National Commentary Wrong About Detroit's Failure

Mismanagement, not lack of money, is to blame

Economist Joseph Stiglitz, writing in the New York Times Opinionator blog, argues that Detroit has fallen due to economic losses and that bondholders should accept most of the losses in the city's bankruptcy. He's wrong on both counts.

Detroit has suffered through decades of bad public policy and filed for bankruptcy after serious and acute mismanagement. The city is unable to provide the quality basic services that every other municipality in Michigan has been able to offer. The city has been unable to manage its books, balance its budget, and adequately manage its contracts either with unions or its private vendors.

Its delay in fixing these problems meant borrowing to pay for current expenses without an adequate plan to pay down that debt. This includes the city's general obligation bonds, its borrowing to make pension contributions, and the city's underfunding of its pension plans.

The amortization payments on unfunded pension liabilities requires the same cash that can be used for operating expenses or bond payments. The city has to pay down this debt like the rest. That's why Detroit Emergency Manager Kevyn Orr's original proposal puts unfunded liabilities through the same process as the rest of the city's unsecured debt.

The proposal may be tweaked as a bankruptcy judge hears arguments and mediation proceeds, but holding harmless the holders of a substantial portion of the city's debt is irresponsible when debt payments are expected to exceed 60 percent of the city's operating revenues within five years. Even with the substantial restructuring going on in the city, it will be unable to make the payments on city debt.

This problem does not require more revenue. The city already receives more state money than every other municipality and the city has special revenue sources — like its casino taxes — that no other government receives in Michigan.

The substantial economic problems in Detroit certainly are a problem, but it's not the primary one. Plenty of other cities are in a tough spot but manage to pay their expenses. Nor is it the region's fault that Detroit's leadership has been incapable and corrupt.

National commenters like Stiglitz need to take a closer look at the city's financial problems before telling a broader story.

There are many problems facing Detroit, and city policy has been a hindrance to growth, but the one most responsible for the city's bankruptcy filing is mismanagement. 


See also:

Is the Problem In Detroit Really a Lack Of Revenue?

Detroit Bankruptcy: Why the Emergency Manager Powers Were Insufficient

Former State Treasurer Diverts Blame For Detroit's Problems

Detroit's Fiscal Emergency Cannot Wait; Manager Needs To Fix Administration

Detroit Exhausts Its Options