Dereliction of Duty in Detroit

I’ve had my eye on Detroit’s bankruptcy proceedings because it is indicative of what’s to come for a lot of cities.  How Detroit deals with its bankruptcy could also set a precedent for other cities forced to deal with the decisions of bankruptcy, satisfying pensions and debtors.  Unfortunately, Detroit’s Emergency Manager Kevin Orr is shirking his responsibilities to the city and creditors by not making the hard choices to put Detroit on sound financial footing.

As I wrote a few months ago, the key is the art.  

If you or I were to file for bankruptcy, we would be forced to sell our assets before defaulting to our creditors and other contractual obligations.  That Warhol passed down from your crazy aunt who partied at Studio 54?  Gone in 15 minutes.  And that’s exactly what should happen in Detroit.

The Detroit Institute for Art (DIA) has billions of dollars in art, but elitists in Detroit suburbs are conspiring to keep the art so the collection can’t be split off and sold.  A few foundations attempted to raise money to secure and “own” the art through a private fund of $300-500 million, just a fraction of what it is worth.  Basically, this fund was trying to buy the art at a deep discount so it was off-limits and Detroit’s entire debt would fall on taxpayers and pensioners.  Pensioners that include firemen and police officers.  We may not agree with public sector unions and their tactics, but promises were made to these workers and the city must put all options on the table before sticking pensioners with the bill.

Or as Greg Gutfeld said on The Five, “Sell the damn art.”

However, Orr is still standing by while liberal elitists in Detroit play a shell game with the art’s valuation to avoid using the art to alleviate cuts to pensions and what is owed to creditors.  The latest proposal to pay nickels on the dollar to bondholders does nothing to insure Detroit won’t fall into financial peril again.  It will discourage bondholders from investing in plans to rebuild Detroit.  If creditors are not treated fairly, it will stall the city’s renaissance.   From Reuters:

The significant haircut and treatment of general obligation bonds as unsecured debt likely will upset participants in the $3.7 trillion municipal bond market, where such bonds have long been considered a safe bet for investors. Some have warned investors will demand to be paid more to lend to Detroit and other local Michigan governments and school districts.

“We believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city’s emergence from bankruptcy,” said Steve Spencer, a financial adviser to bond insurer Financial Guaranty Insurance Co, regarding the uneven treatment of pensions and bonds in the plan.

The Michigan legislature should reject Emergency Manager Kevin Orr’s plan and present something that will satisfy Detroit’s obligations in a meaningful way, not just one that pleases elitists.   Selling the DIA’s collection for the benefit of all creditors, not just pensioners, is necessary to ensure Detroit’s revitalization.