Why Chicago Won't Go Bankrupt, and Detroit Didn't Have To

The Real News Network

02 Jul 2015

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Why Chicago Won't Go Bankrupt, and Detroit Didn't Have To

The Real News Network

JAISAL NOOR, PRODUCER, TRNN: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.

Detroit's 2013 bankruptcy, the largest of its kind in history, was not inevitable, and neither is Chicago's, but the austerity haws don't want you to know that. That's according to a new piece by Saqib Bhatti in In These Times. He's now joining us. He's a fellow at the Roosevelt Institute and director of the ReFund America project.

Thanks so much for joining us.

SAQIB BHATTI, DIRECTOR, REFUND AMERICA PROJECT: Thank you.

NOOR: So conventional wisdom dictates that Detroit had to go bankrupt because of its bloated public pensions. You have a different take on this, and the road that Detroit took to address its bankruptcy. And what the lessons are for the rest of the country, including cities like Chicago.

BHATTI: Right. No, there is this narrative out there that Detroit went bankrupt, the bankruptcy was inevitable because of the city's pensions. And in fact, to emerge from bankruptcy the city did end up cutting pensions for its retirees.

But the thing that people don't realize is that Detroit didn't cut pensions to get out of bankruptcy. Detroit filed bankruptcy so they could cut pensions. The reality is that there was a broader political agenda, and cutting pensions was really high on that list. And bankruptcy was the means that they used to accomplish that goal. There was nothing about the Detroit bankruptcy that was inevitable. It was a political decision made by state officials in conjunction with the emergency manager of the city to really push the city into bankruptcy so they could get around constitutional, state constitutional prohibitions against slashing pensions.

NOOR: And in your story you mentioned how many other cities have been compared to the, what could be the next Detroit, including cities like Baltimore, but commentators say that state law would prevent that from happening. But that was also the case in Detroit. Is that correct?

BHATTI: Right. Detroit--I mean, Michigan state law now permits municipalities to file bankruptcy. Currently there is 26 states that do not allow it. So cities file bankruptcy under Chapter 9 of the U.S. bankruptcy code. But under Chapter 9 the filing actually has to be authorized by the state. And so currently there's 26 states that do not authorize it. A thing that's interesting, given people talk about the next Detroit, they seem to completely disregard that fact.

So one city that's often mentioned as the next Detroit is Chicago. Well, in Chicago--in Illinois, Illinois does not allow municipalities to file bankruptcy. There is a bill before the legislature right now to try to change that, but that bill is not passing. It's not, it's basically dead on arrival.

The other thing that's interesting is we've also seen people talk about states going bankrupt. And that's another thing that's just not possible. The bankruptcy code, federal law does not allow states to go bankrupt, period.

And so what we're seeing in a lot of places is this talk of bankruptcy is basically part of a political agenda to really scare people into accepting draconian cuts and austerity agenda. And the idea is that if you sort of scare people enough and say, look what happened to Detroit. You don't want that to happen to your city, you can force them to accept painful cuts. You can really move a radically regressive agenda just by scaring people, even though bankruptcy is typically not even on the table.

NOOR: And so talk about what the alternatives to this could be, because you know, one of the things you propose is raising taxes, but critics would say taxes are high enough, and if you raise taxes you're just going to drive away businesses and you're only going to further hurt the economy.

BHATTI: Right. And the issue is not raising any taxes. It's raising progressive taxes, right. So one of the key things that we have right now in a lot of places is that cities rely on, for most of their funding, from property taxes. And property taxes can be done in a progressive way, but typically they're not. And so it really is how do we actually figure out how to change that?

So in Illinois for instance, Illinois has the fifth most regressive tax system in the country. Two-thirds of corporations pay no income taxes at all. So we should be figuring out how we're actually, flipping that on its head, and creating a fair tax system that allows us to properly fund services while also sort of meeting our obligations to work with retirees and everyone else. Because of course at the end of the day, funding workers who provide the services is part of funding the services.

And we saw this in Los Angeles, that after the financial crash the city's budget took a steep hit and they laid off 5,000 workers. Well, those 5,000 workers provide a lot of services. And the thing that sort of happened since 2008 is that all sorts of service provision have gone down. And so we're often, what the right and sort of Republicans, conservative Democrats often try to do is say that well, you had--if you raise taxes to, you're doing that on the backs of people who are trying to get service--they're trying to pit service recipients against service providers. And the correct solution is that we need proper funding for services, period. And proper funding for services means you got to fund the workers as well as the actual delivery of the service, and that's how you actually [underplay] the good, healthy economy.

The other thing that's important to note is when we talk about, you know, helping the economy, if you eliminate--if you sort of slash pensions down drastically, that actually has a huge negative impact on the economy. Some of the best jobs in cities, particularly in cities with, that are predominantly or majority minority, are often public sector jobs. And if you're actually slashing pensions or going after the public sector, that's going to have a huge impact on the broader economy of the city.

NOOR: And so how do we change this conversation? Because as you alluded to, this threat of bankruptcy is being used to go after public sector pensions in Baltimore. This financial shortfall has led to a similar move to what's happening in Detroit. Thousands of people have had their water cut off, because they say the city--because you know, the city says they are owed millions of dollars in overdue water bills.

So how do we rephrase that conversation? How do we put the wealthy on the defensive, instead of always being on the offensive?

BHATTI: I mean, it's important to really shine a light on who is paying their fair share and who is not. And looking at any crisis, it's also important to look at who's profiting off of it.

And you know, you mentioned the example of the Baltimore water and the Detroit water. Well, in both of those cases one of the big profiteers was actually Wall Street banks that had roped both the city of Detroit and the city of Baltimore into interest rate swap deals that completely backfired as a result of the economic crash. And they ended up costing both cities, Detroit and Baltimore, tens of millions each year.

And so in the case of Detroit, the Detroit water department had to pay more than half a billion dollars in penalties on these swaps in 2012. And as a result of that the water bills skyrocketed, because they had to take out a new bond to pay that off. And currently about 40 percent of the water bill goes towards paying off those swaps. And the thing that's the kicker there is that there's actually a very strong legal argument that those swaps were illegally done, and that if the city were to actually file a lawsuit to get that money back they could potentially recover that money, but that's never been on the table. Instead there's a big push to really just turn off people's water, even if they're only behind a couple of payments. They'll turn off people's water for $150, but they're not trying to recover the half a billion that they paid to the banks. And we have a similar thing happening in Baltimore, where the interest rate swaps in Baltimore were actually directly linked--a lot of them were directly linked to the water and wastewater system. And they've actually really sucked a lot of money out of the budget.

And so I mean, that's just one way that we can start shining a light on who's not paying their fair share. But really the key thing is looking at these types of financial deals, looking at corporate tax subsidies, looking at who are the people who are lobbying to keep taxes down, particularly progressive taxes. Because the solution is not cutting. The fact is that we've had an anti-government--and an anti-government, anti-taxing environment for the last 35 years, since Ronald Reagan's presidency. And we've actually cut services to the bone already. We can't cut out any more without permanently crippling ourselves. We need to actually start finding ways to put more money on the table so we can properly fund the services that we all know that we need and deserve.

NOOR: Thank you so much for joining us.

BHATTI: Thank you.

NOOR: And thank you for joining us at The Real News Network.

Saqib Bhatti is a fellow at the Roosevelt Institute and the Director of the ReFund America Project. He works on campaigns to rebalance the relationship between Wall Street and local communities by advancing solutions to fix inefficiencies in our municipal finance system that cost taxpayers billions of dollars each year. Bhatti was previously a fellow at the Nathan Cummings Foundation. Prior to that, he spent several years working on Wall Street accountability at the Service Employees International Union (SEIU), where he developed strategic campaigns to hold banks accountable for their role in creating and profiteering off the economic crisis, with a particular focus on municipal finance and housing and foreclosure issues.

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