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Detroit Still Not Serious About Getting Its House in Order

Written By : Brian Garst
May 11, 2014

Detroit’s bankruptcy was created by decades of fiscal irresponsibility. Politicians ruined the economy with high taxes to finance their lavish spending and depleted the tax base.

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Given this track record, you would think the city would take a more responsible stance during its bankruptcy process. As CF&P President Andrew Quinlan highlighted in a recent op-ed for the Washington Times, that’s sadly not the case:

One significant asset available to the city, and one that can be sold without compromising essential services, is the artwork held at the Detroit Institute of Arts. Emergency manager Kevyn Orr, however, wants to transfer it to a nonprofit in exchange for just $816 million — including $350 million in state aid, along with additional philanthropic contributions — as part of a so-called “grand bargain.” To blunt criticism of the deal, he solicited a low-ball estimate that valued the galleries at up to $867 million. This figure compares unfavorably to private bids, which have reached into the billions.

One bidder, the Art Capital Group, even offered to keep the art in Detroit as part of its bid to lend the city $2 billion with the art as collateral. However, the full value likely can’t be known until there is an open and competitive process aimed at maximizing the art’s return to the city. Doing so will not only better satisfy creditors, but also means more money in the pockets of city retirees.

Getting a fraction of the value from the institute’s art collection would be a sure sign that Detroit’s leadership again lacks the political will to put its fiscal house in order. Adoption of the bailout plan will also likely mean a poor credit rating for the city, increased future borrowing costs and a bleak financial future. Who will invest in a revitalization plan for Detroit after seeing creditors treated in this manner?

Detroit is the largest city to go under, but their fiscal imprudence is not unique. A number of municipalities are teetering on the edge of bankruptcy. Should Detroit attempt to stiff its creditors with a backroom deal, it could reverberate throughout bond markets and significantly raise the costs of borrowing for governments throughout the US, bankrupting cities like dominoes in the process.

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