Opinion

The Great Debate

Why the federal government should help bail out Detroit

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Starting last month, and continuing through July, Detroit’s 170,000 creditors will vote on the terms of the “Grand Bargain” that will end the city’s bankruptcy.

Different groups are contributing to the deal: the state of Michigan, the city of Detroit, as well as philanthropic organizations including the Knight and Ford foundations. They’ll either contribute money or reduce salaries of city employees, in order to restore Detroit’s solvency and ability to pay its retirees.

So far, absent in the bargain is support from the federal government. On April 24 Treasury Secretary Jack Lew visited Detroit, raising hopes that a $100 million bailout from the government would materialize. The money would come under the category of “blight eradication,” a pre-existing federal program designated for urban renewal. The federal government is careful to avoid setting a precedent of bailing out state or municipal pensions because it doesn’t want to take on a massive liability and, in doing so, encourage local governments to make more unsustainable promises.

This is a mistake. The federal government should use Detroit as an opportunity to take a more active role in state and municipal pensions. Unless the American economy experiences unprecedented growth, future federal bailouts of state and municipal retirement benefits are inevitable. The more likely scenario of low or normal growth will make these retirement benefits a burden to all taxpayers, regardless of where they live. At some point the federal government will inevitably be stuck with the tab, either from increased political pressure or from states gaming existing federal programs.

detroit555The sooner the federal government acts, the lower the cost to taxpayers because the financial hole will only get bigger. In both the mortgage and European debt crises, the world saw how much damage an unacknowledged, but expected government guarantee can cause. Debts became unmanageable and creditors looked to the central government for bailouts. The lack of clarity caused uncertainty and wreaked havoc on financial markets. Rather than staying on the sidelines or engaging in backdoor bailouts, this time the federal government should take a more active role in shoring up state pension finances.

from Stories I’d like to see:

Regrouping for Detroit, GM’s bankruptcy evasion and Chinese corporate records

1. Kevyn Orr and a Detroit rebound?

Last Friday, I happened onto a C-Span broadcast of a speech to a national group of bankruptcy lawyers given by Kevyn Orr -- the emergency manager who Michigan Governor Rick Snyder appointed to take over Detroit’s finances and guide the fallen city through bankruptcy. Since I couldn’t stand watching the Yankees get slaughtered by the Los Angeles Angels of Anaheim, I stopped on the Orr speech for a minute. I stayed 45.

I had never seen Orr speak or paid much attention to Detroit’s troubles and his efforts to dig the city out from under. But if his talk -- riveting, funny, emotional, self-effacing, forceful, fact-filled, wholly convincing and seemingly off the cuff -- is any indication, both Orr and Detroit 2014 are big national stories.

They are worthy of coverage beyond the good work that’s been done by, among other local outlets, the Detroit Free Press, which ran this comprehensive story  last month, on the one-year anniversary of Orr leaving a lucrative partnership at the Jones, Day law firm to take on the rescue job.

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