What Should Detroit Mean to the Rest of Us?

When Detroit filed for protection under Chapter 9 of the U.S. Bankruptcy code on July 18th, a shockwave spread through local and state governments across the United States.  The first reaction was, "Could this be our future?" followed by, "Never!  Detroit is unique and will not be replicated anywhere else."

            Detroit could represent the future of other communities around the country, but  it doesn't have to.  If the leadership class in other communities has the courage and foresight to get real about the size and scope of government activity and the need to adopt a stance friendly to taxpayers and those who create economic growth, their cities and states can avoid Detroit's fate.  As far as the second reaction goes, we need to say, "Not so fast!"

            Detroit, while clearly the largest and with $18 billion  of debt, is only one of twenty-one municipal government agencies to file for protection under the bankruptcy code in the last four years.  I strongly suspect that there will be many more to follow in the near future. 

            Most of the municipal agencies collapsed under the weight of pension obligations.  These were the result of promises made by a generation of politicians, who figured that a future generation would be left to figure out how to pay for their promises.  Well, now the original generation of leaders has passed from the scene and the current generation has found--to their horror--that the available financial resources don't even come close to covering the cost of those promises.

            Detroit added  additional complications.   First, Detroit built its entire economy around the Big Three auto manufacturers.  When they went into decline, Detroit's economy declined with them.  Second, the Detroit city fathers adopted a set of policies that could be charitably described as taxpayer-unfriendly.  Taxpayers who could afford to leave did so in large numbers, taking the city's tax base with them .  Corruption grew to rampant proportions.  Public officials must understand that you can't abuse and demonize taxpayers and then tell them that they have a moral obligation to stay and take more if the same treatment.  Only the most abject masochist would stand for that!

            What does this mean for Illinois and the 5,000-odd taxing districts within its boundaries?  Will Illinois go bankrupt?  Absolutely not!  It couldn't even if it wanted to!

         The United States Code, which governs all bankruptcy petitions, does not provide the means for a State to declare voluntary bankruptcy or for its creditors to force it into involuntary bankruptcy. 

            Does that mean that Illinois cannot become insolvent?  That's a very different question.  Illinois could become insolvent in that it would stop paying its bills.  Many people argue that Illinois has already reached that point.  Would we wake up some morning and find that the State's checks are bouncing?  It wouldn't happen that way.  What would happen is that State agencies would begin take longer and longer to pay more and more of their bills.  If you're a health care provider, you've noticed how long the State takes to pay bills incurred by Medicaid patients,  Many providers refuse to accept new Medicaid patients.  There is nothing to prevent that from being replicated with many other suppliers of goods and services to State agencies.  I suspect that the tipping point would occur when a major supplier concludes that it's receivables with the State of Illinois are unlikely to be paid and is forced to disclose on its filings with the SEC and its annual report to stockholders that it has reclassified them as uncollectible.  That would send a shockwave through the State's suppliers.  Many would soon provide goods and services to the State on a cash-and-carry basis, only.

            Another dimension of this is payments of state aid to local taxing districts.  I wonder how many Counties, Cities, Villages, School Districts and other taxing districts have given any thought to what they would do if payments from the State were delayed or reduced?  How much of a property tax increase would their residents accept?  Here in Kendall County, where we already have the highest property taxes in the Illinois, we could expect resistance to be significant and appear early.  We might experience a rash of municipal bankruptcies greater than the one in California. 

            One last note on the Detroit bankruptcy.  There were two court rulings that received limited attention in the media outside Michigan.  In the first, a State judge attempted to halt Detroit's bankruptcy filing, ruling that it violated the Michigan statutes and constitution.  A federal judge overruled her, saying that, once the bankruptcy petition   had been accepted by the federal court, the State no longer had jurisdiction.  If you think the state laws and/or constitution afford protection, you may be in for a painful awakening.

            Does Illinois need to go down the same road?  We could, but that's not inevitable.  We still have time to get serious about government spending.  We need to pass meaningful pension reform.  We need to move away from the insistence that "...we need a strong public sector before we can have a strong private sector."  We need to reverse our net loss of one taxpayer every seven minutes.

            Let's look at each of these.  The State government needs to reduce spending.  This must be replicated at the County and local level.  We should restructure our system of taxing districts.  We have more of those than any other state.  They are overlapping and duplicative  and generate billions in unneeded administrative overhead.  The state needs to take a hard look at the services it provides and prioritize them.  Indiana has shown us the way it can be done.  The Congress can help by giving the States greater flexibility to structure their Medicaid programs to better suit the needs of their people and by freeing the States from unfunded mandates.           

            Meaningful pension reform must include closing the defined benefit plans to new benefit accruals.  The private sector has already done this, because they have figured out that a defined benefit pension plan is not sustainable, given low birth rates and increasing longevity.  They are relic of another time when birth rates were much higher, employees stayed with one employer for their entire working livesNever and the average retiree died ten years after retirement.  That does not describe the world in which we live or are likely to live in the future.  New contributions would be directed into defined contribution pension plans.

            Illinois needs an economic climate that is competitive with neighboring States, that promotes economic growth and encourages job creation.  We need to view all policy decisions through the lens of how will this decision influence the economic climate of Illinois.  We no longer have the luxury of viewing the private sector as a cash cow to be milked to feed a growing public sector.  In fact, without a strong, vibrant and growing private sector, we will not be able to afford a public sector, strong or otherwise.

            2014 will be a critical year for Illinois.  The choices we make will determine if we pull Illinois back from the brink of economic, financial and social collapse or whether we go over the brink.  Do we want to find out what happens if taxpayers leave the state even faster than one every seven minutes?

            When you think of Detroit, think of a place where a majority of the housing units are vacant, where most blocks have only one or two buildings standing on them, where a majority of the ambulances and fire trucks don't run and where a severely understaffed police force takes 58 minutes to respond to a 9-1-1 call.  Think of a place where 47% of the adult population is illiterate, where over 60% of the people have left and where those who remain are the ones who are unable to leave.  After 52 unbroken years of leftist governance, think of Detroit as the endgame of that set of policy choices.  Think of it as Illinois' endgame if we don't change direction in the very near future!