Detroit in DISTRESS

HOW A MUNICIPALITY RECOVERS FROM BANKRUPTCY

SOLVING THE CRISIS

i. Municipal insolvency trendsii. Counter-example of Harrisburgiii. Collaboration in Detroit

RESEARCH QUESTIONS

1. What political and economic factors affect the fiscal recovery of a municipality?

2. What political structures are conducive to financial recovery for insolvent cities?

Bankruptcy Developments1934 - 2010

Local governments given right to negotiate with their biggest creditors, 1934Most municipal bankruptcy filings are for single-purpose governmentsGlobalization and automation cause America’s “Rustbelt” cities to decaySince 2010, greater number of Chapter 9 filings by general-purpose governments

State Involvement Monitoring Measures:State-wide elected auditors Independent agenciesAdvising

Active Measures:Supplying state aidEnforcing state regulationsOrdering mergers with financially stable municipalities

States hold the power to authorize a municipality’s Chapter 9 bankruptcy filing

Harrisburg, Pennsylvania

What Happened in Harrisburg?

Closing factories, faulty investments, failed venturesChapter 9 Bankruptcy sought by city councilThen-governor Ed Rendell joined state and business leaders in oppositionPA acted under the inefficient Act 47 of the federal bankruptcy code

Nearly 25% of the municipalities that have

entered this type of recovery program have remained there

for over 25 years.

What Actually Happened in Harrisburg?

Bankruptcy and state intervention seen as competing solutionsChapter 9 claim filed over resistance of city mayor – and dismissed six weeks laterCreditors opted for out-of-bankruptcy solutionThreat of filing induced creditors and officials to come to resolution

Detroit, Michigan

THE CAST

Detroit Emergency Manager: Kevyn Orr

Governor of Michigan: Rick Snyder

Federal Mediator: Gerald Rosen

Federal Bankruptcy Judge: Steven Rhodes

Takeover Board Controversy

State-appointed managers see power increaseAs a rule, come from outside of cityUnelected but hold significant influenceLimiting democracy?

Detroit in Poor ConditionRapidly decreasing property values and depopulation translates to smaller tax base

Municipal services cannot be cheaply provided for few remaining residents

Growing pension liability program

How Conditions Got WorseDetroit protracted certificates of participation with retirement service corporationsEntered floating interest rate swap agreements2008 - steep decline in interest rates

$350 MILLION

Bankruptcy Approval December 2013, Judge Rhodes granted Chapter 9 protectionsLack of secured pension funds nearly blocked city from eligibilityFunctioning at tax rates close to maximumsContinued payments to creditors during bankruptcy proceedings

$18 BILLION

The Detroit Institute of Arts

DifficultiesOfficially under city ownershipOption of selling or leasing collections to repay debtorsOpportunity cost of cultural and educational opportunities

“[Selling the artwork] would represent such a defeatist position to be in, and I don't think the city could have ever

recovered from that.”

-Name

SEPTEMBER 11, 2014 - THE NEW YORK TIMES

SEPTEMBER 15, 2014 - DETROIT FREE PRESS

The Grand BargainExited bankruptcy November 7, 2014Creditors agreed to accept reduced amountsInvolved collaboration between: Emergency manager Federal mediator Governor Creditors DIA Foundations Retirees and labor unions

DIA in the Grand Bargain

DIA artwork and grounds transferred from the city to a non-profit trust

Money donated by foundations and supporters on behalf of the museum will go to city pensioners

Newly independent DIA required to raise an additional $100 million

Citizens’ VoiceGreat importance placed on residents’ needsJudge Rhodes treated residents as creditors themselvesRetiree associations urged pension holders to compromise

Compromise RealizedGov. Snyder urged Congress to give aid $7 billion of debt forgiven$1.7 billion in funds for 10-year recovery plan

“A coalition of foundations, state government and the DIA pledged the equivalent of $816 million over 20 years as a proxy for the value of the museum.” – Detroit Free Press,

November 8, 2014

Changes Seen in One Year

Relaxed zoning lawsHomicide rate dropped by 18% percentpolice response dropped from 58 minutes on average according to less than 18 minutes Improvements in street lighting - 40% of street lights broken in 2013

RESEARCH QUESTIONS

1. What political and economic factors affect the fiscal recovery of a municipality?

2. What political structures are conducive to financial recovery for insolvent cities?

What’s Next?Plan of Improvement in placeOrr returned control to elected officialsInfrastructure renovationsStrict monitoring by state-appointed commission

Gillette, Clayton P. "Dictatorships for Democracy: Takeovers of Financially Failed Cities." Columbia Law Review 114.6 (2014): 1373-462. Academic Search Complete. Web. 30 Oct. 2014.

Moringiello, Juliet M. "Goals and Governance in Municipal Bankruptcy." Washington and Lee Law Review 71.1 (n.d.): 403-85. Academic Search Complete. Web. 30 Oct. 2014.

Morrison, Fred L. "The Insolvency of Public Entities in the United States." The American Journal of Comparative Law 50 (2002): 567-79. JSTOR. Web. 12 Nov. 2014.

Shanks, Sanders, Jr. "The Municipal Bankruptcy Act (Sumners-Wilcox Bill)." Ed. Thomas H. Reed. The American Political Science Review 28.6 (1934): 1072-074. JSTOR. Web. 12 Nov. 2014.

Wagner, Richard E., and Robert D. Tollison. Balanced Budgets, Fiscal Responsibility, and the Constitution. Washington, D.C.: Cato Institute, 1982. Print.

New: http://www.bloomberg.com/news/articles/2013-03-14/only-wall-street-wins-in-detroit-crisis-reaping-474-million-fee

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