What Detroit means

The first thing I thought about Detroit is that the state’s appointment of a receiver demonstrated the Republican governor’s profound indifference to the democratic process of a Democratic city, not to mention a white governor’s profound indifference to a black city.   This may be true, but it’s also true that Detroit’s finances are such a catastrophe that, like New York in the 1970s, it seems to need an outsider to get its house in order. It helps that the trustee is African-American, though not very much: even temporary government without the consent of the governed should cause us alarm.

The second thing I thought about Detroit is that selling off the collection of the Detroit Institute of Art, which the trustee estimates would be sufficient to retire all of the city’s debt, is the best of a number of bad options. Museums nationwide are hyperventilating at the prospect, but they also think it’s sensible to keep on hand huge numbers of items that no one ever sees.  I don’t quarrel with the need to have a deep collection for research purposes, but I also don’t see why it’s considered bad form verging on unethical to sell the parts of the collection you’re not using in public to sustain the parts of the collection you ARE using in public, and at the same time not coincidentally making the sold pieces available to the public, albeit in a different location.

If there had been a Great Fire of Detroit, and the whole city destroyed, no one would argue that recreating the city’s art collection should take priority over food and shelter for the city’s people.  The years of financial mismanagement have incinerated Detroit just as surely as a physical fire; why shouldn’t we pay more attention to basic needs than to cultural institutions?

And isn’t the whole function of assets to provide financial security when income doesn’t suffice? Again, I wonder about the racial composition of those who champion the inviolability of the collection as against the racial composition of those who think it might be necessary to dispose of it. The state’s Attorney General has opined that the city may not sell them because they’re held in trust for the citizens.  But “The United States shall guarantee to every State in this Union a Republican Form of Government,” and I don’t notice anyone’s raising a ruckus about the loss of that part of our patrimony.

The third thing I thought about Detroit is that the bondholders’ interests are being given absolute priority over the interests of current and former employees, whose pensions are at stake. This is the case in Illinois as well, where at least some portion of the pension “crisis” could be solved by refinancing the debt and stretching out repayment but where that solution is not even considered because the bondholders don’t like it. I understand the value of the municipal bond market to cities’ ability to expand infrastructure but municipal bond investors are investors and should be prepared to accept some pain when they toss their dollars into what’s obviously a money pit.

And the fourth thing I thought about Detroit is that it’s Americans’ closest analogue to what’s casually referred to as “the European debt crisis,”  throughout which salvaging the Euro has meant satisfying bondholders at the expense of people who’d like to work or collect their pensions.   Very few commentators seem aware that the real crisis is one of self-government (or its destruction), or that the Germans have managed to do through economics what they couldn’t do through war, that is, run Europe.  When externally-imposed austerity hit Greece, all I could remember was the bumper sticker from the era of the junta: “Greece: Democracy born 508 BC, died 1967 AD.”  Or, this time around, “reborn 1974, killed again 2011 or -12 A.D.”  As the saying goes, same s**t, different day.

Back to Detroit: if I were trustee, I’d sell off DIA’s assets in a heartbeat and use the proceeds to protect employee pensions. If there was anything left for the bondholders, fine; if not, too bad: it’s the pensioners who paid their share and are entitled to what they were promised. Even after years of trashing public employee unions (brought to you by the Heritage Foundation and other fronts for wealthy people who don’t like to pay taxes or see working people make reasonable money), there must be some court somewhere willing to recognize that the obligation of contracts shall not be impaired.

Of course, I would never be chosen trustee, but that’s not the point. The point is, my solution is what would happen if Detroit were still governed by its people. Detroit: Democracy died 2013 A.D.

Comments

  1. Sebastian H says

    The answer to your implied question about bonds is the same in Greece and Detroit–you can’t short the bond holders when you still need them to finance current spending. If you are running a budget surplus you can pull off a default because you don’t need them going forward. That is why Italy is in a fairly good position if it ever needs to default–it can pay for most of its current expenses through current taxes. Greece can’t. Detroit can’t.

    • Keith Humphreys says

      Sebastian wrote: The answer to your implied question about bonds is the same in Greece and Detroit–you can’t short the bond holders when you still need them to finance current spending.

      Sebastian makes a reasonable counter-argument, at least for this one aspect of the post. At the same time I know I speak for many readers Kelly when I say “more please” – every post you have here generates good dialogue and raises important points…please quit your day job and become a full-time blogger like your brother.

    • J. Michael Neal says

      Detroit still needs some people in its workforce, too. How does stiffing them not accomplish the same thing/

    • byomtov says

      That depends, doesn’t it, on the exact arrangements? If there is some variation of debtor-in-possession financing sought then I don’t see why it wouldn’t be provided. I don’t think bondholders are the type to let vindictiveness get in the way of profit.

      In any case It seems that the bondholders themselves aren’t getting hurt:

      It’s worth noting that even though Detroit is defaulting on millions of dollars of debt obligations, bondholders in general are not going to be hit, thanks to the wonders of third-party guarantees. For instance, Bloomberg reports that the 2028 general-obligation bond is currently trading at 96 cents on the dollar, “the lowest since March 2012″ (it’s backed by Assured Guaranty).

  2. Brett Bellmore says

    Really, this has nothing to do with Detroit’s status as a majority Black, overwhelmingly Democratic city. The truth of the matter is that the city would have been forced into receivership long ago were it’s population more representative of the state. Only the implicit, (And sometimes explicit…) threat of renewed race riot has permitted the city to sink to this degree without intervention. People in the rest of the state finally got tired of the threats.

    By the way, bonds aren’t contracts?

    • Cranky Observer says

      By the way, union contracts aren’t contracts? They can be declared “thuggish” and broken at will?

      Cranky

    • NCG says

      I know nothing of Detroit’s history, and yet somehow … I suspect it’s not an accident that all the rich areas, and the productive areas, are somehow not connected to the main city.

      Gosh, I wonder what might have caused this?

      • Brett Bellmore says

        Not having been burned to the ground by the city’s own population certainly helped. But that was long enough ago for major trees to have grown up through the burnt hulks along Michigan Avenue. Perhaps it’s just that, already being developed, none of the corrupt administrations had any reason to cut off utilities and police protection to run down the price should they ever want to take them by eminent domain for this or that project. (A favorite tactic of Mayor Young.)

        Or maybe it’s just that since Metro Airport is actually in Romulus, not Detroit, Detroit was unable to screw it up too much?

    • byomtov says

      Nor does it have anything to do with the fact that the industry it depended on, probably more than any other American city ever depended on a single industry, an industry concentrated in three very large companies, was badly mismanaged by its White (since we’re capitalizing) managers for decades.

      To talk about the decline of Detroit without discussing the mostly self-inflicted troubles of the auto industry is to ignore not the elephant in the room but the blue whale.

  3. paul says

    One of the things that is particularly galling about the insistence on paying off bondholders in full is that many, many of them are not the original purchasers who plunked down 100 or even 90 or 80 cents on the dollar for a promise to pay later; they’re people who bought on the secondary market, quite possibly for far less. The original buyers already took their haircut, and now the secondary purchasers are looking to make a large profit instead. (According to reports, some of the city’s bonds won’t be repaid at face value — the administrator has said that anyone who lent to the city without demanding security should have known what they were getting.)

    Meanwhile, I would argue against selling the DIA collection for a few reasons: 1) It would represent a final hollowing-out of the city’s structure, and reinforce the longstanding argument that there’s really nothing there to save 2) The money wouldn’t go to pensions or workers or even current expenditures but to speculators (see above), and so do little or nothing for the long-run condition of the city 3) The estimate of how much the collection is worth is very likely to be way overblown — certainly if any single item came up for bid it might fetch the estimated price, but if everything goes at once there’s quite possibly not that much liquidity or acquisition capacity floating around in the collector/museum community. And the collectors in question all know that they’ll do much better by quietly divvying up the loot before the bidding starts.

    • Brett Bellmore says

      “and reinforce the longstanding argument that there’s really nothing there to save”

      Um, what’s wrong with reinforcing valid arguments? Are we concerned, properly, about ‘Detroit’, or are we concerned with the people currently unfortunate enough to live there? People don’t exist for the benefit of cities, it’s the other way around. We should be ruthless with cities which no longer advance the interests of their inhabitants.

      And, frankly, screwing over the bondholders in favor of the city employees would be the final wrong; The city government, with it’s employees as a supporting cadre, a self-perpetuating political machine which launders taxes through municipal unions into the politics which keep it in power, has been leaching off the shrinking population for decades. All you’re proposing is one last meal.

    • Foster Boondoggle says

      The “below face value speculator” argument is one that comes up periodically in these contexts (it did around Greece’s haircut also), and I don’t think it makes sense.

      When a company or a government entity wants to borrow, it needs to find people with money to lend. There are a variety of types of these potential investors. Some (mainly insurance companies) plan to hold to maturity. But they’re only one segment of the market. Others, such as pension and mutual funds, care about liquidity — that is, the ability to get out of their position if their investment goals or perception of value changes. Those investors will pay a rate that is, in part, predicated on the assumption that they can sell the debt later.

      If you argue that stiffing those who bought below face value is OK and change the laws accordingly, one of two things happens. If you change the law to stiff everyone equally, everyone will demand higher rates. Given typical recovery assumptions, those rates could easily be twice as high as current ones. If you only stiff the secondary market buyers (though how you could do this isn’t clear), they’ll stop buying that type of debt, and the primary market buyers who want liquidity will disappear or at least demand much higher rates. So again the rates needed to sell future debt go up.

      This isn’t a moral issue. It’s just one of contracts and functioning markets. You can screw investors in some fashion once. But they learn pretty quickly. If you still need them to finance new (or refinance old) debt, defaulting isn’t a good idea.

  4. OkeyDokey says

    Well, let’s see:
    All of the city council and city clerk are non-whites, appears to be all African-American.
    http://www.detroitmi.gov/CityCouncil/tabid/2509/Default.aspx

    The mayors from 1974 starting with Coleman Young to the current mayor, Dave Bing have been African-American.

    It appears that many of the departments heads, such as Fire, are African-American. It would be safe to assume that many union heads are African-American.

    So, the question is: Since you claim Detroit to be a black city, was there not enough consent and representation to able
    to run and to right the ship before going to receivership? Or perhaps, this governor who happens to be GOP and white decided
    that the city needed outside intervention that the internal machinery of the democratic process of Detroit was broken.
    By the way, apples are also red.

  5. James Wimberley says

    The money quote is this: “The United States shall guarantee to every State in this Union a Republican Form of Government.” It’s unconstitutional to elect Democrats.

  6. Ebenezer Scrooge says

    I dunno about this local democracy stuff. A few points:
    - Skepticism about localism goes all the way back to Madison’s Federalist #10 (IIRC.) In most developed countries, the national level of government is the least corrupt; intermediate levels intermediate; and local levels the most corrupt. There are some squeaky-clean local governments (e.g., Montgomery County, MD), but they’re more the exception than the rule.
    - The US Constitution has no theory of local governments. As interpreted by the federal courts, local governments have no US Constitutional rights, and little-to-no sovereign protection. Many states, however, give local governments extensive constitutional protection.
    - Also as interpreted by the courts, local government is a permissible mechanism for ensuring that rich people don’t pay for the services that go to poor people.
    - As a number of jurisdictions have discovered, voting is a splendid way of ensuring non-representative government. The formula is simple: 1.) Have strange election days for local officials to ensure low turnout; 2.) Eliminate partisan designations to obscure candidate positions (not necessary in one-party municipalities); 3.) Have a decent political machine that can get enough votes. This is the argument for mayoral control over education–mayoral elections have salience; school board elections do not.
    - Democracy is a lot more than voting. One of the problem with poor municipalities is that they do not have the necessary supporting institutions: public-minded moneyed elites, a chattering class, organized groups of voters and taxpayers, a functioning bureaucracy, etc. These institutions exist, in most states, at the state level. They’re spotty at the local level.

    Finally, this “black elected official” stuff is so 1960′s. Yes, Coleman Young was awful, and frequently shouted “Ungawa!” to conceal this. But the current run of black elected officials is decent enough. (You still have a few black elected officials who shouts “Ungawa!” to conceal relatively conservative policies, but that’s 1980′s politics.) Bing would probably be fine, if he hadn’t inherited a bankrupt city.

    • NCG says

      This: “Also as interpreted by the courts, local government is a permissible mechanism for ensuring that rich people don’t pay for the services that go to poor people.”

      Ime, very little happens by accident.

  7. koreyel says

    In most developed countries, the national level of government is the least corrupt; intermediate levels intermediate; and local levels the most corrupt. There are some squeaky-clean local governments (e.g., Montgomery County, MD), but they’re more the exception than the rule.

    This is a fascinating observation. And if it has been supported by study, it says something incredibly interesting and fundamental about humanity:

    In “Better Angels,” Pinker identifies four “better angels”—self-control, empathy, morality, and reason­—which are constantly at odds with our five “inner demons”­—sadism, revenge, dominance, violence in pursuit of practical benefit and violence in pursuit of an ideology. Pinker argues that while the fundamentals of human nature have remained unchanged, institutional forces such as democracy, effective policing, a fair judicial system, and free commerce have gradually succeeded in suppressing our inner demons.

    http://www.thecrimson.com/article/2011/10/4/pinker-violence-human-psychology/

    • NCG says

      In today’s LAT, I read that the Cali Leg is considering relaxing requirements on public access to records. A bad move.

  8. EB says

    Detroit as a jurisdiction doesn’t have enough people to support its infrastructure (in addition to the skewed income distribution of the people it does have). Publicly-owned art collections are equivalent to infrastructure. In rural areas where the population is declining, counties are having to make the difficult decision to stop paving secondary roads. It’s causing huge outcry (insofar as counties with fewer than 20,000 people can make an outcry that’s heard elsewhere. At least art collections can be sold for big bucks, unlike crumbling asphalt.

  9. Barbara says

    A few points: My understanding is that the art collection is held in trust for the state of Michigan; which is to say it is a “public asset” for a larger political jurisdiction than the city of Detroit. Five years ago I would have agreed with you wholeheartedly but now I see that there is an entire class composed of people who would loot the rest of us to make an additional 1 penny on the dollar so that now, I appreciate what few restraints remain in place to prevent them from making our lives even more squalid and precarious than they already are. This might not have been the intent of the organizers of the DIA but so what. In addition, you seriously underestimate the ease with which a museum can sell off its collection — look at the example of Brandeis University. As soon as it even contemplated going down this road, donors raised their hands and asked for their donations back, for nothing, because selling them to raise funds was not the intent of the donor. The rule of law is such a bitch, but I don’t think our lives are better off if we keep ditching it when it seems convenient. It just means all of us have become that much more vulnerable to predation.

    Second, public pensions are a nightmare. It isn’t the fault of the workers and retirees, it is the fault of states, and perhaps the federal government, for not requiring the same kind of funding levels to be in place for municipalities in order to ensure that funds will be there when needed. It’s not the benefits per se that are the problem, it’s the fact that Detroit promised and then never put money away to fund them. I have tried to think of a federal fix, and the best I can come up with is this: A municipality will be unable to take advantage of tax-exempt municipal bond offerings if its retiree plans are not funded to a certain level with actual money and assets. That would prevent the municipality from incurring debt in the first instance, and hopefully, calibrating its pension promises with shorter time horizon for when it might actually have to pay the piper if it is underfunded.

    • byomtov says

      You make a good point with repect to the funding of pension plans, but I think this is one area where there is blame to go around, and a fair share goes to the unions. Retirement benefits are part of a union contract after all, and negotiators might have insisted on a proper funding scheme. Probably, that would have meant giving some ground elsewhere – on wages or the scope of benefits or something else, but it could have been done. Similarly, I’d guess that government negotiators were only too happy to make future concessions in exchange for immediate ones: “OK, we’ll go up 10% on the pensions in exchange for giving you a smaller raise next year.”

      It’s a natural human tendency. Get the deal done today and maybe all that other stuff won’t happen, or if it does it’ll be someone else’s concern. I suspect there was a lot of that going on in those negotiations, all around the table.

      • Barbara says

        There is a very good parallel private comparison here, and that is the requirements for adequately funded private pensions. I understand that they are slowly disappearing, but the to the extent they exist there are funding rules in place they have to meet. The consequences of not meeting them can be dire to the plan sponsor. There is also an insurance mechanism in place through the PBGC. Any of these measures can be replicated at a state level for ensuring that municipal pension plans are not grossly underfunded — indeed, simply requiring insurance would likely cause the funding situation to improve because insurers won’t provide it if the pension is underfunded.

        Blaming human frailty is not going to get us anywhere. I will stipulate that everyone is responsible to the same extent I stipulate that everyone likes the prospect of eating unlimited quantities of fattening food without gaining weight. The point is to make rules that either keep it from causing dire consequences or that make the short-term consequences as unpleasant as the long-term consequences. It’s probably past time for Detroit, where the outcome is going to suck no matter what we do.

        • byomtov says

          Yes, it would be nice if there were stronger rules about funding pensions and other retirement benefits. This is also true of private pensions, many of which are underfunded, and which I think ae not as well-protected by law as they should be.

          But in the absence of such rules it seems to me that the negotiators had some obligation to be sure that the contract provided for proper funding. If you know you have no statutory protection, then get contractual protection.

        • Cranky Observer says

          Well, those rules about funding private pensions were nice, but apparently not as strong as those who drafted them (or the workers who contributed to them in good faith over periods of up to 50 years [1]) believed. You may recall the saga of young Willard “Mitt” Romney, the Bain consultant, who formed Bain Capital with the express purpose of acquiring firms to crack open those pension investments and perform “cashectomies” on what they deemed “surplus” funding. That the “surplus” funds were required for long-term health in an up-and-down economy mattered not to young Mitt; when my family members and neighbors were left destitute in their old age that was perfectly square with his vision of Christian morality. So yeah, strong funding laws are good, but they do create funds that are irresistible to certain types of people…

          Cranky

          [1] for at least one of my neighbors

          • Barbara says

            You’re right, a big pot of money is irresistible to all kinds of people. In some cases, companies are targeted because there is a perception that their benefit plans are overfunded, so that they can be terminated, etc. Yep. But if there is never any pot then the benefits are all but illusory for any community that isn’t continually growing. As with social security, the temptation is strong for a legislature to act as if the money hasn’t been committed and use it. But, importantly, that’s kind of what they have been doing — by using current funds for other things and not putting it away for pension benefits. There needs to be a kind of near term if not immediate cost to doing that, and being stymied in tax preferred financing would definitely provide current pain to municipalities because they would have to pay more for taking on additional debt. It’s not perfect by any means, but it at least keeps the issue squarely on the table, instead of under it.

  10. alkali says

    As a technical legal matter the City of Detroit may be the ultimate legal owner of the art in the DIA, but in point of fact the DIA has operated over the past several decades in a quasi-independent fashion, roughly comparable to most other significant urban art museums which operate as private nonprofits. The art in the DIA was for the most part given or paid for by the donors, visitors, and volunteers of the DIA. Selling that art to retire the city’s debt would be an enormous betrayal of trust. By comparison, if the city had shelled out big bucks for some Rembrandts to decorate city hall, by all means they should go on the auction block.

    • ShadowFox says

      Much of the art that has been donated or purchased with specific endowments cannot be sold because of conditions attached to those funds/items. We go through these convulsions periodically, but generally court decisions have sided with the donors and the trusts, not the recipient charities. This is the same reason why much donated art goes into rotating storage and loans to other collections while the centerpieces of the collection are the pieces purchased by the curators (with general funds). Furthermore, many collections are thematic, not merely assemblages of important pieces of art. What might be estimated to be an expensive local collection would either raise a pittance at a public auction or go into the hands of private collectors and disappear forever. Third, as has already been pointed out, much of the collection is held in trust either for the state of Michigan or the ostensible donors of the pieces and the trustees, not the city manager would have to sign off on the sale.We’ve already learned that GOP city managers are idiots when it comes to trust property and always try to sell items and land that is not theirs to sell. And, again, courts will side with the trustees. The bottom line is, as much as Republicans are salivating over this, the sale is DOA. Furthermore, the only reason other public museums might be involved is to prevent the collections from ending up in private hands. I can’t imagine many curators being happy about this because they can easily envision themselves to be next, if this public idiocy manages to set the precedent.If the conservatives’ caricature of the liberals’ motto is “Steal from the rich and give to the poor”, the caricature of the US conservatives’ motto may be “Steal from the public and self-deal”.

      • Barbara says

        A well-managed and reasonably prosperous museum will actually turn down donations for this reason. Any donation needs to be insured, well-stored and in some cases conserved in order to prevent deterioration, all of which can be expensive.

        The thing is, I think the position of the museum association is somewhat extreme — there are private museums that, literally, will have to fold and go out of business if they can never sell art — but then something like this happens and I appreciate that they understand all too well how tempting it can be to sell an asset for short-term gain and long-term loss.

  11. Marc says

    You don’t build things like great museums overnight. But you can destroy them quickly, and you won’t be able to rebuild them. Selling off the museum collection is a way to make the city a permanently worse place for the sake of short-term gain; it’s the equivalent of advocating that cities solve their fiscal problems by selling off their parks.

    And the fact that it is very likely to end up being used to pay off outside bond-holders, while leaving the employees shafted, just adds to the insult to the people of the city.

  12. mwilbert says

    There are a number of questionable statements in the original post. I’m not going to take them in order.

    1) The idea that the bondholders are going to be held harmless while the pensioners take large haircuts is completely unclear. The initial proposal from the EM is literally offering pennies on the dollar for the unsecured debt. It isn’t clear that the pensioners are going to do worse relative to the unfunded portions of their pensions, and I have seen no one is talking about reducing the funded portion. There is some disagreement as to what portion is in fact funded in each of the two main pension funds.

    2) The DIA (like most museums) does have a lot of art it doesn’t regularly display, but the notion that is it worth a lot of money is wrong. The high-value pieces are on display.

    3) The quoted passage of the Constitution guarantees representative government in the states, not in municipalities. The Constitution says nothing about municipalities at all, so far as I can recall. Cities are creatures of the state, and are governed by state law. The people of Detroit have not been deprived of the state or federal representation, nor has Michigan ceased to have a representative government. On the other hand, there is a plausible (not to me) argument that the emergency manager law conflicts with the Michigan constitution, and the ACLU is claiming (also implausibly) that the way it was enacted conflicts with the Voting Rights Act, and in addition the current law was passed immediately after its predecessor was voted down in a referendum, which is certainly a questionable (but apparently legal in Michigan) process.

    4) If you were rebuilding a city after a disaster, is the first thing you would do fund retirees’ pensions? The pensions have little or nothing to do with feeding or sheltering the city’s people as relatively few pensioners live in the city. In fact, the city budget in general has little to do with either of those things.

    5) Maybe the people of Detroit would vote to sell off the DIA collection in order to make sure pensions were funded, but I hardly think that is obvious. Again, not that many of the pensioners live in Detroit. Also, I would guess that many of the people who are least interested in maintaining the DIA also don’t vote. Dedicated property tax support to the DIA passed overwhelmingly in the city last year.

    6) No, a museum’s assets are not there to provide financial security in hard times. That is a very peculiar idea.

    Implicit in the whole piece is the idea that somehow having an emergency manager is worse than the alternative. The alternative is bankruptcy–that is likely in any case–but instead of bankruptcy under the control of someone who is at least expert at the process, under the control of one or more members of the Detroit political class, which has no demonstrated competence at anything. I’m reasonably sure that the EM is the better approach.

    • Brett Bellmore says

      Bankruptcy under Detroit’s political class would be nothing more than a final looting of the city’s assets. The level of corruption there is virtually unimaginable to anybody living in a functional area of the country. The chief of police’s ceiling literally fell in during a press conference once, because it had too many bags of money stuffed into it. That would have been considered heavy handed in a Leslie Neilson movie.

    • mwilbert says

      I mis-thought in point 3. It is the NAACP, not the ACLU that is claiming a violation of the VRA.