So is this a partial victory for Detroit? Will it help the city face its financial problems? What’s next?
It should help the city get its finances in order, but it will take time. The next step is to for the city to seek to pay out secured debt holders and then deal with the unsecured debt, including the retirement benefits, which are not protected under Chapter 9 filings. This process will take months, if not years, and be tied up in court. And no one can say that this will break the cycle of population loss and therefore revenue loss that has played such a large part in the city’s troubles up to this point. But it should certainly help to shed the debt burden on the city.
How about the fact that Detroit approached the White House for a bailout and was denied? What kind of precedent did that set for other troubled cities?
Not coming to the assistance of Detroit was certainly controversial in some sectors, especially after the bank bailouts during the last 5 years. We have to remember that the government gave AIG a bailout worth more than $180 billion, and over $45 billion to Citibank, not including the nearly $300 billion of guarantees on bad assets. And now unions are getting the cold shoulder and having their pensions slashed, so this will certainly be a very hard pill to swallow for many, many residents of Detroit. However, in terms of precedent, it is probably a good one, considering the scope of financial issues that are confronting states and municipalities across the country. One bailout for a city would have justified other cities in thinking that they could simply go that route as well.
What about other states and municipalities? What’s the scale of the bankruptcy problem for them?
It’s pretty significant, and it has clearly gotten worse since the economic downturn, as revenues fell, demand for social safety nets rose and the national and state governments had to cut resources for cities. Since 2010, 23 cities, municipalities and municipal utilities have files for Chapter 9 bankruptcy in the US. This obviously does not count the many that are very close to the edge but have not yet been forced into a decision. But there will certainly be more, due to the rising liabilities. One economist estimates that the public pension shortfall in this country is nearly $1 trillion dollars.
Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
The Detroit Bankruptcy Fallout was originally published on blackamericaweb.com
