Detroit is officially the largest city in U.S. history to declare bankruptcy. Judge Steven Rhones gave permission to its operators to begin looking for ways to put the scissors to public accounts in order to balance them and reduce massive debt.
All this happened while fears of a revolt from the workers, who are likely to see how their salaries and pensions are cut because of the rampant corruption that governed over their state for decades.
Employees should have little comfort on the fact that big fat cats such as Warren Buffett see Detroit an opportunity to direct his money and to help revive the metropolis. Furthermore, this initiative should be a cause of concern, because when a big fish like Buffett decides to put his money on anythin, it’s because he expects to see large returns at any cost.
Detroit’s example is a similar case to what happened to Greece and Cyprus in Europe, where so-called foreign investors went in after the financial collapse to buy everything for pennies on the dollar.
As informed by the union representing municipal public employees, the situation is “dire” and its members are “concerned about whether they can keep their homes.” The conflict therefore is served.
The public sector, as indicated through the union that it “does not have the same protections” that is enjoyed by the private sector before the current events began to unfold. That is why they have said that it is their intention to appeal the decision made by Rhones because they believe it violates the Constitution of the State of Michigan and their rights.
But in view of the degradation experienced by the birthplace of the automobile, the judge’s opinion was not a surprise. In fact, he described the current situation as “dangerous.”
If the bankruptcy process does not go ahead, he warned that the residents of Detroit will be “severely affected”. Even the Mayor, Dave Bing, said he understands the frustration of the citizens. But Mr. Bing is leaving his office in a few weeks.
His successor, Mike Dugan, the first white mayor in four decades, will have to deal with the mess that has been accumulating for about the same period of time. His challenge will be to recover the prosperity that the city enjoyed and to do something about the astronomical debt. As of right now, Detroit reports an accumulated debt of $18.5 billion.
The accounting is a reflection of what happens in the street. Detroit is a depressed city. It has half the population that it had six decades ago, some 700,000 inhabitants. Unemployment is conservatively at levels that triple those of 2000, more than 18%, with 47% of the properties not paying municipal taxes on time. The non-payment, in many cases is due to the fact people have abandoned their homes to move elsewhere.
The lack of public funds is translated in worse public services, with police taking as much as one hour to respond to emergency calls. Many city neighborhoods have no public light service, which make the city scene appropriate for shooting any scene from The Walking Dead. A recent episode of Anthony Bourdain Places Unknown provided a reality check about the state of affairs in Detroit, with commercial real estate of a once booming city now crumbling down at the rate that mother nature imposes.
“This is the day in the history of Detroit that nobody wanted to see,” said Dugan after learning of the decision to let the city go into bankruptcy. He tried to make a nod to pensioners, saying that he will seek to have them “treated fairly”. But he admitted that at this time it is necessary to make adjustments so that the city can afford to pay for basic services that citizens deserve.
As judge Rhodes said, Detroit today is “insolvent” and is not able to generate the income necessary to meet its obligations. He added that the goal of imposing a financial manager was to restructure the accounts so that the city can emerge from bankruptcy by 2014. This plan will require an agreement with the city’s 100,000 creditors and the reduction of spending without reducing public services.
“We now have the opportunity to begin again,” Rhodes said. Detroit has dragged problems from six decades ago, when it was the fourth most important town in the U.S.. Its future became uncertain with the recent crisis, which severely hit the auto industry.
In July, the governor of Michigan took the first step to adopting bankruptcy. The restructuring plan must be submitted by March 1.
Although Rhodes’ decision to go ahead with the process of bankruptcy was no surprise, most mainstream experts and commentators did not expected it to be so blunt in regards to employee pensions.
But for those who watched from outside, the cuts in salaries and pensions was just a matter of time. After all, it had happened in Greece and Cyprus just a few months earlier. According to the judge’s statement, pension and salary protection legislation was not applicable at this time.
Judge Rhodes also said he recognized that the city did not negotiate in good faith. But at the same time noted that the unions were quite stubborn and that such behavior prevented a realistic agreement. As a result, Mr. Rhodes authorized bankruptcy and accepted that the pensions and salaries were cut.
Unfortunately for employees in the United States, Detroit’s way to deal with the crisis will serve as the model to be followed by other cities such as Chicago and New York, which have been dragging financial problems and that are on the way to cutting pensions and salaries as a way to decrease their debt problems.
In the Big Apple, Mayor Michael Bloomberg warned last summer that such obligations are a significant burden on the public accounts, which should be lowered without going to this extreme.
Luis R. Miranda is the Founder and Editor of The Real Agenda. His 16 years of experience in Journalism include television, radio, print and Internet news. Luis obtained his Journalism degree from Universidad Latina de Costa Rica, where he graduated in Mass Media Communication in 1998. He also holds a Bachelor’s Degree in Broadcasting from Montclair State University in New Jersey. Among his most distinguished interviews are: Costa Rican President Jose Maria Figueres and James Hansen from NASA Space Goddard Institute. Read more about Luis.