We applaud the announcement Wednesday from Gov. Rick Snyder and state legislative leaders supporting an offer of $350 million to resolve Detroit’s bankruptcy. It will likely come as welcome news to the Detroit Institute of Arts and city retirees, but it’s already raising cries of a “bailout” elsewhere.
Residents who don’t live in Detroit have good reason to challenge why they should be on the hook. After all, they didn’t elect the politicians who mismanaged the city for decades — underfunding pensions and disregarding other obligations.
But there are good reasons for them and their lawmakers to support this deal. A strong core city is an asset for the entire state. And since Detroit is a constitutional entity of Michigan, like all other cities, the state bears ultimately responsibility for its well-being.
This will still be a tough sell to the Legislature. House and Senate leaders appear on board, but that doesn’t mean their caucuses will join them without considerable convincing.
Here’s the bottom line. It doesn’t benefit anyone in Michigan to have the state’s largest city mired in bankruptcy for an extended period. And it is essential for lawmakers to understand the past is the past. After all, the woes of Detroit and other communities can be partly attributed to shrinking state revenue sharing support. Realistically, Detroit isn’t getting through bankruptcy without state help. It’s a matter of how much the state will have to commit.
The offer of state aid to protect the city’s art collection and boost retiree pensions will match the $330 million already raised by private foundations.
“I think what the foundations did is outstanding, and it set a tone and tenor that there is an opportunity here to have people all come to the table,” Snyder told The Detroit News last week.
He said it’s his goal to have retirees, unions, and the city all to come to a settlement. “Settling this case would be a very good situation in my view, because then we could close a chapter that is 60 years old.” Snyder also said enough money was coming together “to make a real difference for retirees.”
If these foundations and the state are providing this much support, the DIA must also step up. Museum officials have been asked to raise $100 million over 20 years from donors. That’s a challenge, but it’s an essential step for the museum to take.
Detroit pension funds are underfunded by an estimated $3.5 billion. Since pensions are guaranteed in the Michigan constitution, offering this money now could be a smart bargaining tool for the state. Of course, it’s uncertain about how this will play out. U.S. Bankruptcy Judge Steven Rhodes ruled last month that the state’s constitutional protection for pensions doesn’t hold up in federal court. Yet Michigan Attorney General Bill Schuette has vowed to defend the pensions.
According to one bankruptcy expert, the pensioners’ lawyers will have to weigh whether taking this deal makes more sense than the potential higher payout from appealing the judge’s ruling regarding pension protection and trying to force a full pension pay-off. And it’s uncertain what conditions pensioners will put forward if they accept the offer from the state and foundations.
Some think it may be too soon for the state to commit such a significant sum. “Are we going to bail out pensioners on the hypothetical possibility that Rhodes and other scholars could be wrong?” says Michael LaFaive, fiscal policy director with the Mackinac Center. “It’s too unclear whether the state will really be on the hook.”
But before Detroit can fully begin to rebuild, it must first emerge from bankruptcy. This deal coming from the state and foundations could lead to a settlement that limits the state’s future exposure and provides relief for the DIA and pensioners.
That would benefit the entire state.