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Bankrupt in Detroit: What It Means for America’s Struggling Cities

Posted August 14, 2013

Detroit may be three time zones and more than 2,000 miles away, but struggling cities in California will keep close tabs on its high-profile bankruptcy proceeding. In the state and across the nation, said Berkeley Law assistant professor and local government expert Michelle Wilde Anderson, cash-strapped municipalities have a vested interest in Detroit’s fate.

“The issue of whether state or federal labor law applies will have huge implications for those cities,” Anderson explained. “If the bankruptcy court applies federal labor law to a city’s collective bargaining agreement, it means public employees could have their contracts modified. The other major issue to resolve is bankruptcy eligibility, including the requirement of negotiating in good faith before filing.”

Anderson notes that “everyone agrees Detroit is insolvent.” But she predicts a “vicious fight” on whether the city gave creditors sufficient opportunity to reorganize their contracts before filing for bankruptcy. “That will be a pivotal determination by the court,” she said. “What happens in Detroit may become the most influential precedent on the matter.”

Other daunting challenges facing the court include the scale of Detroit’s debt, its large number of creditors, and the deep service needs of city residents. Because public services have been underfunded for years, those needs have accumulated—generating a troubling backlog of unmet obligations.

Detroit’s dire task

In Detroit, major layoffs have led to an average police response time of 58 minutes after calling 911 for an officer. More than 15,000 violent crimes and 500 acts of arson occurred in the city last year, just 30 percent of streetlights are operational, and there are 80,000 abandoned and blighted structures Detroit cannot afford to demolish.

Anderson, however, cautions against having creditors bear the sole burden of improving city services. In a recent Los Angeles Times op-ed, she wrote that many of Detroit’s creditors “are rank-and-file public employees and retirees who have counted on a public pension and are not eligible for Social Security.” Anderson warns that a misguided bankruptcy plan could see them spiral into poverty as senior citizens.

Without any state or federal government funding help for operating costs, the bankruptcy court will have to determine whether Detroit can reduce current services more than it already has. In that scenario, residents will be pitted against creditors for a share of city revenue.

“We need more research and public debate on how cities can recover and balance these interests,” said Anderson, who described key factors driving urban decline in a recent Yale Law Journal article entitledDissolving Cities. “Because our national economy relies on metropolitan health and innovation, we have a collective interest in our population centers.”

A troubling trend

While Detroit is the largest U.S. city to file for bankruptcy, 25 other urban municipalities have gone into bankruptcy or state receivership for fiscal insolvency since 2008. Anderson is immersed in a detailed research project on the legal proceedings in these cities.

Despite signs of economic recovery nationally, she said the recession will persist much longer in reeling jurisdictions because of Proposition 13 in California and similar measures in other states that curtail property tax revenue. “These measures tag the assessed values of properties to the time of last transfer,” Anderson explained. “The housing crisis launched the recession, and the bottoming out of the housing market means local governments face an uphill financial climb.”

In the face of contractual obligations to pensioners, bond holders, and tort creditors, the issue of what minimum level of public services should be guaranteed for U.S. cities remains hotly debated. To date, the law has not set any concrete standards for minimum adequacy.

As financial woes prompt a growing number of American cities to consider bankruptcy or disincorporation, Anderson believes “what happens in Detroit will have a profound impact on other cities facing similar hardships.”

Source: UC Berkeley

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