Mitch McConnell Has No Idea What Bankruptcy Actually Means

Cities should avoid bankruptcy. It hasn’t helped Detroit.

By Jodie Adams Kirshner

Professor Kirshner is a research professor at New York University’s Marron Institute of Urban Management.

  • April 27, 2020, 3:00 p.m. ET
The once thriving Brush Park neighbourhood with the downtown Detroit skyline behind it in Detroit, Michigan in 2013.
The once thriving Brush Park neighbourhood with the downtown Detroit skyline behind it in Detroit, Michigan in 2013.Credit…Rebecca Cook/Reuters

Cities across the country are facing a red-ink cascade. On April 22, Mitch McConnell recommended that cities and states try bankruptcy if they’re struggling during the coronavirus pandemic. This is a terrible idea, and we don’t need to look farther than Detroit to see why.

Although filing for bankruptcy enables a city to renegotiate debts with its creditors, freeing future revenues for uses beyond interest payments on outstanding debt, the maneuver exacerbates negative trends. Bankruptcy does not bring back lost jobs or shuttered businesses, nor will it magically reconstruct a tax base.

While some cities with resilient industries may have reserves to weather the storm, many that were already contending with unemployment, stagnant wages and rising inequality will fare worse. Officials in San Jose, Calif., anticipate losses of $110 million in revenue, three times higher in relative terms than the 2008 financial crisis. The mayor of Dayton, Ohio, has modeled a future with 30 percent fewer firefighters and police officers, while the New Orleans mayor forecasts $100 million in reductions from the city’s operating budget.

Detroit’s 2013 bankruptcy and the experiences of people who endured it demonstrate the limits of a bankruptcy declaration as a cure-all. Instead, it’s important to invest in people directly.

I got to know Miles, a man in Detroit in his late 40s, as I studied the lingering effects of Detroit’s bankruptcy.

“Everywhere you look someone’s getting sick or they can’t go to work,” he told me recently. “It’s getting thick out there, real thick.”

Already struggling to make a living in construction, he fears the loss of his livelihood, his house and his ability to afford food. Since bankruptcy, Detroit has balanced its budget by welcoming speculative property investment and levying costs on residents like Miles. A company in Florida scammed him on a house with unpaid property taxes, triggering tax foreclosure a few months after the sale. He has been juggling minimum payments on bills in a suddenly more expensive metropolis. Now, faced with the loss of more income from Michigan’s stay-at-home order, he wonders in earnest: “Could I quarantine myself at a job site in order to get work?”

In the private sector, bankruptcy only helps companies with viable business models and temporary revenue disruptions. Many have repeatedly entered bankruptcy before permanently going out of business. Similarly, municipal bankruptcy is most effective in addressing onetime debt imbalances — such as a large, outstanding legal judgment — or to cover losses on misguided investments. Declaring bankruptcy will not reverse deeper and more pervasive challenges.

Though the Families First Coronavirus Act eased some pressures on state unemployment insurance programs and augmented federal coverage of Medicaid payments, similar aid during the financial crisis was more generous. The 2020 CARES Act pledged “loans, loan guarantees and other investments” to “businesses, states or municipalities,” but that money can only be used to reimburse costs stemming from the virus. It cannot boost general revenues, Medicaid spending or unemployment insurance.

The CARES Act also provides only half as much funding to state and local governments as they received following the 2008 financial crisis. Senator Elizabeth Warren has highlighted the need for guarantees that the funds available under the act would first flow to state and local governments rather than to large corporations.

In the aftermath of the 2008 financial crisis, federal grants increased to support state and local government spending. By 2011, that spigot had largely run dry. In 2012, Stockton, Calif., became the largest city at that time to file for bankruptcy. Several hundred cities struggled on the brink of default, shrinking their public payrolls, cutting services and selling public land. Since 2007, more than 70 American municipalities have entered bankruptcy, a deluge in comparison to the three cities that chose that route between 1970 and 2007.

The choice to abandon cities to their own insufficient budgets created weaknesses that still hamper the response to the coronavirus. In the lead-up to bankruptcy, for example, Detroit reduced spending by outsourcing the responsibilities of the public health department to a private agency. To boost revenues from Detroit’s water system and leverage its value as a city asset in the bankruptcy, service shut-offs of customers with delinquent accounts surged. During the bankruptcy episode, the water department turned off water at 900 houses a day, threatening a public health crisis.

During this period, Miles found himself responsible for an unpaid water bill from the company that sold him his home. When added to the company’s unpaid property taxes, he nearly lost the house. Detroit’s attempts to raise revenues from residents, through higher taxes, fines and fees, left residents like Miles with less savings to withstand a crisis like the coronavirus.

“Isn’t the economy us that’s sitting at home, and us that have no choice but to go to work?” Miles asked.

Municipal balance sheets reflect the financial health of city residents. In Detroit, when Miles can fully realize his talents, he will pay more in city income taxes and spend more in the local economy. The future of cities lies in investing in people like him.Read moreOpinion | Darren A. NicholsDetroit Is MourningApril 2, 2020Opinion | Kenya SlaughterI Never Planned to Be a Front-Line Worker at Dollar GeneralApril 26, 2020Opinion | Rod NordlandIs the Light at the End of This Tunnel the Beam of an Oncoming Train?April 26, 2020

Jodie Adams Kirshner is a research professor at New York University’s Marron Institute of Urban Management and the author of “Broke: Hardship and Resilience in a City of Broken Promises.”

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