Double Whammy

Confronting social inequality is harder when a city is struggling.

By Frank Shafroth

New York City Mayor Bill de Blasio described social inequality in his inaugural address as a “quiet crisis” on par with fiscal collapses, crime waves and terrorist attacks. He said income disparity was a struggle no less urgent to confront.

Unfortunately, it’s not being confronted, especially in cities where the “quiet crisis” is leading to bankruptcy. These cities have disproportionate levels of poverty, minorities, crime and deteriorating tax bases. With each attempt to balance their budgets, they are forced to reduce essential public services. That, in turn, leads those who can afford it, to leave—further exacerbating an eroding tax base and forcing even more cuts in essential public safety services. Each round of departures results in a smaller and poorer population and tax base.

That bleak spiral is playing out in Detroit, where the city is destitute, overwhelmed by legacy debts and far less able to compete in our 21st-century economy. In his first address to his city, Detroit’s newly elected Mayor Mike Duggan urged citizens considering moving out of the city to hold off for six months to give him, his administration and the new city council a chance to demonstrate measurable improvements in quality of life. “Give us six months and let us prove to you what we can do,” he said.

But it’s not clear that Duggan will even be given a fair chance to help make things right. As the new mayor was taking office, the state of Michigan and representatives of Detroit’s thousands of creditors were meeting behind closed doors to negotiate the future of Detroit. No party responsible for a sustainable future for the city—and that includes Duggan—was invited. Moreover, the current federal municipal bankruptcy law provides that the path to exit municipal bankruptcy is through approval by a federal court of a plan of adjustment that fairly apportions the “haircuts” among all of a city’s creditors. The federal law similarly excludes a city’s future economic viability or sustainability as a factor.

Nearly a half century ago, President Lyndon B. Johnson created the Kerner Commission while race rioting was underway in Detroit and other cities to investigate the causes. Upon signing the order establishing the commission, Johnson asked for answers to three basic questions about the riots: “What happened? Why did it happen? What can be done to prevent it from happening again and again?”

The issues those questions raised about links between despair and unrest are relevant today, since there is a sharp diminution in both federal and state programs to address disparities—like general revenue sharing and state revenue sharing programs. While the federal government and the states have broad economic and tax bases, cities and counties increasingly do not. Chapter 9, the federal municipal bankruptcy law, used to be a key tool for municipal utilities, special districts, villages and school districts. Abruptly, in this decade, it has become a vital lifeline for major cities and counties from Jefferson County, Ala., to Stockton, Calif., to Detroit.

It is not clear that the “lifeline” is up to the job. There is a profound risk with the unprecedented number of larger cities that are in or have just emerged from municipal bankruptcy of going right back into a depressing economic cycle. That’s because the current laws (including state enabling statutes) do not take into account that large urban municipalities are very, very different from agricultural or conservation districts.

Nor do they offer the city much room for growth. Bill Nowling, the spokesperson for Detroit’s emergency manager, described the city’s secret negotiations with its creditors in New York as “three-dimensional chess,” with each of the city’s creditors intent on fighting to oppose any outcome under which they might take less. Key players include not just the city’s unions and retirees, but also its bond insurers, water and sewer bondholders, and other governments in the greater Detroit metropolitan region. Not at the table, of course, were Detroit’s citizens, taxpayers or its sustainable future.

Reprinted with permission of GOVERNING, copyright @ 2014. http://www.governing.com/

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