Detroit's financial struggles were no secret, nor were its 50/50 chances of filing a Chapter 9. Still, although some have covered the growing threat of cash-strapped municipalities for the last three years, Detroit's record $17 billion Chapter 9 case has suddenly shined a spotlight on this rarely exercised portion of the Bankruptcy Code, starting with media outlets and extending to the Administrative Office of the U.S. Courts, which, a day after Detroit filed, released a free guide on its website, simply titled, "When Cities Go Bankrupt."
The largest Chapter 9 filing in U.S. history has also thrown the similarities between Detroit and Greece into sharp relief. Both have been held up as the poster boys for post-recession municipal and sovereign debt struggles, but the journeys of both Motor City and the Hellenic Republic into the red are startlingly similar, and the road ahead equally dire.
"At some point in their history some truly stupid decisions were made and at some point in the last few years conditions changed that made what looked like a good move turn into a disaster," said NACM Economist Chris Kuehl, PhD, noting that, in Greece's case, it bought labor peace by offering more than it could afford to public sector workers and retirees. "The litany of giveaways is long and there was never a point where Greece could really afford them," he added.
Detroit made similar mistakes, based on a big assumption that's now proven itself tragically incorrect. "In order to buy time with the public sector workers, they were offered generous benefits in retirement in lieu of pay raises during their working careers," said Kuehl. "It was a bargain based on the assumption that the city would expand and make more money in the future. The city leaders went annexation crazy at one point and created a city with more land area than communities with three times the population."
Much as the reasons for their struggles are the same, the roads to solvency for both Detroit and Greece will need to involve a combination of taxation, investment and government intervention if they're to have any chance of success. "The taxation system will have to expand but with the realization that too much tax will drive people elsewhere. The investor has to be enticed to take a big risk and that drives up the cost of that loan—just look at the yield on Greek bonds," Kuehl noted. "The third leg is government bailout. That is what is taking place in Greece… Thus far there is no promise of rescue from the state of Michigan or from the U.S., but that position will have to change, and will once the city of Detroit makes the same adjustments and makes the same promises that Greece had to make."
Most depressingly among the many connections between Detroit and Greece is the fact that their renewal won't be paid for by the people who instituted these disastrous policies in the first place. "The people who will take the brunt of the assault are not the ones that made the bad decisions and behaved stupidly," said Kuehl. "It will be the hapless people who simply ended up living in these communities."
To learn more about the Chapter 9 process and the role it will play for other municipalities in the coming months and years, tune into NACM's teleconference, "Chapter 9—Coming to a Municipality Near You," led by Bruce Nathan, Esq. on October 7. Click here for more information.
- Jacob Barron, CICP, NACM staff writer