The other day I talked over the city of Ypsilanti’s financial troubles with a classmate who said the city should simply declare bankruptcy like the city of Detroit.
There are two reasons why this is not plausible – the first is political, and the second is financial.
In the aftermath of the Great Depression, it wasn’t only people that lost money. Governments lost money because people lost money – tax collections fell. A.M. Hillhouse’s “Municipal Bonds, A Century of Experience,” published in 1936, estimated that in 1932, out of the thousands of local jurisdictions there were only 678 defaults by municipalities. That number jumped to 1,729 by 1934 and municipalities around the country needed a set of procedures for debt adjustment.
Thus, the Municipal Bankruptcy Act was passed in 1934. The law was complicated by the fact that local entities are creatures of the state. And as the 10th amendment to the Constitution says: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” All bankruptcies must be carried out in federal courts. Hopefully the controversy is clear.
Ultimately, the Municipal Bankruptcy Act was declared unconstitutional in 1936; the case was Ashton v. Cameron County Water Improvement District. The Supreme Court ruled that the law interfered with the powers of the state. Congress rewrote the law in 1937; the new version of the law survived the Supreme Court in United States v. Bekins et al.
The rule within the law, which allowed the second incarnate of the law to pass another round of scrutiny, was that any bankruptcy filing by a municipality relied on state authorization.
Gov. Rick Snyder, Republican of the Great Lakes State, is unlikely to provide that consent, especially after the bankruptcy by the state’s most populous city. Former Gov. Jennifer Granholm and Snyder both rejected pleas from the city of Hamtramck, which requested permission to file for bankruptcy
in 2010 and 2011. It is unlikely that Ypsilanti would receive further consideration.
Mayor Paul Schreiber and the city council are also unlikely to want to cede so much control to a federal bankruptcy court. That is the political consideration.
Secondly, the city is not insolvent. The city’s assets exceed its liabilities by around $20.9 million according to the latest financial disclosure.
Municipal bankruptcy also leaves filers with the equivalent of a low credit score. The city would be considered a deadbeat. That means the bankrupted city is either shut out of the bond market completely or is forced to pay a high interest rate in order to borrow.
And the city will certainly have to borrow, especially to carry out the capital improvements listed in the Master Plan. It is unlikely those improvements could be financed by equity, or that the city would want to liquidate an asset in order to pay for improvements or services.
The city is certainly in a rut, but it hasn’t fallen off a fiscal cliff like Detroit. Retiree health care costs are a concern, like they are in any other municipality across the country, as are pension costs. Debt from the real estate purchase on Water Street is also a considerable burden.
Surely, the mayor and city council already understand the importance of financial stewardship, lest they become like Flint, Benton Harbor or Allen Park, where critical decisions are made for them.
