Rob Cox: Can we Grand Bargain before going bust?

May 29, 2014

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It is Kumbaya time in Detroit. The Motor City’s bankers, labor leaders and politicians are breaking into hugs and high-fiving each other for coming together on a deal that will allow the city to emerge from bankruptcy. It’s good news, of course. But it raises a worrying question about America’s political culture: Can we ever get a grand bargain before going bust?

Don’t think that Detroit is a special case. True, its fiscal problems were extreme. And its reliance on one industry, cars, made it particularly vulnerable. But Detroit can happen here, there and everywhere. Its fate could befall other municipalities, even states, burdened by shrinking tax bases and rising obligations to pensioners.

Chicago, for instance – the most American of cities – has dismal finances and the second-lowest credit score in the country after Detroit. And what happens to a nation’s great cities may eventually spread around the country.

But first, let’s enjoy the mood music from Motown. Last week the Michigan House approved what it called a “Grand Bargain.” This will channel $195 million of aid, lessening the blow to pensioners whose benefits are being cut as part of the largest municipal bankruptcy in U.S. history. In Lansing, Republican governor Rick Snyder joined hands with Democrats. Even suburban politicos, who have long argued that Detroit’s problems aren’t theirs, pitched in.

Labor leaders joined the chorus. The United Auto Workers agreed to participate in the Grand Bargain by committing to help raise material contributions toward the healthcare costs for Detroit’s retirees. The bankruptcy court’s mediators hailed the union’s “very constructive and unprecedented effort to assist in helping work towards a secure future” for the city.

Even the supposedly rapacious bankers of Wall Street sang along. JPMorgan chief Jamie Dimon, at a luncheon in The Garden Theater – a century-old landmark that was recently brought back to life – unveiled a $100 million, five-year commitment to support and accelerate Detroit’s economic recovery. “We have been in Detroit for a very long time, and we’re here for the long term,” Dimon proclaimed. Goldman Sachs has also pledged $20 million.

As a consequence of this largesse, the city is on track to emerge from Chapter 9 protection. General retirees will be 4.5 percent poorer than they had expected when they stopped working. And they had better hope the current bout of disinflation persists, as they will lose their cost-of-living adjustments. Retired cops and firefighters will see inflation-linked increases cut in half. But the city, and all of its constituents, will get something like a fresh start.

The tragic side of the Detroit story is that it took extraordinary failure to get to this point. It required a trip to bankruptcy court, and a realization that the city’s obligations might, in any event, wind up becoming the state’s problems. That sets an ugly precedent. Detroit isn’t the first leading American city to come close to the brink, but it was the first to go over.

“People are not paying attention to the lessons of 1975,” says Richard Ravitch, the former New York lieutenant governor who was involved in New York City’s successful efforts back then to avert a bankruptcy filing. “When push came to shove, everyone did everything they had to do,” including the legislature, the governor, unions and businesses. Ravitch struggles to imagine doing that in today’s short-term and deeply partisan political environment.

The worrisome aspect to Detroit’s Grand Bargain is that it will become the de facto blueprint for dealing with fiscal crisis in America. That would risk giving politicians, labor and business leaders pre-bankruptcy cover for inaction. They could avoid unpopular choices, in the knowledge that a filing would eventually make it necessary to cut spending and close beloved programs, or raise tax rates and the cost of services.

The pity is that there are solutions to the problems facing municipalities, and even territories and states such as Puerto Rico and Illinois. But redrawing metropolitan boundaries or electoral maps requires a level of political courage that is sadly absent – and not just locally. The federal government should arguably pay big cities for some of the externalities they create but cannot fully profit from – think the buzz of Motown or the technology generation of the car industry.

If the big lesson from Detroit is that bankruptcy court is the only place to resolve knotty problems, it will be bad for other cities grappling with fiscal complexity, like Chicago. And it will send the wrong message to Congress, the only body that has done less than Detroit’s previous leaders to proactively tackle its financial problems.

Comments

well said and thought out.

Posted by piddlyopin | Report as abusive
 

“The federal government should arguably pay big cities for some of the externalities they create but cannot fully profit from – think the buzz of Motown or the technology generation of the car industry.” Really? And who gets to decide what constitutes valid ‘externalities’ and what they are worth? This is just more of the same flawed thinking that gets us into financial problems in the first place. Financial problems are financial. Detroit spent more than it received in tax revenues and the result was bankruptcy. Your piece was seemingly about political inaction, yet that statement reveals you have to examine your own bias.

Also, I’m curious why cops and firemen rate higher than other city workers? Shouldn’t the cuts have been fairly apportioned? On whose backs was this deal made?

Posted by aeci | Report as abusive
 

It is the American way to do nothing until a catastrophe occurs. Bridges are not regularly maintained until they fall down. Same goes for rails, pipelines, electric transmission lines, and highways.

Posted by pbgd | Report as abusive
 

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