that’s something that we usually agree should be done when it’s convenient, though as we can learn from Detroit that sweet spot of painless belt tightening just never does seem to arise.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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