Saturday, July 20, 2013

Detroit Files for Municipal Bankruptcy – Yes Virginia, There are Costs to be Paid for Decades of Inept Management

And Everyone, Including Bond Holders and Pensioners Will Have to Pay Them

If anyone wants to know in a very concise way just why Detroit is bankrupt (and has been for many years) there is this sentence from the New York Times report on the story.

Stephen McGee for The New York Times
Kevyn D. Orr, the emergency
manager tasked with resolving
 Detroit’s financial 
problems, in June.
Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager who was appointed by Mr. Snyder to resolve the city’s financial problems, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

That’s right, the city is in such bad shape administratively that no one even knows how bad, the numbers vary in the billions.

Expect to see retired city workers have to lose some of their retirement benefits.  These were citizens who had a stake in seeing that the city remained solvent and so are in part a responsible party here.  Expect to see bondholders lose some of their investment.  These were investors who could have voted with their pocketbook to deny Detroit the easy credit that lead it to overspend and undertax and ignore economic development.  Expect lawyers to make tens of millions on the legal battles, that's what they do.

One final point here, the city may have to sell its art collection.  Earlier this brought protests for reasons we do not understand.  Selling the collection will not destroy it, and selling it to another museum or public display institution will not deprive the public from seeing the art.  But keeping the asset while cutting retirement benefits for city workers is just not right.

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