DEMOCRACY LOST AND WON: THE DETROIT BANKRUPTCY AND ITS LEGACY The Honorable Michael D. Warren, Judge of the Oakland County Circuit, Michigan, co-creator of Patriot Week Amy Bloom, History and Social Studies Consultant, Oakland Schools, Michigan USING THE C3 FRAMEWORK TO INVESTIGATE THE DETROIT BANKRUPTCY Dimension 1: Developing Questions and Planning Inquiries Dimension 2: Applying Disciplinary Concepts and Tools Dimension 3: Evaluating Sources and Using Evidence Dimension 4: Communicating Conclusions and Taking Informed Action Workers leave a Ford Motor factory in Detroit DETROIT, 1930S Detroit was once a place of hard working middle class Americans who flocked to the Motor City to work in its factories. DETROIT, 1942 In July 1942, Detroits factories were producing tanks for the war effort. Detroit was viewed as the Arsenal of Democracy. DETROIT, 1942 Even though Detroit had a booming economy, the city had issues. Racial disparities roiled to a head in 1943 as a race riot broke out. DETROIT, 1943 In 1950, Detroit boasted 1.84 million people. By the 1950s, Detroit had one of the highest per capita incomes in the country. Detroit had an exemplary public school system. DETROIT, 1950S Motown Record Corporation was founded by Barry Gordy in Gordy created a 24-hour hit-making and artist development factory, nurturing the artistic talent of singers, writers, producers and corporate executives. MOTOWN! (1959) During the summer of 1967, Detroit experienced one of the most violent urban revolts in the 20th century RIOTS While its immediate cause was a response to police brutality, the underlying conditions including segregated housing and schools and rising black unemployment helped drive the anger of the rioters. Began in 1973 when OPEC proclaimed an oil embargo March 1974 oil rose from $3 per barrel to $12 per barrel The second oil crisis or oil shock occurred in the United States due to decreased oil output in the wake of the Iranian Revolution. 1970S OIL CRISIS AND ITS IMPACT ON THE REGION The growth of the big three automobile companies, fueled by SUV and luxury car sales, boosted the economy in Detroit. New businesses such as Comerica Tower, the MGM Grand Detroit, MotorCity Casino, and Greektown Casino moved to Detroit. New stadiums were constructed for the Detroit Lions and the Detroit Tigers and the historic Book Cadillac Hotel and the Fort Shelby Hotel reopened for the first time in over 20 years. Events such as Super Bowl XL, the 2006 World Series and the NCAA Final Four offered further improvements to the downtown area. DETROIT SHOWS SIGNS OF IMPROVEMENT, At that time: The city had one of the highest unemployment rates in the U.S. The population of Detroit it had declined to just 714,000 spread over some 140 square miles. The public school system was broke and broken, and had been under an emergency manager YET, BY 2013 THE CITY OF DETROIT FILED FOR BANKRUPTCY Economic Perspective HOW DID A CITY THAT WAS A BEACON DURING THE GREAT MIGRATION AND THE ARSENAL OF DEMOCRACY DURING WORLD WAR II GO BROKE? THE DETROIT BANKRUPTCY WHAT HAPPENED? Taxing higher and higher: Despite raising taxes, revenue fell 40% from 1962 to 2012 Downsizing too little, too late: In the past 50 years, property tax value fell 77% in todays dollars Skyrocketing employee benefits and the 13 th check. Missing chance after chance during less turbulent times Borrowing more and more: From 2000 to 2012, Detroit went on a borrowing binge to close budget holes and to build infrastructure, more than doubling debt to $8 billion Kilpatrick restructure pension fund debt like the mortgage fiasco Then came the Great Recession.... REASONS FOR DECLINE Detroit got into a trap of doing a lot of borrowing for cash flow purposes and then trying to figure out how to push costs (out) as much as possible. That was the whole culture how do we get what we want and not pay for it until tomorrow and tomorrow and tomorrow? BETTIE BUSS, A FORMER CITY BUDGET STAFFER WHO SPENT YEARS ANALYZING CITY FINANCES FOR THE NONPARTISAN CITIZENS RESEARCH COUNCIL OF MICHIGAN. Historical Perspective TO WHAT EXTENT DOES THE HISTORY OF DETROIT REFLECT THE NATIONAL NARRATIVE DURING THE 20 TH CENTURY? 23 TO WHAT EXTENT DID THE STRUGGLE FOR CIVIL RIGHTS PLAY OUT IN DETROIT? While at Cobo, Dr. Martin Luther King Jr. delivered a rousing 30-minute speech an early take on what would become his famous "I Have A Dream" speech in Washington D.C. In June 1963, a crowd of 125,000 took to the streets of Detroit in the Walk to Freedom march that eventually concluded at Cobo Hall. RACIAL INEQUALITY Most mainstream media stories about the bankruptcy focus on the overreliance on the auto industry, poorly structured city policies related to employee compensation, and related issues. However, they generally do not delve into the historical complexities of racial inequality, including the riots/rebellions of 1943 and 1967, white flight, the role of racist real estate policies in establishing de facto segregation, and federal highway and urban renewal policies that isolated communities of color, etc. How do these social issues connect to the economic and political story of the city and its bankruptcy? SEGREGATION IN THE DETROIT METROPOLITAN REGION 26 DETROIT: CYCLE OF DECAY Civics and Government Perspective TO WHAT EXTENT DOES THE DETROIT BANKRUPTCY REFLECT IDEAS OF FEDERALISM AND THE SOCIAL COMPACT? Cities are creatures of the state under the Michigan Constitution This means that the state government, through its constitution or laws, empower local governments and define their structure. WHAT IS THE CITY OF DETROIT, POLITICALLY SPEAKING? Michigans first Emergency Financial Manager Law 1990 PA 72, expanded the law to allow for the take over of public schools 2011 State government replaced PA 72 with Public Act 4 Gave the Emergency Manager the ability to cancel contracts Allowed EM to make non-financial moves Voters repealed PA4 via referendum. In 2012, state government passes a new Emergency Manager Law known as Public Act 436. HISTORY OF THE EMERGENCY MANAGER LAW Allows the state to intervene in a local government's or school district's financial struggles at an early stage A state financial review team examines the finances to determine if a 'financial emergency' exists After confirmation of a financial emergency, the governing body of the local government must select one of the following: Consent Agreement Emergency Manager Neutral Evaluation Chapter 9 Bankruptcy PUBLIC ACT 436 The ability to reject, modify, or terminate labor agreements Oversees employees and elected officials in the school district or local government Can sell off assets of a local government or school district Can change staffing levels or combine departments, so long as it doesn't conflict with an existing charter provision. POWERS OF THE EMERGENCY MANAGER Kevyn Orr was appointed as EM After review of city finances, finds no feasible plan EM files for bankruptcy on July 18, 2013 EM LAW IMPACT ON DETROIT Provides a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts (POA Plan of Adjustment) Differs from traditional bankruptcy in that there is no provision for liquidation of assets of the municipality and distribution of the proceeds to creditors WHAT IS CHAPTER 9 BANKRUPTCY? Is the emergency manager law constitutional? What might be the arguments on both sides? To what extent does the Detroit bankruptcy reflect ideas of federalism and the social compact? Use the documents to help you construct your argument CIVICS/GOVERNMENT ISSUES: TURN AND TALK SHARE OUT Is the emergency manager law constitutional? What might be the arguments on both sides? To what extent does the Detroit bankruptcy reflect ideas of federalism and the social compact? THE RULING Judge Rhodes rules that federal bankruptcy law supersedes the State Constitution. Pensions are contractual rights and not subject to any preferential treatment under federal law. Why is compromise the hallmark of a democratic republic? RESOLVING PROBLEMS THROUGH CONVERSATION AND COMPROMISE Creditors include: Retirees General city retirees Police and Fire retirees Bond Holders and Insurers Ensure Detroits general obligation bonds Represent the second largest class of creditors after retirees Syncora (bond insurer) Federal Guarantee Insurance Co. CITY OF DETROIT V. CREDITORS THE GRAND BARGAIN Two Problems: Pensions are underfunded by $3.5 billion. In bankruptcy, city assets can be sold by the Emergency Manager (not forced by a federal bankruptcy court) and the revenues used to pay creditors Distinction between federal and state The Goals: Protect city retirees Save the DIA and keep its art collection in Detroit During the bankruptcy proceedings, creditors were pushing to auction DIA works of art that had been purchased by the city DIA is a city department Started as an independent non-profit But has been a city department for almost 100 years WHY WAS SELLING THE ART ON THE TABLE? Appointed the mediator by the bankruptcy judge Became the architect of the Grand Bargain The problem: $18 billion in liabilities, 78,000 blighted buildings, four of every 10 dollars already devoted to debt, pensions and retiree health care. Thousands of elderly retirees were facing deep pension cuts their livelihoods. Detroit's world-class art museum was at risk of losing its treasured pieces in a fire sale. The city needed hundreds of millions of dollars just to begin to climb out of the hole. What would Churchill do? ENTER JUDGE GERALD ROSEN Chance meeting between Judge Rosen and Mariam Noland, president of the Community Foundation for Southeast Michigan Rosen laid out his idea to Rip Rapson, CEO of Kresge Foundation: National and local foundations, the state and the DIA would all come together to create a fund to ease cuts to underfunded pensions. That new fund would be used in lieu of selling DIA masterpieces. The DIA would be cut loose from city ownership, forever shielding its artwork. Noland gathers foundations for Rosen who shares his idea: Raise money to help offset pension cuts and save the DIA. He pitched his appeal to the philanthropic missions in the room urban revitalization, cultural interests, humanitarian concerns. THE ART TRUST The Pensions WHY WOULD THE STATE LEGISLATURE AGREE TO FUND DETROIT? Federalist No. 10 James Madison The latent causes of faction are thus sown in the nature of man.... the most common and durable source of factions has been the various and unequal distribution of property.... The regulation of these various and interfering interests forms the principal task of modern legislation, and involves the spirit of party and faction in the necessary and ordinary operations of the government. CHANNELING MADISON "a body of men are unfit to be both judges and parties at the same time; yet what are many of the most important acts of legislation, but so many judicial determinations, not indeed concerning the rights of single persons, but concerning the rights of large bodies of citizens? And what are the different classes of legislators but advocates and parties to the causes which they determine? Is a law proposed concerning private debts? It is a question to which the creditors are parties on one side and the debtors on the other. Justice ought to hold the balance between them. Yet the parties are, and must be, themselves the judges; and the most numerous party, or, in other words, the most powerful faction must be expected to prevail. FEDERALIST NO. 10 JAMES MADISON DETROIT CITY RETIREES WHERE THEY LIVE AS OF MAY, 2014 DETROIT POLICE AND FIREFIGHTERS WHERE THEY LIVE Police and fire retirees No cuts to pension checks Reduction in COLA from 2.25% to 1% 90% reduction in health care benefits General retirees Cut of 4.5% monthly No COLA increases 90% reduction in retiree health care benefits Clawback of excessive annuity payments from PENSIONERS IN THE GRAND BARGAIN Long Term Fiscal Health of the State Business An insolvent Detroit crushes growth and opportunity Perceptions Global Reputation Moral Imperative OTHER LEGISLATIVE REASONS AN ARTIFACT FROM THE BANKRUPTCY SO, WHAT HAPPENED? Slashing $7 billion in liabilities Reinvesting $1.4 billion over 10 years in services Includes: Grand Bargain Creation of Regional Water Authority Settlement of creditor claims Syncora and FGIC POA PLAN OF ADJUSTMENT Judge Rhodes had to decide whether to approve the sweeping debt- cutting and investment plan The Bankruptcy Code provides that a plan may not unfairly discriminate among classes of creditors holding claims of equal priority. The Detroit plan proposed to pay police and fire retirees approximately 90% and general retirees approximately 70% of their earned pensions (in both cases after elimination of cost of living allowances). Holders of general obligation bonds are slated to receive approximately a 20% recovery. SO, WHAT LEVEL OF DISCRIMINATION IS FAIR? Investment in City services include: $148 million earmarked for technology investments $82 million worth of investment in Detroit fire/EMS over the next five years. Serious investment in blight removal $520 million over the next six years into demolition. Anticipates tearing down an average of residential properties per week PROVIDING FOR A BRIGHTER TOMORROW THE LANGUAGE OF COMPROMISE... AND LEADERSHIP We have used the phrase, the grand bargain, to describe the group of agreements that will fix the City's pension problem. That description is entirely fitting. In our nation, we join together in the promise and in the ideal of a much grander bargain. It is the bargain by which we interact with each other and with our government, all for the common good. That grander bargain, enshrined in our constitution, is democracy. It is now time to restore democracy to the people of the City of Detroit. I urge you to participate in it. And I hope that you will soon realize its full potential. --- Judge Rhodes, U.S. District Court, ED. Mich. THE WORLD IS WATCHING - Mitch Landrieu Mayor, New Orleans 2014 Mackinac Policy Conference Keynote Address The future of Detroit, New Orleans, and the rest of the country are inextricably linked. Detroits struggles and how we as a nation respond to those challenges have far reaching effects for all of us COMPELLING QUESTIONS 1.To what extent did the Detroit bankruptcy uphold the rule of law? Reflect the social compact? 2. To what extent is Detroits rise and decline a reflection of the historical context? 3. To what extent is the story of Detroit a model case study of the domestic problems facing the nation over the past 60 years? 4. How does the Detroit bankruptcy reflect constitutional principles of federalism and constitutional supremacy? 5. To what extent does the economic and political story of the city and its bankruptcy reflect racial issues and tensions since the 1950s? 6. To what extent does the Detroit bankruptcy and its resolution challenge our notions of good governance? (think about concepts of representative democracy, compromise) 7. How much disparate treatment of different creditor classes can be tolerated? THANK YOU Judge Michael J. Warren, Oakland County Circuit Judge Author of Americas Survival Guide Amy B. Bloom, History/Social Studies Consultant, Oakland Schools