By: Joe Mathewson*
As the City of Chicago prepares to borrow still more to pay current bills, we taxpayers are constrained to wonder: where’s the plan to reduce the billions of debt for which we’re ultimately responsible? The total is already soaring beyond an impossible, unimaginable $30 billion!
We can learn from a new book, Detroit Resurrected: To Bankruptcy and Back, by Nathan Bomey, who covered the complex 2013-2014 court process for the Detroit Free Press. Four lessons stand out:
1. Most important, if not entirely new, is Bomey’s granular description of how U.S. Bankruptcy Judge Steven Rhodes insisted that Detroit’s multiple creditors—city employees and retirees, bondholders and bond insurers, banks holding swap agreements unfavorable to the stricken city—must reduce their $18 billion of claims to a level manageable by the city going forward. Bomey writes that at one point Rhodes rejected even a tentative settlement arduously negotiated by his nominal boss, U.S. District Court Chief Judge Gerald Rosen, serving in an unusual capacity as Rhodes’s chief mediator in the case.
2. Fearing intolerable terms in a possible “cramdown” of creditors’ claims imposed by the court, the city’s unions accepted new collective bargaining agreements, and retirees voted overwhelmingly to accept pension cuts and even a 90 percent reduction in their health care benefits. Even the bond insurers, who got crumbs, a measly 13 percent of their claims (plus some development rights to well-located parcels of land owned by the city), reluctantly accepted the restructuring as better than total collapse of the city. A wise judge equipped with the enormous hammer of the Bankruptcy Code can do wonders when it comes to altering contracts and reducing debt.
3. Even the contractual guarantee of public pensions in Michigan’s constitution, very much like the guarantee in the Illinois constitution that has blocked legislative reduction of future benefits, was swept aside without much resistance. Bomey quotes Judge Rhodes as saying later, “We in bankruptcy impair contracts all day, every day. That is what we do.” Bomey adds: “Even if they’re not legally bound by Rhodes’s ruling, judges in future municipal bankruptcies are almost sure to analyze Detroit’s case for guidance in their own adjudication.”
4. Bomey quotes one consultant as concluding that “Detroit’s bankruptcy plan would put it on a financially feasible path—but only by a slim margin.”
Bomey himself states: “What emerged from the bankruptcy was a plan that, for the first time in decades, offered hope to the people of the City of Detroit.” In other words, municipal bankruptcy, wondrous though it may be, is not a long-term financial plan. That’s up to the city management.
Does Chicago resemble post-industrial Detroit? Hardly. This is a vibrant, thriving city, contrasting sharply with the sadly shrinking shell of the once-muscular Motor City. But both cities have suffered from irresponsible financial management over many, many years, with promises to bond investors and public unions grossly exceeding the politicians’ will and ability to wring the implied tax increases from city residents and businesses. And while Detroit’s collapsing city services were absolutely appalling and needed vast injections of money, money to be saved by the reduction of debt payments, Chicago could save similarly and devote the liberated revenues to our long-festering problems of housing, unemployment, gangs and guns on the South and West Sides.
Bomey salutes both Michigan Governor Rick Snyder, who provided state financial assistance, and his appointed temporary emergency manager of Detroit, Kevyn Orr, and writes:
“Opponents accused Snyder and Orr of shattering promises that were made to retirees who relied on pensions and health care benefits and promises that were made to bondholders who relied on the city’s financial wherewithal. But the city had broken those promises years ago—perhaps decades ago—by failing to reach labor deals it could afford and by borrowing to pay the bills instead of correcting course to avoid a fiscal iceberg. Snyder and Orr simply acknowledged the city’s reality and tried to do something about it.”
If the shoe fits, Chicago . . .
* Joe Mathewson was formerly Supreme Court correspondent for The Wall Street Journal and a practicing lawyer in Chicago. He teaches at Northwestern’s Medill School of Journalism, Media, Integrated Marketing Communications.