Jamie Peck, Geography professor at The University of British Columbia, has written quite a bit about neoliberalism, what he calls “austerity urbanism” and the ongoing saga of Detroit’s finances. He has an insightful blog post on how terms like bailout, responsibility, and federalism are serving to seal Detroit’s fate as a sinking ship, forced to go under in the name of civic individualism, while the state and federal government stand by and watch.
These arguments are perfectly consistent with the conservative legal doctrine of fiscal federalism, where not only “each level of government,” but in effect each unit of government, must “internalize both the costs and the benefits of its activities.” This is the antithesis, effectively, of Keynesian redistribution, with its compensatory fiscal transfers and anti-cyclical stabilizers. In contrast, the neoliberal version of fiscal federalism holds that cities, suburbs, and local-government entities must always be free to opt out, as in the logic of small-government suburbanism, but they must never, in any circumstances, be “bailed out.” This disaggregated, go-it-alone world is a world ruled by fiscal discipline, imposed across different tiers of government and between neighbors; (in)solvency duly becomes, rightfully, a local matter. The new fiscal landscape can be crudely divided between free-riding, low-tax suburbs on the one hand, and indebted (or even bankrupt) cities on the other. In the morality plays of austerity urbanism,“irresponsibility” is perversely conferred on the latter, not the former.
While we wait for the federal judge to rule on Detroit’s petition for bankruptcy, a Demos report enters the fray:
WASHINGTON — A New York-based think tank released a report today questioning Detroit Emergency Manager Kevyn Orr’s assertion that the city’s long-term debt is responsible for its fiscal problems, or that pension contributions are at major hurdle for the city’s finances.
Instead, the report by Wallace Turbeville, a senior fellow at Demos, a public policy organization, said Detroit’s decline into bankruptcy was caused by a steep decline in revenues partially due both to a shrinking tax base and deep cuts in state revenue sharing with the city.
“By cutting revenue sharing with the city, the state effectively reduced its own budget challenges on the backs of the taxpayers of Detroit,” Turbeville wrote. “These cuts account for nearly a third of the city’s revenue losses between (fiscal year) 2011 and FY 2013. … Furthermore, the Legislature placed strict limits on the city’s ability to raise revenue itself to offset these losses.”
It says a lot about what’s at stake in Detroit that Demos, an organization committed to reducing political and economic inequality, chose to question the factors that have been blamed for Detroit’s struggles for decades, but especially in the past few years: unions and an “addiction to debt” (Orr’s words). I haven’t had a chance to read the report yet, but I hope it’s able to break some of the conservative grip on the narrative about urban fiscal crisis in Detroit and elsewhere.
The Detroit slide into bankruptcy is like describing an elephant: hard to know where to start. The narratives circulating about Detroit are all fascinating, sometimes irritatingly (but predictably) simplistic but I think the reporting has improved with time, as reporters are forced to look for new angles. Here’s the New York Times’ latest piece:
Detroit’s glittering sports teams operate in a different economy than does the rest of the city. Because of billionaire owners, lucrative television deals, dedicated fans and public subsidies, the city’s teams have few of the problems that have dragged their hometown into the largest municipal bankruptcy filing in the nation’s history.
The post I wish I had time to write: how easily people can imagine taking away a retiree’s pension, how small those pensions usually are, and how controversial the assessment of Detroit’s (and everyone else’s) actual pension problem is (for starters, Morningstar says Detroit followed industry practice for its pension plan right up until the bankruptcy filing). Read: Municipal Workers in Bankrupt Cities Facing Financial Nightmare « naked capitalism.
Detroit, currently under the governance of an emergency manager, seems destined for bankruptcy or mass default (it has already begun to default on some of its credit payments. Either scenario will be groundbreaking in municipal finance and in the power relationships between bankers, retirees, cities, and states. The impending battle between people living on fixed retirement incomes (many of whom still live in Detroit, in houses that have likely lost the overwhelming majority of their purchase price) and investors who say they banked on the reliability of municipal bonds.
So what’s at stake in how this plays out?
Public finance experts have warned that broad societal problems could follow a loss of faith in municipalities’ commitments to honor their pledges. In a major report on the state of the muni market last year, the Securities and Exchange Commission warned that communities would find it increasingly costly to raise money, throwing into question the time-honored practices of building and financing public works at the local level.
It’s interesting, but not surprising, that the “broad societal problems” that could result from tens of thousands of retirees, mostly African-American, suddenly losing their retirement (and the implication for other retired public employees) is not framed. And perhaps this kind of local financing is something we as a country should move away from, given how much it focuses risk in individual cities.
Losing their pensions will mean real pain for retirees, and a cascade of pain for the neighborhoods and city they live in. Someone needs to be talking about that.
Wall Street is taking America’s biggest pension fund to court this week, for a long-awaited battle over who takes the losses when a city goes bust — workers and retirees, municipal bondholders, or both.
California is being closely watched as battles in San Bernardino and Stockton look to reshape how pensions are treated in municipal bankruptcies. Bondholders may be emboldened by Rhode Island’s successful attempt to prioritize bondholders over other creditors, thus placing risk more squarely on cities, their employees and retirees, and taxpayers throughout the state.
Michigan’s Emergency Manager law is a big part of my dissertation, so I haven’t written about it much here. But after wading through the overwhelming media support for Proposition 1, which will affirm the Emergency Manager law passed by Republicans in 2011, a rare piece on the underlying issues caught my eye:
Those who like the emergency manager approach — like the Mackinac Center — don’t like the prospect of bankruptcy for a simple reason: Municipal bankruptcy under federal law requires real sacrifices from bondholders and bankers — not just residents and workers.
Unlike emergency managers, bankruptcy courts have the power to bring creditors to the table. That can lessen cuts in services like police and fire departments, and public transportation. But compromise and sacrifice by creditors is something the emergency manager law was explicitly designed to prevent.
Jordan is from Flint, which has had a particularly volatile experience with the law, and he is part of the lawsuit that led to the law being suspended, paving the way for Proposal 1. I’ll have more to say once the voting (and perhaps my dissertation) is done, but I wanted to highlight his article now.
The municipal bond market’s view of city budget woes, via Goodwin Procter’s take on the Pew report about struggling cities (which is worth reading):
A recent report issued by The Pew Charitable Trusts American Cities Project describes how the Great Recession has sandwiched municipalities between an increased demand for services and an inability to raise the revenue required to meet the cost of current services or legacy obligations.
This problem is widespread and comes at a time when state aid to local governments has also declined. According to the report:
State aid to local governments fell by $12.6 billion in FY 2010, with additional cuts in 2011 and 2012.
Simultaneously, local governments lost $11.9 billion in property tax revenue in FY 2010.
The stark reality faced by municipalities is that services must be cut and legacy obligations reined in. Privatization of services, regional partnerships, layoffs and budget cuts appear to be the only way that municipalities can begin to operate in the black.
While municipal defaults and bankruptcies remain rare, bankruptcy, or the threat of bankruptcy, will continue to be a useful tool for municipalities that must force compromises and lessen their debt load. And, for the truly troubled few, it will remain the only way out of the current financial crisis.
Emphasis mine. There are of course other ways out of the mess, including other approaches to debt reduction or increasing revenues. But better to use the threat of bankruptcy to “force compromises.”
Fitch Ratings issued a press release on the situation with Michigan’s Emergency Manager law (right now the court is weighing whether to put on the fall ballot a measure to repeal the current version of the emergency manager law, under which Detroit’s consent agreement with the state). Ratings agencies have been vocal about Detroit’s troubles, and instrumental in affirming the State’s position that Detroit is in irrevocable fiscal trouble.
As Detroit’s fiscal stability agreement has several features that rely on the existence of PA 4, most notably the ability to suspend collective bargaining, the repeal of PA4 could weaken or nullify the agreement. This may have an adverse effect on the city’s ability to continue the reforms already begun under the agreement and therefore stabilize and improve its credit quality.
We also believe the prospects for financial stability among entities assisted by emergency managers now, or those that might need them in the future, are unclear.
Fitch will continue to monitor this evolving situation and report back when more details and analysis will become available.
New York’s State Comptroller has issued a report on local government finances that sounds a strong alarm.
Local governments across New York State are collecting less in taxes, burning through their cash reserves and running up deficits.
Differing visions emerge of where this leaves local governments, and the state:
As he has in the past, [Comptroller] DiNapoli urged local governments on Wednesday to embrace multiyear financial planning and to resist fiscal trickery as they seek to balance their budgets in the short term. The report said that poor record-keeping and other questionable accounting practices were serving, in some cases, to mask the extent of the governments’ financial distress.
But Richard L. Brodsky, a former assemblyman who was a writer of a recent report on the troubled finances of Yonkers, said cities that had improved their financial planning and forsaken gimmicks found that within the next few years, they would be unable to close their projected budget gaps.
Mr. Brodsky predicted that “New York will see what California has already seen,” with localities simply unable to make the budget math work.
“You’ve got an unsolvable problem,” he said, “which logically takes you to the consequences of that, which are bankruptcy, bailout or control board. That’s where the mayors are. That’s the conversation they’re having.”