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Detroit's Debt Crisis: Everything Must Go

The city just suspended its payments to Wall Street. But is this the beginning of a resurrection for the city – or an organ sale?

June 20, 2013 11:07 AM ET
Kevyn Orr
Detroit emergency manager Kevyn Orr has suspended some of the city's debt payments.
Jeff Kowalsky/Bloomberg via Getty Images

Diego Rivera is under attack in Detroit. It's not the first threat to the late Mexican artist's famed murals, which depict the city's steel factories with a not-quite-subtle anti-capitalist bent. In 1933, union workers had to guard the then-new exhibit from the followers of a fanatical local preacher. But today the mural series is facing a different challenge: It is one of many assets that the city could potentially sell off to pay back billions of dollars in long-term debts to Wall Street creditors.

Detroit's finances and governance have been controlled since March by Kevyn Orr, the emergency manager appointed by Republican Governor Rick Snyder. Under Michigan's controversial Public Act 436, Orr's primary duty is to pay back the money that Detroit owes to Wall Street – which would mean scrounging up an impossible $16 to $18 billion. Orr recently announced that the city is temporarily suspending some of its debt payments, setting off a new round of speculation that the city could soon be declaring Chapter 9 bankruptcy. In the meantime, he has ordered that everything in the city be evaluated for the impending fire sale.

Many residents trace Detroit's current troubles directly back to the foreclosure crisis it faced over the past decade. "Predatory dealing went down in Detroit," says Egypt, a resident who works in the city's law department. (She asked to use a pseudonym to protect her job.) "The media will say that it's because of elected officials' mismanagement – but that didn't cause billions in debt."

Egypt knows firsthand how hard Detroit was hit when the housing market collapsed. She got trapped in a ballooning mortgage that claimed her house in 2005 – a common story in this majority African-American city, where the crisis hit early and with a predatory vengeance. Between 2004 and 2006, a full 75 percent of mortgages issued in Detroit were subprime. By 2012, banks had foreclosed on 100,000 homes, which drove down the city's total real estate value by 30 percent and spurred a mass exodus of nearly a quarter million people.

"We're almost like economic refugees," says Mike Shane, an organizer with Moratorium Now!, an activist group that is calling for a moratorium both on foreclosures and on municipal debt payments to Wall Street. According to the group's analysis of thousands of city documents obtained through a Freedom of Information Request, it was the foreclosure crisis – not simply the steady march of deindustrialization – that pushed Detroit over the edge.

Starting in the mid-2000s, foreclosures eroded millions of dollars from the city's tax base. This shortfall forced the city to begin borrowing money from Wall Street by issuing municipal bonds in 2005, the same year Egypt lost her home. As a result of a series of interest rate swaps and other financial acrobatics, the debt spiraled out of control. The city further shut down services to cut costs, which spurred even more people to leave – taking their tax dollars with them. In the last five years, the city lost $1.6 billion from declined property tax revenue alone.

"There was predatory lending against people, which precipitated the financial crisis," says Jerry Goldberg, a leading anti-foreclosure lawyer. "Then the banks carried out what amounted to predatory lending against the city itself."

Goldberg explains that pattern is repeating in other areas with high minority populations like Stockton, California and Jefferson County, Alabama. "That's because the municipal crisis is itself an outgrowth of subprime lending," he says.

Still, few places have been hit as badly as Detroit. "Detroit is called post-industrial, but it's almost like a post-housing situation," says Mike Fannon, development associate for the Charles H. Wright Museum of African American history. "There's a lack of access to housing, even though the structures are there."

To concerned residents like Fannon, recent events in Detroit raise a troubling question: Can America's most basic democratic rights be realized without protecting economic rights as well? It's the same point Franklin D. Roosevelt made in his Second Bill of Rights speech in 1944, when he said, "People who are hungry and out of a job are the stuff of which dictatorships are made."

A quick survey of Michigan's other emergency manager-controlled cities offers a bleak vision of what could happen soon in Detroit. From the start, the emergency manager plan was heavily backed by right-wing think tanks and the much-criticized American Legislative Exchange Council – and sure enough, emergency managers across the state have followed a radical right-wing blueprint. In Pontiac, the number of city employees plummeted from 600 to 50. In Muskegon last year, the school district's emergency manager fired every single employee. Benton Harbor's emergency manager effectively dissolved the city council. Allen Park's emergency manager privatized the community center.

Debt payments aside, it's increasingly clear to many residents that these policies are not improving their cities' ability to provide basic services. In Highland Park, finances remained so dire even after a decade of emergency management that the gas and electric company recently repossessed 1,400 of the city's streetlights – light poles included. Hamtramck, Flint and Highland Park are all still in debt after more than a decade under financial managers.

Orr's most recent report suggests that Detroit may be headed down the same path of privatization and pension-slashing. His proposal to creditors included leasing the city's water department to a regional agency and cutting back on health care for retirees. But the big question is whether the suspension of scheduled debt payments to Wall Street could potentially grow into the moratorium that activists are demanding – or whether it's simply a threat intended to coerce unions and civic groups to accept sweeping cuts. "It's pretty stunning," says Moratorium Now!'s Shane. "This is signaling that he's going to do some pretty drastic things."

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