Detroit, currently under the governance of an emergency manager, seems destined for bankruptcy or mass default (it has already begun to default on some of its credit payments. Either scenario will be groundbreaking in municipal finance and in the power relationships between bankers, retirees, cities, and states. The impending battle between people living on fixed retirement incomes (many of whom still live in Detroit, in houses that have likely lost the overwhelming majority of their purchase price) and investors who say they banked on the reliability of municipal bonds.
So what’s at stake in how this plays out?
Public finance experts have warned that broad societal problems could follow a loss of faith in municipalities’ commitments to honor their pledges. In a major report on the state of the muni market last year, the Securities and Exchange Commission warned that communities would find it increasingly costly to raise money, throwing into question the time-honored practices of building and financing public works at the local level.
It’s interesting, but not surprising, that the “broad societal problems” that could result from tens of thousands of retirees, mostly African-American, suddenly losing their retirement (and the implication for other retired public employees) is not framed. And perhaps this kind of local financing is something we as a country should move away from, given how much it focuses risk in individual cities.
Losing their pensions will mean real pain for retirees, and a cascade of pain for the neighborhoods and city they live in. Someone needs to be talking about that.