The calculus here is pretty simple: Screw the banks and take a short-term hit to the city's borrowing ability, but get the debt off our backs, lower the taxes needed to pay it, and free up money to spend on services hoping that a more functional
This is the principal virtue of the decision to take the city into bankruptcy.
But in the finance world, it's a big deal that is already getting lots of national attention, and will inspire an epic fight from the banks to prevent it from happening.
Every Detroiter needs to hope that Orr can prevail in court, and that the city's new management, Mayor
Orr's biggest gamble here is his treatment of so-called unlimited tax bonds, voter-approved borrowing that pledges to raise taxes to any rate necessary to repay the debt. The banks and insurers holding that debt are generally thought to have greater protection than other creditors, a near-unbreakable promise that the money they loaned (if not the interest and other terms agreed to) would be repaid.
That debt represents only about
The danger, of course, is repercussion in the municipal lending market. Under the worst scenarios being contemplated, interest rates could skyrocket for future city borrowing (and you need bonds for development and infrastructure) or access to the market could narrow or disappear.
There are a number of reasons, however, that this is probably worth the risk, and that Detroiters -- who wander dark streets and wait too long for a diminished police force to respond to crimes -- could benefit in the long run.
First is the axiom that to make money, banks have to lend it. So yes,
It's also true that eliminated tax-dedicated debt will wipe out (or ease) the associated taxes. In
Then there's the redirection of revenue away from debt and into city services. (That could prevent another hurdle for Orr in court, too; Rhodes will have to decide whether taxes raised for debt can be spent on cops and firefighters and streetlights.) If Orr can lower the percentage of the city's money that goes to banks, it opens the opportunity for serious reinvestment in things that will make the city more livable. Better parks. Faster police and firefighter response times. Taking better care of cultural assets and institutions.
Fixing those things could grow the city's tax base through higher population or an influx of middle-class taxpayers, and that improved tax base could be a primary driver for more favorable lending down the road.
The key here is to consider Orr's welshing on debt in the full context of the overall plan. If the city looks like a safer investment risk as a result of improvements made possible by the default on previous debt, the payoff could be immeasurable.
That means it's also important to change the way
The virtue of bankruptcy is the ability to start over. If Orr is successful,
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