This article first appeared at The McAlvany Intelligence Advisor on Wednesday, January 22nd, 2014:
The chasm between dream and reality, between hope and substance, between promises made and the mathematics behind them, were never more starkly on display than back in 2007 when taxpayers in Highland Park – a three-square mile city located inside Detroit – approved a measure offered by the city council to borrow $27 million from local banks in order to make the city’s pension plan payments. Talk about robbing Peter to pay Paul, or, more accurately, making one credit card payment by using another credit card! So there’s plenty of guilt to go around as the city now descends, rapidly and certainly, into bankruptcy.
There was no money in the treasury to make the payments. The city council decided to borrow the money. The voters approved the measure. The banks ignored the city’s perilous financial condition and loaned it the money anyway. In the short run, it appeared that the only ones to benefit from this insanity were the pension plans and their beneficiaries.
That was then. The dream ended and reality descended on December 12th last year when the city received a letter from Fifth Third Bank, one of the three banks keeping the city on life support, declaring that it was going to stop loaning money to the city. The check for $168,000 they sent out last week would be the last one.
The letter was revealing. The stream of loans was ending, it said, “based on the city’s incurrence and continuance of debt relating to, among other things, the city’s failure to pay amounts owed to the city of Detroit and [to] the Detroit Water and Sewerage Department.” The letter failed to mention that the city couldn’t pay its light bill either.
The letter followed a lawsuit filed by Kevyn Orr, Detroit’s emergency financial manager, in the amount of $18 million for those amounts owed. It’s unclear exactly how much the city owes the banks or how badly underfunded the city’s pension plans are, but back in November 2011 the total was estimated to be $60 million. And this was to be serviced by Highland Park’s annual tax revenue stream, which had collapsed to just $12 million.
Highland Park used to be the crown jewel of Detroit, the center of manufacturing for Ford and Chrysler. Henry Ford himself built a plant there to make Model Ts back in the 1920s, and up through the 1950s Ford used the plant to build its farm tractors. When Ford closed up shop for good in 1973, it took away an estimated 5,000 jobs. This was a hit, but it wasn’t fatal to a city of 50,000.
What was fatal was Chrysler’s move away in the late 1990s, removing 25 percent of the city’s tax base, and cutting the city’s tax revenues in half. The city never recovered.
Michigan’s governor was forced to appoint an emergency financial manager in 2001 to take over running the city from the mayor and his city council. A steady stream of managers were appointed and fired, one of the latest for stealing funds from the city.
Despite failing to keep many promises to run the city on a fiscally sound basis, the mayor and city council took back control and proceeded with numerous draconian measures to keep making those pension plan payments. One of them was an attempt to cut the city’s $60,000 monthly electric bill by removing 2,000 street lights – not just shutting them off but literally uprooting and removing them! – leaving just 500, mostly at intersections, still operational. The light bill was reduced to $12,000 a month, but the city couldn’t even pay that. Council members said it was a good deal, but residents were advised to keep their porch lights on to deter crime. One council member had the gall to say “We had to watch our backs when we got out of our cars before [the lights were removed]. Now we have to watch them even more closely.”
The city, which used to be called “The City of Trees,” is now the city without lights and soon to be without water. A couple of years ago, the city shut down its water treatment plant because it couldn’t come up with the $9 million needed to renovate it, so it started buying its water from Detroit. And every year since 2008 it has fallen behind on its water bills.
The city council unwrapped a Christmas gift for its 11,000 remaining residents in an announcement it sent out in December 2012, notifying them of their new program called WRAP – the Water Recalculation-Assessment Program – whereby citizens discovered to their dismay that they owed back water fees, some as high as $3,000! Merry Christmas.
The residents don’t have the money. The turnip has been squeezed dry. The average household income in Highland Park is just over $18,000 a year, many are on fixed incomes, and 42 percent are living in poverty.
There’s plenty of blame to go around: unions successfully demanding that pension plan payments come first before anything else, city council members who are bad at math, banks that ignore weakened balance sheets, voters who think that money rains down from Heaven and that consequences can be delayed forever.
Michigan Governor Rick Snyder will, in the next 30 days, be deciding whether or not to appoint another emergency financial manager who will turn the mayor and city council members into mere observers of the passing scene, or just go ahead and recognize reality and allow it to declare Chapter 9 immediately.
One thing is certain: Highland Park is headed for bankruptcy and this time there will be no winners.
The Detroit News: Highland Park, bank battle over loans for pension costs
Yahoo News: Unable to pay bill, Mich. city turns off lights
Detroit Free Press: Detroit sues Highland Park for $16.9M over unpaid water, sewer bills
The Huffington Post: Highland Park Water Bills Anger Residents Hit With Huge Back Charges