Sunday, June 28, 2015

The Detroit Playbook

In These Times has an interesting piece about whether "Chicago is the next Detroit," and how Detroit got to where it was:
Detroit’s bankruptcy was not borne out of financial necessity and was not a foregone conclusion. It was a political decision made by state officials. Gov. Rick Snyder and the Michigan Legislature chose to push the distressed city over the edge in order to accomplish two otherwise difficult political goals: slashing pensions and regionalizing the Detroit Water and Sewerage Department. It was disaster capitalism at its finest.
Austerity hawks are now hoping to use the Detroit playbook in other cities to force the public to accept extreme measures to fix budget crises. And the bond markets seem to have finally settled on an answer to that question about which city will be the next Detroit: Chicago. Moody’s Investor Service, one of the three major credit rating agencies, just downgraded Chicago’s credit rating to junk level—the municipal equivalent of a subprime credit score, cautioning potential lenders that the city may not be able to pay them back—making it the lowest-rated major city in the country after Detroit....
During Detroit’s bankruptcy proceedings, Emergency Manager Kevyn Orr, who had been appointed by Snyder to run the city during its fiscal crisis, repeatedly asserted that the city had $18 billion in outstanding debt, so as to imply that the city had to come up with $18 billion in savings to get out of bankruptcy. This was not true.
First of all, that $18 billion number itself was inflated using non-standard accounting assumptions and by including debt that did not actually belong to the city itself, such as the debt of the Detroit Water and Sewerage Department. But more importantly, the $18 billion figure was irrelevant for the purposes of Chapter 9 bankruptcy, since there was never any expectation that the city pay all of its long-term debts immediately. What mattered, according to an analysis by the think-tank Demos, was the $198 million cash flow shortfall that the city faced that fiscal year. Detroit’s expenses were $198 million more than its revenues, so it could not pay its bills as they came due.
The $198 million shortfall could have been addressed fairly easily—in part, simply by undoing state actions that had pushed Detroit into bad financial straits in the first place. For example, Detroit had taken a major financial hit over the course of 2011 and 2012, when Snyder and the Michigan Legislature decided to cut annual state revenue sharing with the city by $67 million. Restoring that funding would have filled one-third of the city’s shortfall. Second, there were state-imposed restrictions on the city’s ability to raise local taxes, dating back to the 1990s. Lifting those restrictions would have allowed the city to raise taxes and bring in new revenue.
Or the legislature could have passed a law requiring suburban employers to automatically deduct city income tax for reverse commuters who lived in Detroit. The city instead had to rely on reverse commuters to voluntarily pay their taxes. According to a study commissioned by the Mayor’s Office, in 2009 alone, Detroit lost $142 million as a result of this loophole. But instead, the $18 billion figure was held up to create a greater sense of urgency in order to justify drastic cuts at the expense of public employees and wrest control of the water department from the city.
It amazes me that politicians (mainly of one party, but often helped by the other) can slash taxes, underfund pensions for decades and massively cut revenue sharing with local governments, then turn around and claim pensions have to be cut because the governments are short of cash to pay those pensions.  Before being able to renege on pension promises, those tax cuts should be rolled back.  However, that's not how the system works.  At this point, anything that can be done to benefit the wealthy and screw the working class will be done, and done as quickly as possible.  It is pretty sad, and it will be depressing to watch this playbook run over and over, but I think that is our future.  To be honest, I think job losses and a shrinking population made a Detroit bankruptcy eventually inevitable, but it was pretty clear that Republicans in Lansing saw their chance to make it happen sooner rather than later.  It will be interesting to see how Chicago plays out.  It is so much better off than Detroit, but it seems the fix is in to screw city employees and reward the well-connected.

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