Last Thursday in Detroit, 60 consecutive years of progressive Democratic governance, in collaboration with rapacious government employee unions, produced an inevitable conclusion: the largest municipal bankruptcy in the history of the nation. “This is a difficult step, but the only viable option to address a problem that has been six decades in the making,” said Republican Gov. Rick Snyder, who approved the filing after emergency manager Kevyn D. Orr recommended the move. Orr revealed the city’s enormous debt load is somewhere between $18 billion and $20 billion. City employee Terence Tyson succinctly summed up the devastation. “It’s sad, but you could see the writing on the wall,” he said. “This has been coming for ages.”
Indeed it has. The precipitous fall of the so-called “arsenal of democracy” has been stunning in both its scope and duration. In 1960, Detroit had the highest per-capita income in the nation. Now, in 2013, it is the nation’s poorest city, besieged by the inevitable dysfunction that attends such a dubious distinction. The current unemployment rate, which has tripled since 2000, remains double the national average. The murder rate has reached a 40-year high, making it home to the three most dangerous neighborhoods in America. More than 78,000 properties have been abandoned, and there are no buyers for houses on sale literally for a single dollar. The population has declined from 1.8 million in 1950, to 700,000 today–47 percent of whom are functionally illiterate.
The impetus behind this devastation is all too familiar, namely, the unholy alliance of Democratic politicians buying the loyalty of Big Labor over the course of decades with unsustainable wage and benefit packages for their members. That alliance has left the city with $9 billion of its $11 billion in unsecured loans owed to pensions and health-benefit plans of municipal workers, and contributes mightily to the city’s current $380 million annual deficit. It has also left the city with a total number of pensioned retirees that is more than double the number of active workers.
The remaining workforce can’t cope. Two-thirds of the city’s ambulances are out of service, and police take an average of 58 minutes to respond to emergencies, five times the national average. Forty percent of the city’s streetlights don’t work, 210 of its 317 public parks are closed down, and the city’s public schools, also on the verge of bankruptcy, are some of the worst in the nation. The city’s mass-transit system is virtually non-functional.
Corruption was part of the mix as well. Corrupt city officials include former Mayor Kwame Kilpatrick, his aide, Monica Conyers, the wife of House Judiciary Committee chairman John Conyers (D-MI), several city council members and a police chief who, along with countless others, were indicted, arrested and/or imprisoned for criminal charges involving bribes, embezzlement and kickbacks. In 2009, corrupt Detroit Public School (DPS) officials perpetrated a scam where 257 “ghost” employees were receiving paychecks. That same year, seven more public officials were charged with multiple felonies for operating an embezzlement scheme, and 500 illegal healthcare dependents costing the city millions of dollars were discovered.
All of it and more led to the Chapter 9 bankruptcy filing in the United States Bankruptcy Court — a move immediately challenged with a lawsuit by the General Retirement System and the Police and Fire Retirement System of the City of Detroit in state court in Ingham County, Michigan.
That filing brought the full scope of the conflict — and the machinations behind it — into focus.
The machinations began Thursday. Attorneys representing both funds, as well as the interests of individual pensioners who had also filed suit, got an emergency hearing with Ingham County Circuit Judge Rosemarie Aquilina, during which she telegraphed her intention to derail the filing. Yet Orr beat them to the punch, filing bankruptcy papers five minutes before the hearing began. Undaunted, Aquilina ruled on Friday that Detroit’s bankruptcy violated Article IX, Section 24 of the Michigan Constitution, and must be withdrawn. ”The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby,” the law states.
That paragraph became part of the Constitution in 1963, following a state Constitutional Convention in 1961 and 1962. Yet it remains problematic, due to another clause enacted during the same Convention. ”Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year,” and, the “accrued financial benefits of each [government] pension plan shall be a contractual obligation thereof.”
There is little doubt that Detroit and many other Michigan municipalities have failed to meet those contractual obligations. In 1996, the Michigan Supreme Court recognized that reality, ruling that the state legislature had failed to provide adequate funds for annual pension contributions — even as it noted that it could not compel the legislature to appropriate them.
Aquilina apparently decided half a loaf was better than none. “In order to rectify his unauthorized and unconstitutional actions … the Governor must (1) direct the Emergency Manager to immediately withdraw the Chapter 9 petition filed on July 18, and (2) not authorize any further Chapter 9 filing which threatens to diminish or impair accrued pension benefits,” she said in her order. Attorney General Bill Schuette said he will appeal the rulings and seek emergency consideration by the Michigan Court of Appeals. Aquilina also let assistant Attorney General Brian Devlin know she did not appreciate Orr’s maneuver — even as she added a bizarrely political rationale to her reasoning. “It’s cheating, sir, and it’s cheating good people who work,” the judge told Devlin. “It’s also not honoring the president, who took (GM and Chrysler) out of bankruptcy.”
Presidential honor notwithstanding, University of Michigan law professor John Pottow got the heart of why this case will likely end up in the United States Supreme Court — if Stockton, CA, whose bankruptcy earlier this year raises the same fundamental issues — doesn’t beat Detroit to the punch. “There’s nothing that precludes a federal judge from adjudicating the constitutionality of the Michigan statute,” Pottow said. “The bankruptcy judge can interpret Michigan law.”
In other words, the battle pits states’ rights, and the obligations owed to municipal workers, against those of the federal government’s bankruptcy court, and the interests of municipal bond market investors. Thousands of such investors, including those dependent on small stock portfolios for their own retirement, have long been told such bonds are a relatively safe investment with virtually no chance of default. If they are forced to take substantial losses, the ripple effect could be devastating, not only for investors, but for the countless number of municipalities who use the bond market to underwrite municipal projects. Either that funding will no longer be as readily available, or the interest rates to secure it may be unbearable.
On the other hand, if the federal bankruptcy court allows Detroit to get out from under the overly onerous contractual obligations owed to municipal workers, it is virtually certain an avalanche of other municipalities struggling with similar obligations will follow Detroit’s lead. Karol K. Denniston, a bankruptcy lawyer advising a taxpayer group in Stockton, emphasized that reality. “If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” she warned. “Detroit is going to be a huge test kitchen.”
Unfortunately Detroit has already been a test kitchen, and its grim determination to embrace sixty years of progressive Democrat policies has proved to be a spectacular failure, impoverishing an entire city, with no end in sight. It also makes a complete mockery of President Obama’s 2012 campaign assertion, “We refused to let Detroit go bankrupt.” “We bet on American workers and American ingenuity, and three years later, that bet is paying off in a big way.” Nine months later, that “bet” is a bust.
Unsurprisingly, there are calls for a federal bailout. Former Obama administration Auto Czar Steven Rattner, who helped engineer the federal bailout of GM and Chrysler — and who also paid more than $16 million to New York’s Attorney General and the Securities and Exchange Commission to settle civil cases involving an alleged kickback scheme to get public pension fund investments for his private equity firm — led the charge. “No one likes bailouts or the prospect of rewarding Detroit’s historic fiscal mismanagement,” writes Rattner. “But apart from voting in elections, the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.”
It is little wonder Rattner would like to exclude “voting in elections” as a cause for Detroit’s problem. The last Republican Mayor the city had was ousted in 1961, and city residents gave Barack Obama 98 percent of their vote in the 2012 election.
Moreover, Hurricane Sandy was a natural disaster. Detroit’s disaster is a manmade, willfully self-inflicted exercise, and the idea that Americans who shared no part of it should still bear some measure of responsibility, is utterly absurd. Such a “solution” would be little more than an invitation for every municipality in the nation to be as fiscally reckless as they want, even as they would be assured “someone else” would pay for that recklessness.
Furthermore, as spectacular as Detroit’s failure is, the city is nothing more than the proverbial canary in the coal mine. Human Events’ John Hayward illuminates the bigger, and far more ominous, picture. “Detroit is end-stage Obamanomics,” he warns. “They’ve already tried the standard liberal snake oil of big tax increases on the Evil Rich; the result is empty buildings and catastrophic unemployment…Just wait until entire states, like Illinois, follow Detroit into the abyss.”
After that? “Like Detroit, America has unfunded liabilities, to the tune of $220 trillion, according to the economist Laurence Kotlikoff,” writes National Review’s Mark Steyn. “Like Detroit, it’s cosseting the government class and expanding the dependency class, to the point where its bipartisan ‘immigration reform’ actively recruits 50–60 million low-skilled chain migrants. Like Detroit, America’s governing institutions are increasingly the corrupt enforcers of a one-party state–the IRS and Eric Holder’s amusingly misnamed Department of Justice being only the most obvious examples. Like Detroit, America is bifurcating into the class of ‘community organizers’ and the unfortunate denizens of the communities so organized.”
That class of so-called community organizers includes Fed Chairman Ben Bernanke, whose own brand of fiscal recklessness, aka Quantitative Easing, has largely obscured the reality that America’s finances are every bit as precarious as Detroit’s. Yet as Detroit indicates, the day of reckoning can only be postponed, not eliminated. If Americans don’t wake up soon to the utter destruction wrought by prime-the-pump, tax-and-spend, liberal Democratic ideology, they will no longer have to worry about Detroit. Everywhere else in the nation will be just like it.
Freedom Center pamphlets now available on Kindle: Click here.