Bankruptcy accelerates debts to get everything settled at one time, Novine. Creditors have to take what they can get then -- cash and securities -- because there's no going back to the well later. If liquidated assets cover everything, then the debtor was illiquid but not insolvent, and the creditors can walk away with cash. That's the standard deal in such a bankruptcy, and that may be Detroit's situation... choosing financial distress rather than mobilizing assets that more than cover its liabilities. The way, though, that penalties from financial distress keep adding more liabilities -- $350 million here, $400 million there -- Detroit may face true insolvency soon [[it would take a LOT of penalties with all Detroit owns over at the DIA, but then, bond indenture writers have known about Detroit's financial problems for a LONG time).
No one really knows how a Detroit EFM or bankruptcy will play out... this really is uncharted territory, whether precedents and statutes apply [[rule of law) or not [[rule of men). Even if precedents and statutes do apply, a Detroit bankruptcy or EFM court review would be a court of first instance for many decisions. That court will explore just how the statutes apply in context with prior law -- perhaps strictly, perhaps not -- and perforce set lots of new precedents along the way -- perhaps in line with current law, perhaps out of line. When it's done, then come the appeals. Red Devil and Gistok may not end up competing with Zacha341, Lowell, and the Sheik of Araby for everything the Detroit Arts Department has, but don't be so sure. I think Det_ard has a point about just how effectively this process has protected the City's jewels so far. They're at risk.
Raising property taxes may not save them. With Detroit's property values so low that people can and do maintain control over many properties simply by paying the minimum bid every time it comes up for tax auction, rather than paying the assessments along the way, Michigan municipal bond law doesn't really matter. The property taxes and other revenues the City can actually raise can't keep up with essential services plus the interest on the bonds, much less generate additional funds to retire the principal as promised. Raising property tax and income tax rates, especially with any additional funds going to interest and principal and pensions rather than current municipal services, can drive more and more people out of Detroit in a vicious cycle [[will the last Detroiter please pay off the city's bonds and turn out the lights before leaving town?). That's where Detroit's assets can come into play to satisfy creditors, leaving taxes to pay for services. What assets does the city need for essential municipal functions -- e.g., police cars, fire trucks, and ambulances -- and what non-essentials can it sell off without harming public safety and health? What assets generate cash to pay related bonds -- e.g., sewer and water plants -- and what assets don't generate cash?
Some folks here want to portray me as a bad guy here. I just wanted to point out -- in time! -- that ways exist so that Detroit's artworks can generate cash while Detroit still retains some form of ownership. If Detroit wants cash along with cultural rights to its artworks, keeping them on permanent exhibition or bringing them back to the DIA at times of the DIA's choosing for temporary exhibitions, research, conservation, etc., I'd be happy to help, but that's not the only alternative that could generate cash from artworks the city still owns in some way [[the smartest alternative, but not the only alternative). I'd hoped Detroit would choose some alternative -- not necessarily mine -- to just plowing straight ahead into a series of defaults and turning control of its assets over to a judge or EFM who'd likely liquidate Detroit's artworks as non-essential, non-cash-generating assets. It looks to me now like Detroit may not avoid more defaults and more associated penalties... it's already on the hook, or so the papers say, for that $350 million penalty for letting its bond ratings slide, and that first $50 million annual payment will hurt... a lot!
Maybe you're right, Novine, that Detroit can avoid a financial doomsday. I wish Detroit luck threading that needle. It just seems awfully late in the day for Detroit to keep bickering with Outstate over who runs the City's finances. If Detroit wants to keep running its own finances, it can mobilize its own assets. It's got assets -- the downgrade's a mistake with all the assets Detroit has -- but it looks to me like it's time to either use 'em or lose 'em to its creditors via EFM or bankruptcy. We'll see pretty soon, one way or another. I think my own scenario is more connected with reality than yours -- it takes into account the City's ability to collect taxes, not just the rates it levies on taxpayers -- but it's quite possible, even likely, something will happen that neither of us anticipate.
And that, Richard, is indeed the art thing again. If anybody's aware of other assets the city owns with financial value on a scale that can turn around the vicious cycle of its financial problems, now would be a good time to introduce them to the discussion. That could just lead us to that eventuality that neither Novine nor I anticipate.
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