Digging Out of the Hole

The recent bankruptcy filing by the City of Detroit, along with earlier filings by the City of Stockton and other municipalities, presents an opportunity for urbanism.

Nor will the opportunities likely be limited to Detroit and Stockton.  Much of how we’ve built our cities in the past seventy years had led to financial distress.  Detroit and Stockton may have reached bankruptcy first, but there are numerous other cities, including some in the North Bay, that are at risk of financial turmoil over the next decades.

This isn’t to say that land use form is the only cause of municipal bankruptcy.  There were multiple factors behind the Detroit and Stockton bankruptcies, including failing local economies and poorly conceived redevelopment strategies.  And when Orange County went bankrupt a few years back, it was largely the result of financial ineptitude.

But land use form plays a key role.  It has been shown that urbanism can reduce city expenses.  Had Detroit and Stockton made a stronger commitment to effective urbanism over the past decades, the current financial distress would likely have been lessened.  And a commitment to urbanism starting today would likely improve the post-bankruptcy outlook.

However, the municipal reboots will depend, in part, on access to capital for new infrastructure.  Urbanism requires less infrastructure per residential unit than does sprawl.  But a conversion from sprawl to urbanism still requires new infrastructure.  And, as Charles Marohn of StrongTowns points out, access to capital may be impacted by the Detroit bankruptcy.

Condensing Marohn’s cogently presented summary, Detroit has two kinds of debts, secured debt, much of which is owed to lenders who have provided capital for improvement projects in exchange for repayment from property taxes, and unsecured debt, which is largely comprised of pension benefits owed to former and current municipal employees.

Detroit is in bankruptcy because it lacks the assets to cover the combined debt.  The question is which type of debt should receive priority in the allocation of remaining assets.  The legal battles thus far in the Stockton bankruptcy have focused on the same issue.

By law, it would seem that the secured debt should come first.  Capital markets provided loans in exchange for access to revenue streams that continue to exist, so it would seem that the loans should be repaid.

But the Michigan State Constitution requires that pension benefits be paid.  So the Constitution and the loan contracts are in conflict.  The conflict will require legal adjudication.

I know that many readers will side with the pension benefits, feeling that Wall Street should take the financial blow.  But, as Marohn points out, the distinction isn’t that clear-cut.  Many of the assets that were loaned to Detroit came from invested pension funds.

Although overly-simplistic, one can view the Detroit resolution as a contest between the pension benefits of Detroit employees and the pension benefits of school teachers from across the country.  Not a pretty picture, is it?

Perhaps the best for which one can hope is a speedy resolution that leaves as many assets as possible with the pensioners and as few as possible with the legal firms charged with fighting the battle.

But there is a final twist.  If the secured loans aren’t adequately covered by the resolution, a damper would be placed on future lending to municipalities, denying cities the funds needed to convert from sprawl to urbanism.  Instead, cities would be forced to look at more rounds of frenzied development, relying on impact fees to keep the municipal ledgers barely in the black.  The Ponzi scheme would continue.

Oh, what a mess we’ve made of things.  There are no easy solutions.  Instead, there will be shared pain.  But now is the time to start making the necessary changes.

As always, your questions or comments will be appreciated.  Please comment below or email me.  And thanks for reading. - Dave Alden (davealden53@comcast.net)