Everyone’s favorite Gormogon* Volgi emailed ‘Puter an article from City Journal by the incomparable Steve Malanga on Detroit’s pending municipal bankruptcy. It’s a thoughtful article, getting into the weeds on municipal finance, public pensions and bankruptcy treatment of both.
‘Puter’s written extensively on the Detroit bankruptcy, presciently raising many of the issues pertaining to bankruptcy treatment of bondholders and pensioners Detroit and its creditors encountered. Not only that, ‘Puter’s predictions as to bankruptcy court treatment of “inviolate” public pensions and “untouchable” municipal bondholders have come to pass.
‘Puter enjoyed Mr. Malanga’s thoughts on Detroit’s pending municipal bankruptcy, but perhaps not for the reasons Volgi expected. After pondering the treatment of bondholders and pensioners alike, ‘Puter came to the following conclusion. We may be witnessing the beginning of the end of the real axis of evil: politicians and rent-seekers.
Kevyn Orr, Detroit’s emergency manager, and United States Bankruptcy Judge Steven Rhodes have changed the rules of the game. Public pensioners now know that politicians and unions lied to them about the sanctity of pension obligations. Similarly, municipal bondholders know that once-sacrosanct general obligation municipal bonds are touchable.
This is a game-changing revelation.
Public workers and their unions now know they have to care about the financial stability of the municipality lest they lose their pensions completely as the jurisdiction death spirals into bankruptcy. Gone are the days when unions and politicians can promise public employees the world (and have union members believe them) irrespective of a municipality’s ability to pay.
Wall Street investment bankers and other large municipal bond funds also have to reassess the conventional wisdom that municipal bonds are essentially risk-free investments. Gone are the days of knowing full well the issuing municipality can’t possibly repay the bonds and effectively run the city and buying bonds any way. Bond purchasers now know there is real risk in buying municipal bonds issued by a city teetering on the fiscal brink.
So who, if anyone, wins here? That’s easy: taxpayers everywhere. If not today, then soon, public workers will realize government employers are not a never ending cascade of cash and boondoggles. If employees and unions get too greedy, they may lose everything, including their jobs and their pensions. This realization will lessen demand for revenue, permitting tax rates to remain steady or perhaps drop. Better, municipalities will now confront a more skeptical bond market which will demand higher yields for greater risk. This will encourage municipalities to more effectively manage their finances lest they be unable to access capital markets altogether, at least at an affordable cost.
Destroying bondholders’ and union members’ toxic “it doesn’t matter to us what happens to municipalities because we’re still going to get paid” mentality may be the most important and least reported outcome of Detroit’s bankruptcy.
And for that alone ‘Puter thanks Kevyn Orr and Judge Steven Rhodes.
* Volgi is everyone’s favorite Gormogon if you exclude the ladies from your polling sample. Among our many exceptionally sharp, witty and attractive female followers (see, e.g., The Ninjababe, The Castle Archivist and our newest addition, the Crypt Keeptrix), Puter’s far and away the favorite.