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OPINION - Bankrupt

by Chris Conley

NEWS BLOG (WSAU) Before Detroit filed for bankruptcy, there was Bridgeport. Connecticut’s largest city (Bridgeport is bigger than Hartford) tried to file for bankruptcy in 1991. The state fought against the bankruptcy, the mayor who filed for Chapter 9 protection was voted out of office, the petition was eventually withdrawn.

There are a few things I remember about the Bridgeport bankruptcy debate from 22 years ago.

First, there’s a legitimate question about whether a municipality that has taxing authority can ever be bankrupt. Bridgeport had a multi-million dollar shortfall. But it could have raised property taxes to cover the difference. Of course more businesses and families would leave the city – which already had the highest taxes in the state. But bankruptcy is not supposed to be about politically unpopular choices; it’s supposed to be about whether an entity is solvent or not. Bridgeport, indeed, did have cash on-hand. So does Detroit. These are filings because the future is untenable, when bonds and pensions come due.

There is also the issue pensioners vs. bondholders. It’s the second-most interesting issue in the Detroit bankruptcy. Pensioners have worked all their lives for their retirements. But they’ve been promised benefits the city can no longer afford. How much of a hit should they take? Bondholders, on the other hand, are secured creditors. They’re first-in-line to be paid. You can see the PR battle that looms. Investors are supposed to be made whole, while sick and elderly retirees get cut. Yes – that’s how it’s supposed to be under that pesky thing called The Law. The Obama Administration interceded against the bondholders of Chrysler as part of the auto industry bailout. It was a gift to union workers. All of Detroit’s retirees were also union workers.

The big question is whether there will be a federal bailout. Detroit was once America’s 4th largest city. Now 40-percent of the city’s streetlights are out and entire neighborhoods are abandoned. The White House has already helped – like with cash for clunkers – to no avail. I expect the President to offer a lifeline. They’d be acting with a purpose. It blazes a trail for future, bigger bailouts. Is the State of California next? It would send the disturbing message that state and local leaders can make any promises they wish, spend all they can, and the federal government (which simply prints money to cover its shortfalls) has their backs. There may be other Detroits in our future.

Chris Conley
7.23.13