Urban America has a much-needed new truth-teller; his name is Kevyn Orr.
Orr is emergency manager for Detroit – a Democrat tasked by Michigan’s Republican governor, Rick Snyder, with arresting the financial death spiral in that state’s largest city. On June 14, Orr issued a 128-page report that cut through years of official obfuscation and delivered the grim facts. Drained of resources by unemployment, debt service, high public-employee benefit costs, a declining population and inefficient tax collection, among other ills, the once-proud Motor City is now quite simply insolvent, Orr affirmed.
And it shows: According to Orr’s report, Detroit has more than 78,000 vacant structures, 66,000 vacant and blighted lots and a demoralized police force that takes nearly an hour, on average, to respond to 911 calls.
This is an unspeakably sad situation for Detroit’s 700,000 remaining residents, only a third of whom have jobs. It’s a crisis rooted deep within a city that, for many years, rose and fell economically with the auto industry – while poverty, racial segregation, crime and official corruption festered.
Wisely, Orr focused on where Detroit goes from here. His hopeful plan for the future calls for a 10-year, $1.25 billion investment in public services that would remake Detroit’s institutions. The only way to finance this plan for rebirth is to seek concessions – deep concessions – from the public-employee unions and private investors that have claims on the city in the form of pensions and municipal bonds.
This is where the rest of the country acquires more than just a rooting interest in Orr’s plans. It matters not only whether he succeeds but how. We refer to the possible default on some or all of Detroit’s $530 million in general-obligation debt, which Orr contemplates.
Backed by a jurisdiction’s full faith and credit, general-obligation bonds have been considered the least risky in the $3.7 trillion municipal bond market, upon which many state and local governments rely. As a result, general-obligation bonds enable cities and towns to borrow relatively cheaply. The Detroit precedent could undermine that, if it hasn’t already. And when borrowing costs go up, so do taxes – or services shrink.
The challenge for Orr, and the stakeholders with which he will negotiate, is to fix Detroit with minimal collateral damage – to remember that the legal positions they take and the rights they assert, in or out of a possible bankruptcy proceeding, will affect the whole country. It’s actually in the Detroit parties’ self-interest to keep the rest of America in mind, since many of the same investors and public-employee unions also have stakes elsewhere. And let’s face it, both creditors and unions took advantage of the city’s profligacy, certainly more than most ordinary Detroiters did.
We, like the residents of other major U.S. cities, can feel Detroit’s pain. But in this case, empathy must be a two-way street.