Detroit Is out of Money

Moneybox
A blog about business and economics.
May 13 2013 3:55 PM

Detroit Is out of Money

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The General Motors world headquarters building dominates the Detroit skyline Nov. 7, 2007

Photo by Bill Pugliano/Getty Images

The fact that Michigan Gov. Rick Snyder picked a bankruptcy attorney to serve as Detroit's city manager was probably a good warning that bankruptcy was in the city's future, and now the city manager in question, Kevyn Orr, is telling people the city is insolvent.

Insolvent isn't quite the same as bankrupt in the municipal context, but he says that to avoid running out of cash by June the city will have to "defer payments on its current obligations." That includes some kind of nonpayment of Detroit's pension obligations. I am not very well-versed in the municipal bankruptcy process, but I think based on general bankruptcy principles you'd have to say this is something that has to look pretty attractive to Detroit. The city needs a way to use a much-diminished tax base to finance ongoing public services. The only way to do that is to slough-off some obligations incurred in the past, and that means obligations to retired employees and to bondholders. It's not fair to stiff people who've already put years in on the job in expectation of a pension and it's not sound practice to refuse to repay money that you've borrowed. But ultimately Detroit isn't going to be able to pay anyone anything unless it can break the cycle of population flight, tax base decline, and service cutbacks. And bankruptcy processes were put on this earth precisely to give organizations a chance to do things like that.

Of course if things get really desperate you could always try to sell the city to Omni Consumer Products to be redeveloped as Delta City (arguably, Dan Gilbert is already doing this).

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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