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This post is part 2 of 2. Please see “Up in Flames: A Case Study of Harrisburg, PA–Part 1″ to read the first part.
David M. Chapinski
Chapter 9 of the Bankruptcy Code: A Solution in Search of a Problem?
The city of Detroit faces a $300 million deficit, and more than $100 million of liabilities due in 2008 still remained unpaid at the beginning of 2009. When it comes to unlocking the value of city assets for its citizens, a principal strategy Detroit mayor Kenneth Cockerel, Jr., proposes for revenue enhancement involves the leasing of city asses to unlock their value for residents and taxpayers. This practice, which has succeeded in other cities, sells the right to the income generated by city operations over a contracted period of time in exchange for a lump sum payment. This is no different than a citizen winning the mega millions jackpot and taking a single lump payment immediately instead of a series of payments over many years. This transaction allows a person to get money when it is needed most. The city is in the same situation.
Finally, bankruptcy as a narcotic catches my attention as a legal aspect to carrying the burden of borrowing.
It is the belief of Detroit that it is possible to raise significant amounts of revenue by leasing the operation of city-owned assets. We must remember that there are different points to asset management policy that all weigh on the next in order to have a municipality that works in times of uphill battles. For example, maximizing efficiency/reliability and providing optimum subsidy, which is a strategy most applicable to operational assets, utilized to provide specific, recurrent core municipal services. Maximize value/benefit and provide optimum to moderate subsidy. This strategy is applicable to community assets that are utilized to provide a broad, general benefit that enhances or improves the quality of life for residents.
When a county ‘s commission like Jefferson has a unanimous intent to file for bankruptcy it causes some of the county’s creditors to soften their position, fearful that they’ll receive only 50 percent on the dollar for their sewer bond holdings. Nonetheless, the pace of negotiations remains sluggish, and leaves us asking the question, it would be how not to, instead of how to, handle this.
Finally, bankruptcy as a narcotic catches my attention as a legal aspect to carrying the burden of borrowing. Promising things to workers that you cannot legitimately provide is not good government. Unlike Chapter 11, Chapter 9 does not benefit the creditors’ common pool problem. The premise of the ‘common pool problem’ is that in the case of a jointly owned body of water filled with fish, the invisible hand of self-interest fails to maximize joint welfare. If any one person, does not own the pool then diverse, self-interested individuals are free to fish in the pool without restraint. Thus a debtor’s insolvency resembles a ‘common pool,’ with the assets of the insolvent debtor substituted for the fish and the debtor’s creditors substituted for the self-interested fishermen. We must remember that a debtor is balance-sheet insolvent when the sum of its assets is less valuable than the sum of its liabilities.
ASPA member David M Chapinski is a Ph.D. Candidate at Rutgers, the State University of New Jersey, Newark in the School of Public Affairs and Administration (SPAA). Email: [email protected]