Guest Host: Susan Page

Kevyn Orr, Detroit’s emergency manager, cancelled a bus tour scheduled for today. He had hoped to give some of the city’s creditors a firsthand look at just how dire Detroit’s situation had become. Most declined. It’s one more sign of the many challenges he faces in trying to reach a deal among the city’s bondholders, government retirees and other creditors. Years of mismanagement, a shrinking tax base and groups of willing Wall Street investors have left the city on the brink of financial collapse. Bankruptcy remains an option. What’s ahead for Detroit’s residents, its unions and investors.

Guests

  • Stephen Eide senior fellow at Manhattan Institute.
  • Teresa Ghilarducci professor of economics at The New School.
  • Jennifer Bradley fellow of the Brookings Institution Metropolitan Policy Program and co-author of "The Metropolitan Revolution."
  • David Shepardson Washington bureau chief of The Detroit News.

Transcript

  • 10:06:56

    MS. SUSAN PAGEThanks for joining us. I'm Susan Page of USA Today sitting in for Diane Rehm. Vacant lots, burned-out properties, broken streetlights and a near collapse of city services, the residents of Detroit are suffering, and the city is near financial collapse. Joining me to talk about the hard choices in Detroit and the implications for other cash-strapped U.S. cities, David Shepardson of The Detroit News and Jennifer Bradley of the Brookings Institution. Welcome to "The Diane Rehm Show."

  • 10:07:27

    MS. JENNIFER BRADLEYThanks.

  • 10:07:27

    MR. DAVID SHEPARDSONThanks.

  • 10:07:28

    PAGEAnd from an NPR studio in New York City, we're joined by Teresa Ghilarducci, a professor of economics at the New School, and Stephen Eide of the Manhattan Institute. Thank you both for being with us.

  • 10:07:41

    PROF. TERESA GHILARDUCCISure.

  • 10:07:41

    MR. STEPHEN EIDEThank you.

  • 10:07:42

    PAGEWe invite our listeners to join our conversation later in this hour. You can call our toll-free number, 1-800-433-8850, send us an email at drshow@wamu.org, or find us on Facebook or Twitter. Well, Dave, let's start with you. There was supposed to be this bus tour that had drawn a lot of attention today, got canceled yesterday. Tell us about the reasoning behind the bus tour not taking place.

  • 10:08:09

    SHEPARDSONWell, the state-appointed emergency manager had invited major creditors of Detroit to tour some of the city's blighted areas in an effort to try to convince them to take pretty hefty haircuts for that debt. They would have to sign waivers acknowledging they can be injured or potentially killed. According to some reports, they would have been followed by armed guards and potentially news helicopters.

  • 10:08:35

    SHEPARDSONSo this bus tour, which was intended to really show in graphic ways how bad things are, would have turned in -- likely turned to a media circus. And so it's been scrapped, but the creditors have still been invited to take their own tour of the city's worst spots.

  • 10:08:53

    PAGEIt really would have been quite a scene, I'm sure. Well, Steve, to what extent there's something that's not happened before that such a big city in the United States find itself in such dire straits.

  • 10:09:06

    EIDEThis would be truly unprecedented. If Detroit does declare bankruptcy -- and the emergency manager himself has officially said the chance are 50-50, and I think most experts think it's probably likely -- it would be the biggest bankruptcy in American history. The only comparable cases are Orange County in the early '90s and Jefferson County in Alabama which has recently resolved its bankruptcy proceedings.

  • 10:09:29

    EIDEGenerally speaking, we've talked about municipal bankruptcy, Jill is talking about really small kind of special purpose entities. It's very rare for a general purpose city or county to actually have to go to federal court to have to resolve its obligations to creditors.

  • 10:09:43

    PAGESo, Jennifer, what has happened for the daily life of residents in Detroit as a result of its financial crisis?

  • 10:09:53

    BRADLEYWell, it's not just the financial crisis that we're reading about now. I think for a long time, the residents of Detroit have faced a breakdown in municipal services. The streets are dark. 911 calls don't get answered in any reasonable amount of time. People are driving themselves to the emergency room rather than waiting for ambulances. But as we talk about this, I think people who don't live in Detroit imagine it as this vast empty wasteland, and it is a big city that's not full anymore. But there are still 700,000 people who live in Detroit.

  • 10:10:26

    BRADLEYIt's the 18th largest city in the country. So there is something in Detroit that is keeping people there. When -- we can't forget that this is still a place where people are trying to build lives, work, raise their families. So it's not a place that we can write off, and I think that's what makes this struggle to regain municipal solvency so compelling.

  • 10:10:49

    PAGENow, the 18th biggest city, but used to be the fourth biggest city. And of the 700,000 people continuing to live there, are they people who have the option of leaving? Are they people who are stuck there because they don't have any place else to go?

  • 10:11:01

    BRADLEYYou know, I think that there are a lot Detroiters who would love to get out and can't because their houses don't have value. But there's a swath of Detroit, the midtown-downtown area -- it's about five square miles of the city -- where the rental vacancy rates are about 4 percent. There are people who want to be there.

  • 10:11:16

    BRADLEYSo there's this interesting tension in Detroit between this one zone that's actually flourishing, that's got new investment, that's got people buying property, that's got a Whole Foods coming in and the rest of the city. And it's -- the challenge is to bring those two stories together, so it's really one city, not vast swaths of abandoned and in decay surrounding this bright core.

  • 10:11:39

    PAGEAnd, Teresa...

  • 10:11:39

    GHILARDUCCIIf I can add to that -- yeah.

  • 10:11:40

    PAGEYes. Go ahead.

  • 10:11:40

    GHILARDUCCIThis is Teresa. And just to add to that, Detroit actually has many beautiful places and a lot of assets. People are there because they have jobs, very good jobs. There are three corporate headquarters there, Chrysler, GM and Ford, and the Ford plant at the River Rouge is running at three shifts. I was just there a couple of weeks ago and saw hundreds of Ford trucks, 150s, coming off the line. So people are there because they're working. They're -- it's too big for the 700,000 people that are there. We've alluded to that. It used to be 1.4 million people, and it shrunk to 700. That has to be rationalized.

  • 10:12:23

    GHILARDUCCIBut the crisis is not the budget of the city. It's actually the crisis and the problem, and perhaps the hope is to actually consolidate the population so that the city services are delivered efficiently and the assets of the city are used appropriately. It's a gorgeous place, near lots of waterways, a world-class symphony and a world-class zoo and an art museum and many, many national parks and heritage sites. So it needs to be restructured and safe.

  • 10:12:58

    SHEPARDSONBut to Teresa's point, only General Motors of the Detroit Three are still there. Detroit, you know, has gone from 1.85 million people in 1950 to less than 700,000 because much of the auto industry and hundreds of factories, you know, disappeared. And today, although Detroit's downtown is really doing well, you know, 40 percent of streetlights don't work. There are 78,000 abandoned buildings, 65,000 vacant lots.

  • 10:13:24

    SHEPARDSONThe clearance rate for violent crime is just 8.7 percent. That means police are not solving 90 percent of major crimes in part because the police force has been cut by 40 percent since 2000. At the same time, the unemployment rate has gone from 6 percent in 2000 to 18 percent in the city. And, you know, there are hundreds of thousands of people who cannot leave the city because they can't afford to.

  • 10:13:47

    SHEPARDSONThe schools are struggling by any objective measure. Detroit is the poorest large city in America. And now with $17 billion in debt and pension liabilities, they are now taking 40 percent of every dollar, twice as much as any other city in America. You know, absent a major restructuring, there simply doesn't appear anyway that the city can get on its feet again.

  • 10:14:09

    PAGESo, Dave, how does the city of Detroit owe and to whom do they owe it?

  • 10:14:14

    SHEPARDSONIt's roughly $17 billion. The majority of that is to the retirees through the -- both pension and non-pension liabilities. Those are roughly $10 billion. The remainder are for various, you know, general purpose funds, the Sewer Department and other bond issues that the city has issued over the years.

  • 10:14:39

    PAGESo the man in charge these days is Kevyn Orr. Teresa, tell me who he is and what he is trying to do.

  • 10:14:47

    GHILARDUCCIHe's a bankruptcy lawyer, and he's negotiating. He's negotiating with three parties. He's negotiating with the unions that represent the city employees. He's negotiating with the creditors, the Wall Street firms, and he's negotiating basically with the public. And he's preparing all three parties to give in a bit, shared sacrifice.

  • 10:15:06

    GHILARDUCCISo he's done this before with corporate bankruptcies. This is a big challenge for him. He's seen as loyal to the city. That was really important for this delicate set of negotiations to work. So bankruptcy threats are basically a table in which all these parties can negotiate.

  • 10:15:27

    PAGESo, Jennifer, let's talk about one of those affected parties, and that would be Detroit's retired city workers. What would the proposed deal that Kevyn Orr has put forward mean to them?

  • 10:15:40

    BRADLEYIt would mean that the promises that they were made during their working lives wouldn't necessarily be fulfilled that their pensions would not be to the level that that they thought. And that's a big sacrifice for them because they have gone ahead and made plans. They have -- they've relied on a particular level.

  • 10:15:58

    BRADLEYI think what Orr is telling them is this is not going to get better. And if the city goes completely bankrupt or can't continue to pay its bills, you won't do any better. I think that's his message to all the people at the table which is this is the best deal you're going to get. We've got to turn the city around, and it's only by going through this that we'll have an opportunity ever to get better.

  • 10:16:24

    PAGEAnd, Steve, tell us about what it would mean to the investors to accept the deal or something like the deal that Kevyn Orr has proposed.

  • 10:16:33

    EIDEYeah. Well, the phrase that's he's used often is shared sacrifice, and he certainly failed that promise in that he's made a lot of enemies thus far, both in the Wall Street side and with retirees and unions. I mean, he's staked out a very tough negotiating position. With creditors, you're talking about two classes. There are what you call the secured creditors in which case the debt is backed by certain pledged stream of revenues and the unsecured creditors.

  • 10:17:00

    EIDEAnd the unsecured creditors, he's asking them to take pretty significant haircut, 10 cents on the dollar. Municipal bond analysts, credit markets are very concerned about this, about the implications this could have for -- bargaining costs certainly in Michigan and nationwide. The larger context is that municipal bargain costs are going up already as a result of the Fed's agreement last month that it's going to shift direction perhaps on monetary policy.

  • 10:17:26

    EIDEAnd so the market has been anxious than it's been in a number of years already. And with Detroit that it's going to be restructuring its debt maybe in cutting its debt, they're on edge, and they're concerned. The biggest exposure is bond insurance companies, as well as bond holders. And they can be expected to play probably some pretty hardball negotiations either before or during bankruptcy proceedings.

  • 10:17:51

    PAGESo, Teresa...

  • 10:17:51

    GHILARDUCCII just want to add that.

  • 10:17:52

    PAGEYes, please go ahead.

  • 10:17:53

    GHILARDUCCIWhat's surprising to me -- and we've seen this happen in the financial collapse -- is that the creditors, the insurance companies that guarantee the lenders and the lenders themselves, these Wall Street firms and the Wall Street insurers, did not take a tour of the city before they lent the city money.

  • 10:18:12

    GHILARDUCCISo for them to say that they're shocked and horrified that they will have to take a huge haircut means they really didn't do their due diligence. But, again, this is what happens in negotiations. But look who the parties are pitted against. The workers who had no control over their pension funds and who took wage cuts in order to get retiree health benefits and pension benefits...

  • 10:18:39

    PAGERight.

  • 10:18:39

    GHILARDUCCI...who are older, have no place to go versus the Wall Street lenders and insurance companies that didn't even take a tour of the city before.

  • 10:18:45

    PAGEOK. We're going to take a short break. When we come back, we'll go and take some of your calls and questions. Stay with us.

  • 10:20:04

    PAGEWelcome back. I'm Susan Page of USA Today, sitting in today for Diane Rehm. With me in the studio, Jennifer Bradley, she's a fellow at the Brookings Institution and co-author of "The Metropolitan Revolution." And David Shepardson, he's the Washington bureau chief for The Detroit News. And joining us from an NPR studio in New York City, Teresa Ghilarducci, a professor of economics at The New School in New York, and Stephen Eide, he's a senior fellow at the Manhattan Institute.

  • 10:20:31

    PAGEWe're discussing the situation in Detroit, what it might mean for other American cities. We welcome your calls. Our toll-free number is 1-800-433-8850. Our toll line -- our phone lines are open. You can send us an email at drshow@wamu.org. Well, Steve, we've seen big battles in the past few years over public employee benefits in Wisconsin and elsewhere. And I wonder to what extent that the -- what we've called the haircut that public employee retirees may be -- may have to take in Detroit is part of this general trend of tightening and reducing benefits for public employees.

  • 10:21:08

    EIDEWell, it's a complicated question, but Detroit is definitely an extreme, and most cities are not going to face dire insolvency probably in the next few years. However, the bigger problem nationwide with local governments is that expenditures on pensions and health care both for active employees and retirees are rising at a rate faster than revenues.

  • 10:21:32

    EIDEAnd so they are squeezing budgets, preventing local governments, providing basic services and also reinvesting in their future, which is -- in the case of a place like Detroit, they obviously need to reinvest very badly. So to that extent, there is a similarity between what we see going on in Detroit and what's going on local governments nationwide.

  • 10:21:51

    PAGESo, you know, you look at this situation, Dave, for Detroit, and you wonder, how in the world could this happen? How could Detroit find itself in this situation?

  • 10:22:02

    SHEPARDSONYou know, in a nutshell, it was about putting off the hard choices for years and years. You know, the city's former mayor was sent to jail for corruption. He's awaiting sentencing. And as the city lost population, it put off those tough decisions. It borrowed money to pay its, you know, annual budget and now really faces itself with, you know, few options when you have this much debt.

  • 10:22:28

    SHEPARDSONIt's simply not sustainable, and, you know, it becomes this viscous circle. There are fewer jobs. Fewer people live there. They move out. The property values decline. And there really has been no way to stop this cycle. Just consider, you know, two-thirds of the people in Metro Detroit used to live in the city in 1960.

  • 10:22:49

    SHEPARDSONToday, it's less than 20 percent. Most of the people have moved out to the suburbs with the exception of Detroit. And there's just, you know, very little incentive for people to stay, especially in these very bad neighborhoods, and there are thousands of abandoned homes. And as you see these neighborhoods decay, it's just very difficult to turn them around.

  • 10:23:09

    BRADLEYBut I think it's important to point out...

  • 10:23:09

    PAGEBut, you know, others -- but, you know, Jennifer, other cities have faced big financial crisis, including a city as big as New York City and come through it in a healthier way without getting kind of the brink of catastrophe. So why didn't that happen here? Why wasn't there some sensible approach beforehand before it got to this state?

  • 10:23:30

    BRADLEYI think that if we just look at what happened within the boundaries of Detroit itself, we're missing a big part of how this came to be for decades. In the '60s and the '70s, we subsidized the suburbanization of the population. We made it easy and cheap to build outside on untouched suburban land. We built highways. We created a system in which it was really easy to make the costs and some of the concerns of the city somebody else's problem.

  • 10:24:03

    BRADLEYAnd people could take advantage of the benefits of the city, whether that was cultural institutions, jobs, without paying the freight. So you had this real imbalance that all of the costs were concentrated in cities, right? The pensioners of Detroit don't only live in Detroit, right? They're supporting the economy of a lot of the suburbs where they've moved. So I think we need the broader context of state and federal laws that allowed these costs to be shifted and placed on the city.

  • 10:24:32

    BRADLEYI think the difference between Detroit and, say, New York in the 1970s, New York, I think people realized, was just in kind of a rough patch and it would come out of it. There was a sense, I think, too, that New York was too big to fail. I think within Michigan and within the country at large, we've long seen Detroit as this kind of poster child, this sort of train wreck that you can't look away from, and so maybe there's just less civic concern.

  • 10:25:03

    BRADLEYThere's a lot of tension in Michigan. I've done some work there. There's a lot of tension in Michigan between Detroit and the rest of the state, and there's not a willingness to kind of save the -- what is -- in fact, one of Michigan's biggest assets is Detroit and the world's view of Detroit. So people are going to have to realize, I think, that Detroit is, in some ways, too big and too important for the state of Michigan to fail. It's more than just its problems.

  • 10:25:28

    PAGEAnd, Teresa, how would you compare the situation in Detroit with what happened with New York City in the '70s?

  • 10:25:35

    GHILARDUCCIWell, one of the biggest difference is -- and I beg to differ with Jennifer and agree with her on the other point, is that there's a lot of tension between New York state and New York City. And a lot of people in New York State said, you know, it brought the problems onto itself, let it go. The big difference is that the finance industry, the investors were actually living in New York City and had a greater willingness to help make the region healthy because they live there and work there.

  • 10:26:04

    GHILARDUCCIThere were also very, very strong unions, public sector unions in New York City, much stronger than in Detroit. And so the willingness of the -- both creditors, creditors in different ways, the workers and the investors to come together and make the city healthier was one of the big differences. Detroit suffers from having a lot of the creditors outside the state and outside the city.

  • 10:26:29

    GHILARDUCCISo I hope that Kevin Orr can make sure that the city re-organizes in order to do what Jennifer said, consolidate, make the region much more integrated, make sure that the people who benefit from the city actually pay for some of the benefits.

  • 10:26:45

    PAGEAlso, I'm not sure what it means...

  • 10:26:46

    EIDECan I just add to...

  • 10:26:47

    PAGE...when people say we should let it go because, you know, it's not like we're going to give Detroit to Canada.

  • 10:26:51

    GHILARDUCCIExactly.

  • 10:26:51

    PAGEIt's going to be a U.S. city. It's, you know, it's not as though we have the option of not paying attention to the limit.

  • 10:26:57

    EIDEYeah, let me just -- if I can just add a couple important differences there between New York City and Detroit. I mean, in New York -- because New York City plays such an outsized role in the New York state economy and finances, there's a real danger that's actually taking the state down, and that's why the federal government eventually had to get involved on the New York City fiscal clamps. Michigan is not as directly exposed to Detroit's problems in that way.

  • 10:27:19

    EIDESecondly, I mean, the biggest reason why New York City recovered of it long term was the decades-long bull run on Wall Street through the '80s, '90s and much of the past decade. I mean, that's what eventually brought some stability to New York City's finances relatively speaking. If you think that something like that is going to happen in Detroit within the next couple of decades, it strikes me as very speculative.

  • 10:27:41

    SHEPARDSONAnd then don't forget the issue of race. I mean, the 1967 riots, which saw 1,200 people injured, 43 dead, helped hasten the white flight from Detroit. And Jennifer was exactly right. The city did a number of things to help encourage people to leave the city by building massive highways that made it easy to get out of the city, and in the process, destroying, you know, hundreds of thousands of homes and whole neighborhoods as these large highways left.

  • 10:28:09

    SHEPARDSONAnd the city's water department sent the waterlines out to the suburbs to make more money but in doing so helped spur the development of new suburbs, which also pushed people out. And then finally, during World War II, the federal government urged the auto companies to build factories outside the city because it was considered the number one target, you know, of the access, and as a result, these new factories sprung up in farm lands far from the city, and the workers stayed and lived, you know, these new factories.

  • 10:28:39

    PAGEWell, Dave, you don't have a financial industry that's going to have a bull run for Detroit. But you do have an auto industry that has been coming back after the crisis of a couple of years ago. Could that fuel a revival of Detroit?

  • 10:28:53

    SHEPARDSONWell, certainly, General Motors is, you know, the largest U.S. auto company headquartered downtown and has, you know, still employees, you know, thousands of salaried workers downtown. And in general, the auto industry has been a huge boon to Metro Detroit and created a lot of jobs. And there are still a couple of factories in the city. But for the most part, the auto industry is not going to lead to a bunch of jobs in the city, you know, actually producing cars, but it is, you know, going to sort of lift the whole area up and provide opportunities, just not in the city.

  • 10:29:31

    PAGELet's go to the phones and let some of our listeners have a word. We'll start with someone from Detroit. It's Joe. He's calling us. Joe, thanks for giving us a call.

  • 10:29:38

    JOEThank you so much. I love the program. I just want to call you guys and let you know I've lived in the city of Detroit all my life, and I want to paint a slightly different picture. I have never been a victim of crime. When I turn on my water, it comes in. We have the best water in the United States of America, Great Lakes water from the Detroit River. When I call the police, which is not often, they come. And my streetlight works.

  • 10:30:03

    JOEAnd I say that to say this, that we have issues, and we certainly need to deal with those issues. But I don't want the listening audience to believe that Detroit is this dredged and dungeon place. There's a lot of good that's still going on here, and we'll come through this. We've come through difficult times before. We will come through this.

  • 10:30:21

    JOEThe bigger issue to me -- and I hope you guys have an opportunity to talk about this -- is that we have an emergency manager, Kevyn Orr, who is unelected, who has been appointed to take over the position as elected official. And that has got to be the most undemocratic method of governing that I have ever heard of, and we need to find some proper balances. We certainly need to make some changes, but I just don't think you can come in and basically un-elect an elected official.

  • 10:30:50

    PAGEWell, Joe, that's a great point, and I wonder if our panel could address that, about the job that Kevyn Orr is doing and about the reception he's gotten by residents of the city, and also is this, in fact, pretty democratic? What do you think, Jennifer?

  • 10:31:06

    BRADLEYWell, one of the challenges that any local government faces is that it is officially in law a creature of the state. There's no right to a local government. So, in fact, if the state decides that it wanted to -- that it wants -- that it needs to put in an emergency manager, that it needs to change kind of the rules of the game for local government, it has the power. We don't like to think about that, but that's the case.

  • 10:31:33

    BRADLEYThe challenge in Detroit when you think about elected officials and accountability is elected officials have not been able to stanch the bleeding, right? Mayor Bing came in, and people thought, this is great. He's got the city behind him. He will make the changes, and those changes didn't get made.

  • 10:31:54

    BRADLEYAnd the terrible paradox in Detroit is it seems that, at least at the moment, people cannot both have democracy and reliable, steady city services. I'm really glad that Joe called and that he does have, you know, streetlights and safety, but not everybody does. So how do you make those trade-offs? And this is what Michigan has chosen to do with Detroit.

  • 10:32:18

    PAGEI'm Susan Page, and you're listening to "The Diane Rehm Show." We're taking your calls at 1-800-433-8850. Well, Dave, how do people in Detroit tend to view this emergency manager?

  • 10:32:32

    SHEPARDSONI think it's really mixed. You know, it's certainly not, I guess, democratic in the sense that he has replaced the elected mayor in the city council. But the city's, you know, elected officials are having a fair number of problems. The city's -- city council president abruptly left town over allegations he had improper relationship. And so this -- and the city has had, you know, just very difficult times governing and making these tough decisions.

  • 10:33:01

    SHEPARDSONAnd, you know, Mayor Bing has tried, you know -- and they've spent years avoiding the point where the state finally opted to take over the finances. But, look -- I mean, any American who lives in a city and then sees all the power consolidated into the hands of one unelected person who is coming in mostly offering bad news. On the other hand, he has tried to say, look, I recognize the city needs more investment.

  • 10:33:28

    SHEPARDSONPart of this plan will be to invest about $1 billion to improve, you know, services. And he's also doing things like selling off the lighting system and proposing to hand over the city's largest park, Belle Isle, to the state and regionalize the water system and say, hey, I am going to make these hard decisions, but they are going to help the citizens 'cause if they don't -- if the citizens don't get behind it in what is going to be a potentially long, painful bankruptcy process, it may not work.

  • 10:33:58

    PAGELet's go to Don. He's calling us from Rochester, N.Y. Don, thanks for joining us on "The Diane Rehm Show."

  • 10:34:03

    DONWell, good morning, and good morning to all your guests. I would like to talk about the nature of banks. Banks exist to lend money, and when times are good, they fall all over each other to lend money to places like Detroit and, in Europe, to places like Greece and Spain and so on. But when times get tough, they want to be put at the head of the line of all the creditors to get back what's supposedly owed to them. Why should the workers of Detroit have to take pay cuts and slash the staff and cut the pensions of the retirees in order for the banks to get back what they knew could possibly be a bust?

  • 10:34:43

    PAGESo, Don, thanks so much for your call. Steve, what do you think about that? Is it fair that the investors get equal standing, even better standing, than the worker -- former city workers?

  • 10:34:53

    EIDEWell, first of all, almost assuredly, everyone is going to, you know, experience some pain through this debt restructuring. But -- and secondly -- I mean, I agree with much of what the caller said, and I think that it's appropriate that Wall Street take a hit. However, there is this problem in that, unfortunately, state and local governments do need banks.

  • 10:35:08

    EIDEThey need to borrow money to, you know, buy police cruisers, to fix streets and sidewalks, and Detroit has to be very careful as it proceeds through this debt restructuring that it doesn't prevent itself from ever borrowing money again over the next, you know, five, 10, 20 years. That's a big concern. And so it's in Detroit's self-interest to, you know, do what it can to placate creditors, to some extent, so that it can get back into the credit market, which it probably needs to do as soon as possible.

  • 10:35:39

    GHILARDUCCIBut I'm really concerned that the workers and mainly the retirees who are dependent upon the health care dollars are well represented. And so I'm concerned that Kevyn Orr may be more concerned about what Steve said, which is legitimate, that Detroit needs a credit line. But also, he is proposing to cut the retiree health benefits to the current workers. And I just want -- might want to add, that may be tempting in the short run.

  • 10:36:08

    GHILARDUCCIBut those workers spend those health care dollars in the middle of Detroit, at the Detroit big health centers, in the Henry Ford hospitals. In fact, one out of $5, health care dollars in some of those medical places come from actually retiree health benefits of the UAW and of the city workers. So it may not be prudent in the medium and long term to actually cut income from the actual residents, either in their health care dollars or their pension dollars.

  • 10:36:40

    PAGEDave.

  • 10:36:40

    SHEPARDSONBut, remember, that liability. It's $5.7 billion. It's, you know, almost a third of the city's total obligations. It's almost entirely unfunded. And what the manager has proposed is shifting some of those individuals to Medicare or to the new health care exchanges that are going to be coming into place as part of the Affordable Care Act. So it's not entirely saying they're not going to get these benefits, but trying to shift some of the costs to the federal government. Clearly, they're going to take, if this plan goes in effect, a significant cut in their benefits, but it's not simply wiping it out completely.

  • 10:37:18

    PAGEThat's Dave Shepardson with The Detroit News. And we're also joined this hour by Jennifer Bradley from The Brookings Institution, Teresa Ghilarducci of The New School in New York and Stephen Eide from the Manhattan Institute, also in New York. We're going to take a short break. When we come back, we'll go back to the phones, take some of your questions. You can send us an email at drshow@wamu.org. Stay with us.

  • 10:40:05

    PAGESo, Steve Eide, tell us, what would actually trigger a decision to file bankruptcy protection for the city of Detroit?

  • 10:40:13

    EIDEWell, I think, it's in the emergency manager's hands officially. He's still trying to reach an agreement with creditors on the outside of bankruptcy, which can be very expensive. It can last for years. You know, in the case of Stockton and San Bernardino, the bankrupt cities in California, there's no end in sight for them yet. They filed last summer.

  • 10:40:31

    EIDESo he has said he's going to make a decision within the next few months although I think he said that a couple of months ago. So it's basically in his hands, and it depends on what they can get in bankruptcy without federal intervention versus at the table with creditors.

  • 10:40:46

    GHILARDUCCIThere is a trigger, which is the court last year said that the city owes the firefighters' pension fund. I think it's about $30 million. And those trustees really have a duty to try to collect it. If they go in to try to collect a debt from the city, that actually may trigger Kevyn Orr to have to go into bankruptcy so that he can deal with all the creditors in an orderly way.

  • 10:41:13

    SHEPARDSONNow, this -- it's really an important detail about municipal bankruptcy that it has to be a voluntary decision on the part of the municipality. And in the case the municipality, that means Kevyn Orr. It's up to him, depending on his decision on what he thinks inside -- outside of court versus inside of court.

  • 10:41:28

    PAGEAnd, Steve, I think you said earlier in the hour that you thought there was maybe 60-40 chance of bankruptcy? Is that right?

  • 10:41:34

    EIDEWell, he said 50-50.

  • 10:41:36

    PAGE50-50.

  • 10:41:37

    EIDEMost analysts, you know, the people who follow this very carefully think that it's very likely that Detroit will file, yeah.

  • 10:41:42

    PAGEVery likely. Teresa, do you agree with that? Very likely, we'll have bankruptcy there?

  • 10:41:46

    GHILARDUCCIYes, mainly because Kevyn Orr is used to this. He's a corporate bankruptcy lawyer, and that's what he knows, how to reorganize institutions. You know, there are a lot of other visions than Kevyn Orr's about how to reorder Detroit. Jennifer's book has one vision on the ground that Detroit is -- Detroit future city has a blueprint. But I'm afraid that the city manager who has the control that Steve that described has one platform that he's used to, and that's the bankruptcy platform. So I think it's very, very high.

  • 10:42:19

    PAGEAnd, Jennifer, do you think there is an alternative way that ought to be considered, or do you think that Kevyn Orr is kind of doing what has to be done?

  • 10:42:26

    BRADLEYYou know, I think, the challenge in Detroit is, two different timescales, right? The firefighters' pension fund needs their money now. Detroit already has some bills to pay that it said, nope, we're not making those payments right now. The thing that I talk about in my book, "The Metropolitan Revolution" that Teresa so graciously alluded to, is this really powerful emerging innovation district in the downtown and midtown area where you have a lot of assets.

  • 10:42:53

    BRADLEYYou've got health care institutions that are investing tens even hundreds of millions of dollars in new research. You've got entrepreneurial business incubators. You've got people coming in to start new businesses who want to participate in what they see will be a revival of the city. And the challenge is can that get enough steam to kind of lift the city up and give it some of the revenues it needs before all these other demands come in. And I can't tell right now. I'm with Kevyn Orr. I think it's 50-50.

  • 10:43:27

    PAGEAnd, Dave, let me read you this email that we got from Boyd who writes us from Alexandria, Va. He says, "Is there any possibility that the Obama administration will bail out Detroit. We already spent a lot to save the auto industry. Shouldn't we consider saving a major American city? I would think it would be good politically as it was in the last presidential election with Obama having a good argument over Romney in that he saved Detroit."

  • 10:43:51

    SHEPARDSONThat seems very, very unlikely, almost impossible. It's true that the Obama administration did use about $85 billion from the $700 billion Troubled Asset Relief fund to save the auto industry. It's not clear where the president could tap money to bail out Detroit absent congressional approval. And that seems very unlikely. Look, this is not 1975. This is not -- the Feds are not coming to the rescue of Detroit because as we said earlier, Detroit does not hold the city.

  • 10:44:25

    SHEPARDSONYou know, it's not going to put the entire state into collapse or the, you know, economy, like New York City would have. So, you know, there's just that not that lever that is forcing, you know, any talk, really, of saving Detroit through a federal bailout. Unfortunately, for the citizen's point of view, the only way this will likely be done is either through bankruptcy or through voluntarily concessions.

  • 10:44:49

    PAGEAnd, Steve, through...

  • 10:44:49

    GHILARDUCCIBut...

  • 10:44:50

    PAGEI'm sorry. Go ahead, Teresa.

  • 10:44:51

    GHILARDUCCIOh, I just want to point out that Dave had mentioned that the federal government is helping bail out Detroit indirectly. One is through the health care exchanges, the subsidies to low income people who will lose their retiree benefits -- part of it. And also, if it wasn't for TARP, the bail out of the auto industry a few years ago, Detroit would be in much, much worse shape. So the federal government appropriately so is helping Detroit.

  • 10:45:20

    PAGEAnd, Steve, if bankruptcy is filed, who fairs better and who fairs worse likely under bankruptcy protection?

  • 10:45:29

    EIDEThere's a lot of uncertainty about what will happen because, again, these municipal bankruptcies are so rare, there's not a ton of precedent. So people have different opinions. Kevyn Orr definitely thinks that federal law will trump state law and that he can cut pensions. He certainly can cut retiree health care benefits, that's already happening with the bankruptcies in California, but he also thinks that he can cut, you know, payments to bond insurers. And that's why we can expect everybody to -- they already have lawyer up and try to, you know, protect their claim as much as possible.

  • 10:46:05

    PAGELet's go to Toledo, Ohio, and talk to Joe, who's been very patient holding on. Hi. You're on the air.

  • 10:46:11

    JOEHi. Thanks for taking my call. I'm originally a citizen from the state of Michigan up in Saginaw area. And now that I'm in Toledo, I am a teacher here. I still travel to Detroit quite frequently for the art and culture that's down there. And by all means, I would not want to be in the position that Kevyn Orr is at, having to make these tough decisions.

  • 10:46:28

    JOEHowever, one concern that I have is that, you know, he is willing to sell off some of the city assets or even consider some of Detroit's jewels, such as the Detroit Institute of Art, to, you know, collect funds, so that way, he can help the city get out of bankruptcy, to the extent where state of Michigan actually had the Senate had to pass the bill proclaiming that would not be allowed.

  • 10:46:49

    PAGEAnd, Joe, you think this is a bad idea?

  • 10:46:51

    JOEYes, I do.

  • 10:46:52

    PAGEYeah.

  • 10:46:52

    JOEI think that having to put Detroit's precious gems, even Belle Isle and other state -- city institutions and things and trademarks that people come to go see on the table or the chopping block just to create funds there is a great shame for that area and the state.

  • 10:47:09

    PAGEThanks so much for your call. You know, we also got an email from Brian in defense of the Detroit Institute of Arts. He writes, "The paintings -- the museum's first painting was donated in 1883. Its collection consist of over 65,000 works and encyclopedic museum span the globe from ancient Egyptian works to contemporary art." So what is the – are they actually at risk of being sold off, Dave?

  • 10:47:32

    SHEPARDSONThere certainly is a risk. The state attorney general has issued an opinion that says those are held in trust. But legally, these paintings are owned by the city of Detroit, many of which were purchased with city funds during the 1920s. Some of the most, you know, very, very valuable and precious paintings worth conservatively well over $1 billion dollars.

  • 10:47:52

    SHEPARDSONSo I think what will happen, assuming the city files for bankruptcy, is the creditors will go after those paintings and works of art because the strategy is to put your opponent, the city, in as much pain as possible and to fight as hard as you can in the hopes of getting a slightly better, you know, deal at the end of the day. So if the city goes into bankruptcy, it'll be a, you know, an all-out war, and certainly the DIA is going to be thrown in the middle of it.

  • 10:48:19

    PAGEThe Detroit Institute of Arts.

  • 10:48:20

    SHEPARDSONOf arts, right.

  • 10:48:20

    BRADLEYBut the DIA -- the museum is actually a really important regional asset. Not long ago, the citizens of three suburban counties agreed to tax themselves to support the Detroit Institute of Art. That is an incredibly rare case of regional buy-in for a city-based institution. And it would be tragic from the point of view of regional coming together and the sense of -- and the possibilities for Detroit recovering as a region if that asset were drained.

  • 10:48:54

    BRADLEYLeave aside, right, the importance of art and all of the great cultural stuff that's going on around DIA and the, you know, the educational opportunities just that this is finally being recognized as a regional asset, it's so important that it would be a disaster if it fell away.

  • 10:49:11

    GHILARDUCCII have a different -- a little different view. Kevyn Orr is a very clever negotiator. He put the DIA on the block, and Jennifer is right. The response in the suburbs is don't sell the Redon and the impressionist masters. But when a lot of the other people in the city weren't so alarmed about art 'cause they don't go the art institute, he then put up the giraffe -- the breeding giraffe in the zoo and the Corvette in the Detroit History Museum to get different sectors of the citizenship to understand that all the assets could be sold. So I thought that was a very clever negotiating move.

  • 10:49:51

    PAGEWell, unless it turns out that he's actually selling them off, then it might not look so clever, right?

  • 10:49:56

    GHILARDUCCIYeah. Right.

  • 10:49:57

    EIDEAnd many people thought that he only mentioned the art in the first place to concentrate the mind of the suburbs and to make it clear to them that they have a stake in what happens in the central city, too.

  • 10:50:05

    GHILARDUCCIAnd the same thing with the giraffe and the Corvette.

  • 10:50:07

    SHEPARDSONBut don't forget, there's also an opposing view among some city residents said, hey, why don't we have this art in the city when, you know, my street lights don't work, the police don't come, the ambulance doesn't come? You know, there are some people will say, hey, should the city use that funds to help residents?

  • 10:50:21

    PAGECrystal is calling us from Fort Mill, S.C. Hi. Crystal? Crystal, are you there?

  • 10:50:30

    CRYSTALYes. Can you hear me?

  • 10:50:31

    PAGEYes. We can hear you. Welcome to "The Diane Rehm Show."

  • 10:50:34

    CRYSTALI'm sorry. Hi. How are you? And I love the show, let me say that. And I just moved to Fort Mill less than a year ago. I have been a resident of Detroit my entire life. And things had just gotten completely out of control in the city. And it's not just the citizens and the crimes that I'm speaking of.

  • 10:50:53

    CRYSTALI'd like for you guys to touch on the fact that I think that every politician that's been put in office, not every, but the majority of the politicians somehow ended up being corrupt and ended up spilling from the city, spilling from the school board and taking from the city. And this could contribute to the demise of the city. And it's not really going to be addressed. Kwame Kilpatrick would be the major one, but there were so many other politicians that contributed to the demise of the city that have just (word?) and then forgotten.

  • 10:51:23

    PAGEAnd, Crystal, tell me, why did you decide after living in Detroit most of your life to move away?

  • 10:51:30

    CRYSTALLike you said, the police won't come. I mean, I walk into the backyard and -- I mean, just a month or two before I left. And I walked to the backyard, I was going to, you know, check things out and put my car in the garage, and there was a man standing in my backyard. And he was obviously on his way to my backdoor. And you call the police. I mean, I kind of had to chase him out and ask him what he was doing there. And I've called the police, and they won't come. They will take a description and say, thank you for your call.

  • 10:52:01

    CRYSTALBut it's not just bad as people being shot and they take their time coming. If you have a fire, they tell you. If you buy an alarm system for your house and the alarm goes off, we are not coming. We are not responding to alarm systems. And so my mother moved to the city when we were younger and purchased the house with my father and owned several properties. And it just got to the point where you're paying ridiculous amount of taxes, you get no service, and you have no safety. I mean, it's just unsafe.

  • 10:52:32

    PAGECrystal, thanks so much for your call. I'm Susan Page, and you're listening to "The Diane Rehm Show." Dave.

  • 10:52:37

    SHEPARDSONShe's, you know, and you cannot blame the city police department entirely because they're -- they are doing their best, but they have been cut by 40 percent. But she -- the caller raises exactly the right point about why city -- the city is struggling so much because if you cannot provide basic safety when the priority one call response time for, you know, the most urgent violent crime in the city, you know, is 58 minutes, you know, on average, then citizens don't feel safe.

  • 10:53:05

    SHEPARDSONAnd then they leave as soon as they are economically capable of leaving the city. So, you know, absent, you know, the basic services of police and schools and a culture, unfortunately, of endless corruption, you know, the library department has been investigated, the county. You know, city council members have been sent to prison, you know.

  • 10:53:24

    SHEPARDSONSo there's been a lot of corruption in a impoverished city that simply cannot, you know, maintain basic services. And meanwhile, a third of it, 40 square miles, are abandoned. And so absent some dramatic change, the cities will continue to slide into further and further problems.

  • 10:53:43

    PAGEWe have an email from Chris, who writes, "Any discussion of the city's insolvency must include the culpability of populous politicians and city hall unable or unwilling to reverse course. As a former councilmember from Cincinnati, I can say with certainty, the elected city leadership saw the disaster coming years ago. Their failure to act is at best negligent and at worst criminal." Steve, what do you think of that?

  • 10:54:06

    EIDEI totally agree with that. I mean, getting back to the earlier point about democracy, the earlier caller made. Look, the emergency manager law was passed by an elected governor, an elected state legislature, and the alternative here is bankruptcy. I mean, Detroit would already be in federal bankruptcy a couple of years ago had it not been for the efforts on this part of the state government to try to do something better, try to find a better solution. That's an option in California.

  • 10:54:27

    EIDECalifornia sort of lets it cities twist in the wind, get some relatively free access to bankruptcy. And so, you know, I don't find that to be a more democratic alternative. I think the more democratic thing is for the state government to get involved, give the city a chance to resolve its problems but not failing to get involve and try to get through these problems.

  • 10:54:44

    PAGEJennifer, we know that there are some groups in Detroit outside of the government that are trying to bring about an economic turnaround. Tell us about those.

  • 10:54:51

    BRADLEYThere are a lot of groups in Detroit. Detroit has a very strong civic and philanthropic structure. So you've got organizations like Detroit Future City, which has done an elaborate planning process supported by a lot of philanthropists working very hard to get by and to help people understand the choices that they, the citizens, need to make to -- as Teresa's been saying -- rationalize and kind of right-size their city.

  • 10:55:18

    BRADLEYYou've got a lot of community and civic groups, church groups on the ground who, you know, with people like Joe, our earlier caller, who've said, I care about this place, and I'm going to stand here. They have adopted vacant lots. They've done local crime patrols. They've tried to protect what they love about the city. And then you have philanthropy. You've got the New Economy Initiative of Southeast Michigan. You've got the Kresge Foundation.

  • 10:55:43

    BRADLEYYou've got a lot of people pouring money into the city for things like the M1 light rail line. You've got them supporting these business incubators like TechTown. There is a lot of good, smart investment that's still happening in Detroit. And it's laying the groundwork for an economy that's not fully dependent on auto, that takes advantage of the medical and innovation assets there.

  • 10:56:06

    PAGEDave, we have just a little bit of time left. What's the mood of people in Detroit? Do they fell like, oh, we've hit bottom, we're finally coming back or people are pretty discouraged?

  • 10:56:13

    SHEPARDSONI think it's a lot of uncertainty because of, you know, we're in this period before a likely bankruptcy, and people don't know what's going to happen to services. But there is a sense that the city has tried everything else that it faces, you know, endless red ink. But also to Jennifer's point, there are some good things happening. There's urban farming, there are other ways of reusing land and, there are big business groups bringing more jobs in the downtown.

  • 10:56:40

    PAGEDave Shepardson, Jennifer Bradley, Teresa Ghilarducci and Stephen Eide, thank you so much for joining us this hour on "The Diane Rehm Show." I'm Susan Page of USA Today, sitting in for Diane. Thanks for listening.

  • 10:56:53

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Casey Nabors, Rebecca Kaufman, Lisa Dunn and Danielle Knight. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington, D.C. This is NPR.

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