Bankruptcy Didn’t Help Detroit Fight the Coronavirus – The New York Times

Cities across the country are facing a red-ink cascade. On April 22, Mitch McConnell recommended that cities and states try bankruptcy if theyre struggling during the coronavirus pandemic. This is a terrible idea, and we dont need to look farther than Detroit to see why.

Although filing for bankruptcy enables a city to renegotiate debts with its creditors, freeing future revenues for uses beyond interest payments on outstanding debt, the maneuver exacerbates negative trends. Bankruptcy does not bring back lost jobs or shuttered businesses, nor will it magically reconstruct a tax base.

While some cities with resilient industries may have reserves to weather the storm, many that were already contending with unemployment, stagnant wages and rising inequality will fare worse. Officials in San Jose, Calif., anticipate losses of $110 million in revenue, three times higher in relative terms than the 2008 financial crisis. The mayor of Dayton, Ohio, has modeled a future with 30 percent fewer firefighters and police officers, while the New Orleans mayor forecasts $100 million in reductions from the citys operating budget.

Detroits 2013 bankruptcy and the experiences of people who endured it demonstrate the limits of a bankruptcy declaration as a cure-all. Instead, its important to invest in people directly.

I got to know Miles, a man in Detroit in his late 40s, as I studied the lingering effects of Detroits bankruptcy.

Everywhere you look someones getting sick or they cant go to work, he told me recently. Its getting thick out there, real thick.

Already struggling to make a living in construction, he fears the loss of his livelihood, his house and his ability to afford food. Since bankruptcy, Detroit has balanced its budget by welcoming speculative property investment and levying costs on residents like Miles. A company in Florida scammed him on a house with unpaid property taxes, triggering tax foreclosure a few months after the sale. He has been juggling minimum payments on bills in a suddenly more expensive metropolis. Now, faced with the loss of more income from Michigans stay-at-home order, he wonders in earnest: Could I quarantine myself at a job site in order to get work?

In the private sector, bankruptcy only helps companies with viable business models and temporary revenue disruptions. Many have repeatedly entered bankruptcy before permanently going out of business. Similarly, municipal bankruptcy is most effective in addressing onetime debt imbalances such as a large, outstanding legal judgment or to cover losses on misguided investments. Declaring bankruptcy will not reverse deeper and more pervasive challenges.

Though the Families First Coronavirus Act eased some pressures on state unemployment insurance programs and augmented federal coverage of Medicaid payments, similar aid during the financial crisis was more generous. The 2020 CARES Act pledged loans, loan guarantees and other investments to businesses, states or municipalities, but that money can only be used to reimburse costs stemming from the virus. It cannot boost general revenues, Medicaid spending or unemployment insurance.

The CARES Act also provides only half as much funding to state and local governments as they received following the 2008 financial crisis. Senator Elizabeth Warren has highlighted the need for guarantees that the funds available under the act would first flow to state and local governments rather than to large corporations.

In the aftermath of the 2008 financial crisis, federal grants increased to support state and local government spending. By 2011, that spigot had largely run dry. In 2012, Stockton, Calif., became the largest city at that time to file for bankruptcy. Several hundred cities struggled on the brink of default, shrinking their public payrolls, cutting services and selling public land. Since 2007, more than 70 American municipalities have entered bankruptcy, a deluge in comparison to the three cities that chose that route between 1970 and 2007.

The choice to abandon cities to their own insufficient budgets created weaknesses that still hamper the response to the coronavirus. In the lead-up to bankruptcy, for example, Detroit reduced spending by outsourcing the responsibilities of the public health department to a private agency. To boost revenues from Detroits water system and leverage its value as a city asset in the bankruptcy, service shut-offs of customers with delinquent accounts surged. During the bankruptcy episode, the water department turned off water at 900 houses a day, threatening a public health crisis.

During this period, Miles found himself responsible for an unpaid water bill from the company that sold him his home. When added to the companys unpaid property taxes, he nearly lost the house. Detroits attempts to raise revenues from residents, through higher taxes, fines and fees, left residents like Miles with less savings to withstand a crisis like the coronavirus.

Isnt the economy us thats sitting at home, and us that have no choice but to go to work? Miles asked.

Municipal balance sheets reflect the financial health of city residents. In Detroit, when Miles can fully realize his talents, he will pay more in city income taxes and spend more in the local economy. The future of cities lies in investing in people like him.

Originally posted here:

Bankruptcy Didn't Help Detroit Fight the Coronavirus - The New York Times