detroit in distress
TRANSCRIPT
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Detroit in DISTRESS
HOW A MUNICIPALITY RECOVERS FROM BANKRUPTCY
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SOLVING THE CRISIS
i. Municipal insolvency trendsii. Counter-example of Harrisburgiii. Collaboration in Detroit
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RESEARCH QUESTIONS
1. What political and economic factors affect the fiscal recovery of a municipality?
2. What political structures are conducive to financial recovery for insolvent cities?
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Bankruptcy Developments1934 - 2010
Local governments given right to negotiate with their biggest creditors, 1934Most municipal bankruptcy filings are for single-purpose governmentsGlobalization and automation cause America’s “Rustbelt” cities to decaySince 2010, greater number of Chapter 9 filings by general-purpose governments
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State Involvement Monitoring Measures:State-wide elected auditors Independent agenciesAdvising
Active Measures:Supplying state aidEnforcing state regulationsOrdering mergers with financially stable municipalities
States hold the power to authorize a municipality’s Chapter 9 bankruptcy filing
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Harrisburg, Pennsylvania
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What Happened in Harrisburg?
Closing factories, faulty investments, failed venturesChapter 9 Bankruptcy sought by city councilThen-governor Ed Rendell joined state and business leaders in oppositionPA acted under the inefficient Act 47 of the federal bankruptcy code
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Nearly 25% of the municipalities that have
entered this type of recovery program have remained there
for over 25 years.
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What Actually Happened in Harrisburg?
Bankruptcy and state intervention seen as competing solutionsChapter 9 claim filed over resistance of city mayor – and dismissed six weeks laterCreditors opted for out-of-bankruptcy solutionThreat of filing induced creditors and officials to come to resolution
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Detroit, Michigan
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THE CAST
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Detroit Emergency Manager: Kevyn Orr
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Governor of Michigan: Rick Snyder
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Federal Mediator: Gerald Rosen
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Federal Bankruptcy Judge: Steven Rhodes
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Takeover Board Controversy
State-appointed managers see power increaseAs a rule, come from outside of cityUnelected but hold significant influenceLimiting democracy?
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Detroit in Poor ConditionRapidly decreasing property values and depopulation translates to smaller tax base
Municipal services cannot be cheaply provided for few remaining residents
Growing pension liability program
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How Conditions Got WorseDetroit protracted certificates of participation with retirement service corporationsEntered floating interest rate swap agreements2008 - steep decline in interest rates
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$350 MILLION
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Bankruptcy Approval December 2013, Judge Rhodes granted Chapter 9 protectionsLack of secured pension funds nearly blocked city from eligibilityFunctioning at tax rates close to maximumsContinued payments to creditors during bankruptcy proceedings
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$18 BILLION
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The Detroit Institute of Arts
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DifficultiesOfficially under city ownershipOption of selling or leasing collections to repay debtorsOpportunity cost of cultural and educational opportunities
“[Selling the artwork] would represent such a defeatist position to be in, and I don't think the city could have ever
recovered from that.”
-Name
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SEPTEMBER 11, 2014 - THE NEW YORK TIMES
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SEPTEMBER 15, 2014 - DETROIT FREE PRESS
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The Grand BargainExited bankruptcy November 7, 2014Creditors agreed to accept reduced amountsInvolved collaboration between: Emergency manager Federal mediator Governor Creditors DIA Foundations Retirees and labor unions
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DIA in the Grand Bargain
DIA artwork and grounds transferred from the city to a non-profit trust
Money donated by foundations and supporters on behalf of the museum will go to city pensioners
Newly independent DIA required to raise an additional $100 million
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Citizens’ VoiceGreat importance placed on residents’ needsJudge Rhodes treated residents as creditors themselvesRetiree associations urged pension holders to compromise
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Compromise RealizedGov. Snyder urged Congress to give aid $7 billion of debt forgiven$1.7 billion in funds for 10-year recovery plan
“A coalition of foundations, state government and the DIA pledged the equivalent of $816 million over 20 years as a proxy for the value of the museum.” – Detroit Free Press,
November 8, 2014
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Changes Seen in One Year
Relaxed zoning lawsHomicide rate dropped by 18% percentpolice response dropped from 58 minutes on average according to less than 18 minutes Improvements in street lighting - 40% of street lights broken in 2013
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RESEARCH QUESTIONS
1. What political and economic factors affect the fiscal recovery of a municipality?
2. What political structures are conducive to financial recovery for insolvent cities?
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What’s Next?Plan of Improvement in placeOrr returned control to elected officialsInfrastructure renovationsStrict monitoring by state-appointed commission
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Gillette, Clayton P. "Dictatorships for Democracy: Takeovers of Financially Failed Cities." Columbia Law Review 114.6 (2014): 1373-462. Academic Search Complete. Web. 30 Oct. 2014.
Moringiello, Juliet M. "Goals and Governance in Municipal Bankruptcy." Washington and Lee Law Review 71.1 (n.d.): 403-85. Academic Search Complete. Web. 30 Oct. 2014.
Morrison, Fred L. "The Insolvency of Public Entities in the United States." The American Journal of Comparative Law 50 (2002): 567-79. JSTOR. Web. 12 Nov. 2014.
Shanks, Sanders, Jr. "The Municipal Bankruptcy Act (Sumners-Wilcox Bill)." Ed. Thomas H. Reed. The American Political Science Review 28.6 (1934): 1072-074. JSTOR. Web. 12 Nov. 2014.
Wagner, Richard E., and Robert D. Tollison. Balanced Budgets, Fiscal Responsibility, and the Constitution. Washington, D.C.: Cato Institute, 1982. Print.
New: http://www.bloomberg.com/news/articles/2013-03-14/only-wall-street-wins-in-detroit-crisis-reaping-474-million-fee
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