(Article originally published here on August 5, 2013)
The on-again-off-again pending bankruptcy of what was formerly America's 4th largest city, Detroit, has been all over the news lately. In all of these stories, whether blaming the collapse of the domestic auto industry , profligate workers taking pensions, or, even closer to the truth, speculators (read: banks) who precipitated a housing collapse , and even the fact that only 53% of City property owners paid their 2011 property taxes while approximately $246.5 million in taxes and fees went uncollected for 2011, of which $131 million was due to the City - there is one glaring omission of coverage, whether Detroit is, in fact, broke. One would think that with such extensive coverage of everything from the city's crumbling infrastructure to its money-and-personnel starved police department's pathetic 10% crime-solving rate and 58-minute police department responses , that at least some research would have been given to whether Detroit is, in fact, out of money. Note; I didn't say, "whether Detroit is bankrupt." Bankruptcy is a legal finding. Being out of money is a statement of fact. There is a crucial difference, as we shall see.
The courts may have decided the fate of the city by the time you read this. For example, an Ingham County judge issued a stay against the city's attempt at bankruptcy, ruling it unconstitutional, based on State's Article 9, Section 24:
CONSTITUTION OF MICHIGAN OF 1963
- 24 Public pension plans and retirement systems, obligation.
The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.
Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities.
History: Const. 1963, Art. IX, - 24, Eff. Jan. 1, 1964
Says the Daily Kos article cited above:
The city must retract its filing for bankruptcy, made literally minutes after appearing in the circuit court, after asking for, and receiving a 5-minute delay - during which they filed for bankruptcy!
Since this Daily Kos article came out, however, an appeals court has let the bankruptcy proceeding continue, and it now seems the State constitution will be flouted. Why should we be surprised that what is happening on a Federal level is mirrored at the State level? The unions are fighting the loss of their pensions, but only on a token basis and are not questioning the fundamental assumption that Detroit is broke, though the same financial statements are available to them as are available to journalists, or to anyone.
Considering that the city's state-appointed democracy-robbing bankruptcy attorney, Kevyn Orr, is a Washington D.C. attorney and partner at the law firm of Jones Dayare, which is representing Peabody Energy against the coal miners in bankruptcy proceedings, one ought to question any so-called public servant who is saying an entity is broke nowadays. (In addition, Detroit is a particular homing beacon for political corruption, with an ex-Mayor in jail for extortion, racketeering and bribery). Before we indict Detroit as another city wrecked by greedy public employee pensioners - who in this case, live on an average of $19,000/year - let's dig a bit deeper into the true situation.
First, in macro-economic terms, as Paul Krugman lays out, the "Great Pension Scare" is yet another inflated attempt by the New Austerians to force everyone but them into penury with bogus statistics claiming imminent default, deprivation, and even moral debauchery. We ought to know better by now then to trust revolving-door Treasurers and Comptrollers looking for future employment in the FIRE sector. In addition, of course, this is Obama's Gerald Ford moment, when president Ford famously said to New York City - in 1975 suffering its own fiscal crisis - that it should "Drop Dead." In fact, the current Administration spends three times as much on aid for Columbia as it does for Detroit and could easily afford to help out one of America's major cities, if it chose to, and if Congress allowed it.
But, getting back to the fiscal reality of Detroit: to understand the true situation, the first thing to understand is the difference between a budget report and a Comprehensive Annual Financial Report (CAFR).
There is a nascent gathering of interest in examining CAFRs on local, state, and federal levels. It's too soon to call this a movement, and indeed, it's hard to have a movement around 10s of thousands of separately calculated CAFRs, but since they all use similar methods of obscuring their reporting government's true assets, tax and monetary reformers are starting to take notice.