DEMOCRACY LOST AND WON:
THE DETROIT BANKRUPTCY AND ITS
LEGACY
The Honorable Michael D. Warren, Judge of the
Oakland County Circuit, Michigan, co -creator
of Patriot Week
Amy Bloom, History and Social Studies
Consultant, Oakland Schools, Michigan
Dimension 1:
Developing
Questions and
Planning
Inquiries
Dimension 2:
Applying
Disciplinary
Concepts and
Tools
Dimension 3:
Evaluating
Sources and
Using Evidence
Dimension 4:
Communicating
Conclusions and
Taking Informed
Action
USING THE C3 FRAMEWORK TO
INVESTIGATE THE DETROIT BANKRUPTCY
DETROIT, 1930’S
 Workers leave a Ford
Motor factory in
Detroit
DETROIT, 1942
Detroit was
once a place
of hard
working
middle class
Americans
who flocked to
the Motor City
to work in its
factories.
DETROIT, 1942
 In July 1942,
Detroit’s
factories were
producing
tanks for the
war effort.
 Detroit was
viewed as the
Arsenal of
Democracy.
DETROIT, 1943
 Even though
Detroit had a
booming
economy, the
city had issues.
 Racial
disparities
roiled to a head
in 1943 as a
race riot broke
out.
DETROIT, 1950’S
In 1950, Detroit
boasted 1.84 million
people.
By the 1950s,
Detroit had one of
the highest per
capita incomes in
the country.
Detroit had an
exemplary public
school system.
MOTOWN! (1959)
 Motown Record Corporation was founded by Barry
Gordy in 1959.
 Gordy created a 24-hour hit-making and artist
development factory, nurturing the artistic talent of
singers, writers, producers and corporate executives .
1967 RIOTS
During the summer of
1967, Detroit
experienced one of the
most violent urban
revolts in the 20th
century.
While its immediate cause was a
response to police brutality, the
underlying conditions including
segregated housing and schools
and rising black unemployment
helped drive the anger of the
rioters.
1970S OIL CRISIS AND ITS IMPACT ON
THE REGION
 Began in 1973 when OPEC proclaimed an
oil embargo
 March 1974 oil rose from $3 per barrel to
$12 per barrel
 The second oil crisis or oil
shock occurred in the United States due
to decreased oil output in the wake of
the Iranian Revolution.
DETROIT SHOWS SIGNS OF
IMPROVEMENT, 1990-2008
 The growth of the big three automobile
companies, fueled by SUV and luxur y car sales,
boosted the economy in Detroit.
 New businesses such as Comerica Tower,
the MGM Grand Detroit, MotorCity Casino,
and Greektown Casino moved to Detroit.
 New stadiums were constructed for the Detroit
Lions and the Detroit Tigers and the historic
Book Cadillac Hotel and the For t Shelby Hotel
reopened for the fir st time in over 20 year s.
 Events such as Super Bowl XL, the 2006 World
Series and the NCAA Final Four of fered fur ther
improvements to the downtown area .
YET, BY 2013 THE CIT Y OF DETROIT
FILED FOR BANKRUPTCY
At that time:
 The city had one of the highest unemployment
rates in the U.S.
 The population of Detroit it had declined to just
714,000 spread over some 140 square miles .
 The public school system was broke and broken,
and had been under an emergency manager
HOW DID A CITY THAT
WAS A BEACON DURING
THE GREAT MIGRATION
AND THE ARSENAL OF
DEMOCRACY DURING
WORLD WAR II GO
BROKE?
Economic
Perspective
THE DETROIT BANKRUPTCY…
WHAT HAPPENED?
REASONS FOR DECLINE
 Taxing higher and higher: Despite raising taxes, revenue fell 40 %
from 1962 to 2012
 Downsizing — too little, too late: In the past 50 years, property
tax value fell 77% in today’s dollars
 Skyrocketing employee benefits and the 13 th check.
 Missing chance af ter chance during less turbulent times
 Borrowing more and more: From 2000 to 2012, Detroit went on a
borrowing binge to close budget holes and to build infrastructure,
more than doubling debt to $8 billion
 Kilpatrick restructure pension fund debt like the mortgage fiasco
 Then came the Great Recession. . . .
B E T T I E B U S S , A FO R M E R C I T Y B U D G E T S TA F F E R W H O S P E N T Y E A R S
A N A LY Z I N G C I T Y F I N A N C E S FO R T H E N O N PA R T I S A N C I T I Z E N S
RESEARCH COUNCIL OF MICHIGAN.
“Detroit got into a trap of doing a lot of
borrowing for cash flow purposes and then
trying to figure out how to push costs (out)
as much as possible.”
“That was the whole culture — how do we
get what we want and not pay for it until
tomorrow and tomorrow and tomorrow?”
TO WHAT EXTENT DOES
THE HISTORY OF
DETROIT REFLECT THE
NATIONAL NARRATIVE
DURING THE 20 TH
CENTURY?
Historical
Perspective
TO WHAT EXTENT DID THE STRUGGLE FOR CIVIL
RIGHTS PLAY OUT IN DETROIT?
In June 1963, a crowd of
125,000 took to the streets of
Detroit in the Walk to Freedom
march that eventually concluded
at Cobo Hall.
While at Cobo, Dr. Martin
Luther King Jr. delivered a
rousing 30-minute speech — an
early take on what would
become his famous "I Have A
Dream" speech in Washington
D.C.
23
RACIAL INEQUALIT Y
 Most mainstream media stories about the bankruptcy
focus on the overreliance on the auto industry, poorly
structured city policies related to employee
compensation, and related issues.
 However, they generally do not delve into the historical
complexities of racial inequality, including the
riots/rebellions of 1943 and 1967, white flight, the role
of racist real estate policies in establishing de facto
segregation, and federal highway and urban renewal
policies that isolated communities of color, etc.
 How do these social issues connect to the economic and
political story of the city and its bankruptcy?
SEGREGATION IN THE DETROIT
METROPOLITAN REGION
DETROIT: CYCLE OF DECAY
26
TO WHAT EXTENT DOES
THE DETROIT
BANKRUPTCY REFLECT
IDEAS OF FEDERALISM
AND THE SOCIAL
COMPACT?
Civics and
Government
Perspective
WHAT IS THE CIT Y OF DETROIT,
POLITICALLY SPEAKING?
Cities are “creatures of the state” under the
Michigan Constitution
This means that the state government,
through its constitution or laws, empower
local governments and define their structure.
HISTORY OF THE EMERGENCY
MANAGER LAW
1988 -- Michigan’s first Emergency Financial Manager Law
1990 – PA 72, expanded the law to allow for the take over
of public schools
2011 – State government replaced PA 72 with Public Act 4
Gave the Emergency Manager the ability to cancel contracts
Allowed EM to make non-financial moves
Voters repealed PA4 via referendum.
In 2012, state government passes a new Emergency
Manager Law known as “Public Act 436.”
PUBLIC ACT 436
 Allows the state to intervene in a local government's or
school district's financial struggles at an early stage
 A state financial review team examines the finances to
determine if a 'financial emergency' exists
 After confirmation of a financial emergency, the governing
body of the local government must select one of the
following:
Consent Agreement
Emergency Manager
Neutral Evaluation
Chapter 9 Bankruptcy
POWERS OF THE
EMERGENCY MANAGER
The ability to reject, modify, or terminate labor
agreements
Oversees employees and elected officials in the
school district or local government
Can sell off assets of a local government or school
district
Can change staffing levels or combine departments,
so long as it doesn't conflict with an existing charter
provision .
EM LAW – IMPACT ON DETROIT
Kevyn Orr was appointed as EM
After review of city finances, finds no
feasible plan
EM files for bankruptcy on July 18,
2013
WHAT IS CHAPTER 9
BANKRUPTCY?
Provides a financially distressed municipality
protection from its creditors while it develops
and negotiates a plan for adjusting its debts
(POA – Plan of Adjustment)
Differs from traditional bankruptcy in that
there is no provision for liquidation of assets
of the municipality and distribution of the
proceeds to creditors
CIVICS/GOVERNMENT ISSUES: TURN
AND TALK
 Is the emergency manager law constitutional?
 What might be the arguments on both sides?
 To what extent does the Detroit bankruptcy reflect
ideas of federalism and the social compact?
 Use the documents to help you construct your
argument
SHARE OUT
• Is the emergency manager law
constitutional?
• What might be the arguments on both
sides?
• To what extent does the Detroit bankruptcy
reflect ideas of federalism and the social
compact?
THE RULING
 Judge Rhodes rules that federal
bankruptcy law supersedes the State
Constitution.
Pensions are contractual rights and
not subject to any preferential
treatment under federal law.
RESOLVING PROBLEMS
THROUGH
CONVERSATION AND
COMPROMISE
Why is
compromise
the hallmark
of a
democratic
republic?
CIT Y OF DETROIT V. CREDITORS
Creditors include:
Retirees
General city retirees
Police and Fire retirees
Bond Holders and Insurers
Ensure Detroit’s general obligation bonds
Represent the second largest class of
creditors after retirees
Syncora (bond insurer)
Federal Guarantee Insurance Co.
THE GRAND BARGAIN

Two Problems:
 Pensions are underfunded by $3.5 billion.
 In bankruptcy, city assets can be sold by the Emergency
Manager (not forced by a federal bankruptcy court) and the
revenues used to pay creditors
 Distinction between federal and state
 The Goals:
 Protect city retirees
 Save the DIA and keep its art collection in Detroit
WHY WAS SELLING THE ART ON THE
TABLE?
During the bankruptcy proceedings, creditors were
pushing to auction DIA works of art that had been
purchased by the city
DIA is a city department
Started as an independent non-profit
But has been a city department for
almost 100 years
ENTER JUDGE GERALD ROSEN
 Appointed the mediator by the bankruptcy judge
 Became the architect of the Grand Bargain
 The problem:
 $18 billion in liabilities, 78,000 blighted buildings, four of every 10
dollars already devoted to debt, pensions and retiree health care.
 Thousands of elderly retirees were facing deep pension cuts — their
livelihoods.
 Detroit's world-class art museum was at risk of losing its treasured
pieces in a fire sale.
 The city needed hundreds of millions of dollars just to begin to climb out
of the hole.
 What would Churchill do?
THE “ART TRUST”
 Chance meeting between Judge Rosen and Mariam Noland,
president of the Community Foundation for Southeast Michigan
 Rosen laid out his idea to Rip Rapson, CEO of Kresge Foundation:
 National and local foundations, the state and the DIA would all come
together to create a fund to ease cuts to underfunded pensions.
 That new fund would be used in lieu of selling DIA masterpieces.
 The DIA would be cut loose from city ownership, forever shielding its
artwork.
 Noland gathers foundations for Rosen who shares his idea:
Raise money to help offset pension cuts and save the DIA. He
pitched his appeal to the philanthropic missions in the room —
urban revitalization, cultural interests, humanitarian concerns.
WHY WOULD THE STATE
LEGISLATURE AGREE TO
FUND DETROIT?
The
Pensions
CHANNELING MADISON
Federalist No. 10 – James Madison
The latent causes of faction are thus sown in the nature of
man. . . .
the most common and durable source of factions has been
the various and unequal distribution of property. . . .
The regulation of these various and interfering interests
forms the principal task of modern legislation, and
involves the spirit of party and faction in the necessary
and ordinary operations of the government.
FEDERALIST NO. 10 – JAMES MADISON
"a body of men are unfit to be both judges and parties at the
same time; yet what are many of the most important acts of
legislation, but so many judicial determinations, not indeed
concerning the rights of single persons, but concerning the
rights of large bodies of citizens? And what are the
dif ferent classes of legislators but advocates and parties to the
causes which they determine? Is a law proposed concerning
private debts? It is a question to which the creditors are parties
on one side and the debtors on the other. Justice ought to hold
the balance between them. Yet the parties are, and must be,
themselves the judges; and the most numerous party, or, in
other words, the most powerful faction must be expected to
prevail.”
DETROIT CIT Y RETIREES
WHERE THEY LIVE
AS OF MAY, 2014
DETROIT POLICE AND FIREFIGHTERS
WHERE THEY LIVE
PENSIONERS IN THE GRAND BARGAIN
 Police and fire retirees
No cuts to pension checks
Reduction in COLA from 2.25% to 1%
90% reduction in health care benefits
 General retirees
Cut of 4.5% monthly
No COLA increases
90% reduction in retiree health care benefits
Clawback of excessive annuity payments from 2003-13
OTHER LEGISLATIVE REASONS
 Long Term Fiscal Health of the State
 Business – An insolvent Detroit crushes growth and
opportunity
 Perceptions – Global Reputation
 Moral Imperative
AN ARTIFACT FROM THE
BANKRUPTCY
SO, WHAT HAPPENED?
POA – PLAN OF ADJUSTMENT
Judge Rhodes had to decide whether to approve the sweeping debtcutting and investment plan
 Slashing $7 billion in liabilities
 Reinvesting $1 .4 billion over 10 years in services
 Includes:
Grand Bargain
Creation of Regional Water Authority
Settlement of creditor claims – Syncora and FGIC
SO, WHAT LEVEL OF DISCRIMINATION IS
FAIR?
 The Bankruptcy Code provides that a plan may
not “unfairly discriminate” among classes of creditors
holding claims of equal priority.
 The Detroit plan proposed to pay police and fire retirees
approximately 90% and general retirees approximately
70% of their earned pensions (in both cases after
elimination of cost of living allowances).
 Holders of general obligation bonds are slated to receive
approximately a 20% recovery.
PROVIDING FOR A BRIGHTER
TOMORROW
Investment in City services include:
$148 million earmarked for technology
investments
$82 million worth of investment in Detroit
fire/EMS over the next five years.
Serious investment in blight removal
$520 million over the next six years into
demolition.
Anticipates tearing down an average of 400-450
residential properties per week
THE LANGUAGE OF COMPROMISE
. . . AND LEADERSHIP
“We have used the phrase, the grand bargain, to
describe the group of agreements that will fix the
City's pension problem. That description is entirely
fitting. In our nation, we join together in the promise
and in the ideal of a much grander bargain. It is the
bargain by which we interact with each other and with
our government, all for the common good. That
grander bargain, enshrined in our constitution, is
democracy. It is now time to restore democracy to the
people of the City of Detroit. I urge you to participate
in it. And I hope that you will soon realize its full
potential.”
--- Judge Rhodes, U.S. District Court, ED. Mich.
THE WORLD IS WATCHING
“The future of Detroit, New Orleans, and the rest of the
country are inextricably linked. Detroit’s struggles and
how we as a nation respond to those challenges have far
reaching effects for all of us…”
- Mitch Landrieu
Mayor, New Orleans
2014 Mackinac Policy Conference
Keynote Address
COMPELLING QUESTIONS
1. To what extent did the Detroit bankruptcy uphold the rule of law? Reflect the social
compact?
2. To what extent is Detroit’s rise and decline a reflection of the historical context?
3. To what extent is the story of Detroit a model case study of the domestic problems
facing the nation over the past 60 years?
4. How does the Detroit bankruptcy reflect constitutional principles of federalism and
constitutional supremacy?
5. To what extent does the economic and political story of the city and its bankruptcy
reflect racial issues and tensions since the 1950s?
6. To what extent does the Detroit bankruptcy and its resolution challenge our notions of
good governance? (think about concepts of representative democracy, compromise)
7. How much disparate treatment of different creditor classes can be tolerated?
THANK YOU
Judge Michael J. Warren, Oakland County Circuit Judge
Author of America’s Survival Guide
Mwarren@PatriotWeek.org
www.PatriotWeek.org
warren@AmericasSurvivalGuide.com
www.AmericasSurvivalGuide.com
Amy B. Bloom, History/Social Studies Consultant, Oakland Schools
Amy.Bloom@oakland.k12.mi.us