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Detroit Files for Bankruptcy

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"After Detroit, Who's Next?"

http://online.wsj.com/article/SB10001424127887323309404578616320174430366.html?mod=hp_opinion

 

Article focusing on how Detroit's financial problems have worsened with each move they've made, and several other cities which may not be far behind

 

"Take Oakland, which is Detroit's doppelganger on the West Coast. The run-down Bay Area city, which has the highest crime rate in California, recently laid off more than 100 police to fund retirement benefits and pension-obligation bonds. Murders and robberies shot up by nearly 25% last year. To avert steeper cuts, the city borrowed an additional $210 million to finance pensions.

 

Philadelphia and Chicago have been less scrupulous about financing pensions and are now having to make balloon payments to prevent their retirement funds from going broke. Philadelphia is spending about 20% of its budget on pensions to make up for years of short-changing the system. In 1999, it issued $1.3 billion in bonds to invest in the pension fund, but it has paid more in interest than it has earned on its pension investments.

 

Chicago is also fast approaching a day of reckoning. Chicago Public Schools last week announced 2,100 layoffs, which Mayor Rahm Emanuel blamed on a $400 million spike in pension payments. "The pension crisis is no longer around the corner," he said. "It has arrived at our schools."

 

Moody's downgraded the city's general-obligation bonds last week due in large part to rising retirement and debt service costs, which comprise about a third of its operating budget. Chicago plans to dump 30,000 retirees on Medicare and the ObamaCare exchanges in 2017. Yet all savings will go toward pension payments, which will triple in 2015. The mayor has warned that the bill could force a 150% spike in property taxes."

 

There are more than than the above.  Several California cities and counties are hurting.  I, for one, am glad NOT to Cleveland mentioned.

 

The media in NYC is now reporting how the Foreclosure crisis has finally reached Manhattan.  And they mentioned how 4/5 years ago the epidemic hit Ohio, yet turned into something terrible in AZ, NV, FL, GA, CA the area around DC.  Florida and California had overstock and it will be years before they climb out of trouble.

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^Foreclosure crisis reaching Manhattan?  Lord, I hope no media outlets are that gullible.

 

"After Detroit, Who's Next?"

http://online.wsj.com/article/SB10001424127887323309404578616320174430366.html?mod=hp_opinion

 

Article focusing on how Detroit's financial problems have worsened with each move they've made, and several other cities which may not be far behind

 

There's no doubt that politicians court fiscal risk when they make retirement promises they know they won't be around to have to pay for.  Not my expertise, but it's fascinating to look at all the legal tools states have used over the years to try to rein it in.  Unfortunately, even actuarial projections have been overly politicized in some states, gutting some restraints.

 

That article is a bit of a mess though. It's really hard to know how to interpret the fact a given city is spending X% of its budget on pension obligations or debt service without a lot more context.  And any reporter who thinks Oakland is "Detroit's doppelganger on the West Coast" has been in a coma for 20 years.

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More on the Detroit bankruptcy and the Michigan constitution from the Volokh Conspiracy:

 

http://www.volokh.com/2013/07/21/detroits-bankruptcy-and-the-michigan-constitution/

 

Basically, the pensioners' argument is simple enough: The Michigan constitution forbids the government of Michigan and its subdivisions from reducing pensions, and the federal Bankruptcy Code (which, they argue, could be used to cut their pensions) requires the authorization of the state in which the municipality will file for bankruptcy.  The argument is that Governor Snyder is therefore constitutionally barred from giving the authorization that the Bankruptcy Code requires.

 

The counter, in the Adam Levitin column linked in that blawg, is that the Bankruptcy Code itself forbids a municipality in Chapter 9 from doing anything that the municipality is constitutionally forbidden from doing under the constitution of its own state (not to mention that sovereign immunity itself might require such a result, but in this case, I can understand why writing what might ultimately be superfluous language was nevertheless worthwhile).  Therefore, since the pensions clause of the Michigan constitution will continue to apply even in bankruptcy, it should not bar the filing itself.

 

http://www.creditslips.org/creditslips/2013/07/whats-happening-in-detroit.html

 

Of course, the pension burden is one of the things that Detroit is probably most eager to shed.  If either of the above readings hold, then Detroit will be constitutionally forbidden from reducing one of the largest portions of that $18 billion debt, and therefore required to concentrate the losses on other creditors, including existing workers.  Once again, there will be a sharp break between the older generation that managed to pull the ladder up behind itself and the younger generation that they left behind.

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Pensions are just one component. There are plenty of other vendors and contracts that can be torn up - many likely agreed to less than licitly and for a much larger city - things as simple as a copier and payroll company contracts. Often union work rules can be changed in bankruptcy. Worst case scenario would be de-municipalization - it all simply becomes part of Wayne County again and whatever townships once existed - though I'm not that familiar with how much of the original French structure of city's founding remains.

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Worst case scenario would be de-municipalization - it all simply becomes part of Wayne County again and whatever townships once existed - though I'm not that familiar with how much of the original French structure of city's founding remains.

 

That would be silly.  Then again selling off the art collection is silly too.  In personal bankruptcy, you don't get left naked on the street out of spite. 

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Worst case scenario would be de-municipalization - it all simply becomes part of Wayne County again and whatever townships once existed - though I'm not that familiar with how much of the original French structure of city's founding remains.

 

That would be silly.  Then again selling off the art collection is silly too.  In personal bankruptcy, you don't get left naked on the street out of spite. 

 

Detroit isn't a human being, though.  Also, dissolving the corporate person doesn't analogize to being "left naked on the street out of spite."  However, more importantly, the federal judge cannot order that.  The most he could even theoretically do is order a vote be held on dissolution, and the procedure for that vote would be exactly whatever it is under ordinary Michigan state law.  In fact, I'm not even completely sure that he could order the vote.  And regardless, the people remaining in Detroit are the ones who *didn't* want to leave, so the enthusiasm for such a measure among those actually directly affected and entitled to vote on it might be minimal even notwithstanding Detroit's troubles.  Actual regional consolidation (i.e., consolidation with other incorporated suburbs nearby) is probably an even more remote prospect because you'd also have to solicit their votes, too.

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Tuesday, Jul 23, 2013 12:00 PM CDT

Don’t buy the right-wing myth about Detroit

Conservatives want you to think high taxes drove people away. The real truth is much worse for their radical agenda

 

.........

 

In the conservative telling of this particular parable, Detroit faces a fiscal emergency because high taxes supposedly drove a mass exodus from the city, and the supposedly unbridled greed of unions forced city leaders to make fiscally irresponsible pension promises to municipal employees. Written out of the tale is any serious analysis of macroeconomic shifts, international economic policy failures, the geography of recent recessions and unsustainable corporate welfare spending.

 

This is classic right-wing dogma — the kind that employs selective storytelling to use a tragic event as a means to radical ends. In this case, the ends are — big shocker! — three of the conservative movement’s larger long-term economic priorities: 1) preservation of job-killing trade policies 2) immunity for corporations and 3) justification for budget policies that continue to profligately subsidize the rich.

 

http://www.salon.com/2013/07/23/dont_buy_the_right_wing_myth_about_detroit/

 

Ron Paul is launching a television channel and Detroit is first on the topical agenda. I'm betting that these aforementioned global, corporate issues will be the focus. Either way I'm so very tired of the same D vs R low value talking points. To save our cities we need fair analysis and healthy debate, not more political gamesmanship.

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high taxes are fine so long as there is good schools, parks, & services in exchange.  Many people prefer this actually

 

High taxes with no services & high crime & terrible schools is another matter

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One thing I find interesting in Michigan is that cities tend to discourage you living in them. almost every city with an income tax has an income tax that is double for residents than it is for nonresidents.

 

Why is this? I would imagine that having a higher income tax for nonresidents would encourage people to live in the city. I don't think most companies are going to relocate from the city because there is a higher nonresident income tax. If anything it should encourage those who make the most money to live in the city and own property in the city (thus paying more taxes to that municipality, but lower taxes overall).

 

Having a low nonresident income tax seems to encourage people to leave the city in search for fewer taxes (thus reducing property tax revenue and income tax revenue). From what I have heard, Detroit has really high property taxes, but the income tax and sales tax are on par with other midwestern cities. I believe all of Michigan has a 6% sales tax too.

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I think it is a lot about mismanagement, and sort of a  perfect storm/worst-case scenario of urban/economic/social problems all coming together in one place and time...

 

You've had cities here in Ohio that have had severe depopulation and de-industrialization...Youngstown the most famous one, but also Dayton and Toledo, and perhaps smaller places like Springfield and Steubenville, but...so far...these have been on a sort of managed glide-slope down, without the fiscal disaster that Detroit experienced.

 

I'm wondering about elsewhere in the US...Gary and Flint come to mind...as places that have Detroit-style problems...but so far no news about them going bankrupt.   

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This public pension crisis is going to become endemic...one of the fallouts of the baby boom demographic buldge hitting the "golden years"....

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Ron Paul is launching a television channel and Detroit is first on the topical agenda. I'm betting that these aforementioned global, corporate issues will be the focus. Either way I'm so very tired of the same D vs R low value talking points. To save our cities we need fair analysis and healthy debate, not more political gamesmanship.

 

"Fair analysis."

 

"Healthy debate."

 

"National conversation."

 

"Reexamining/revisiting/re-whatever."

 

The codewords of the professional talker and wannabe puppetmaster.  Such phrases are meaningless.  Don't say we need a debate.  If you want one, begin one.  And when you do, you might find out that the debate has actually been going on for a long, long time before you decided that we needed to have one.

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This public pension crisis is going to become endemic...one of the fallouts of the baby boom demographic buldge hitting the "golden years"....

 

Adding to Detroit's problems with massive job & population loss was their pension investments.  Several pension managers for the city were charged with taking bribes from "investment managers" who lured the city into investing in garbage land deals and other baloney schemes. 

 

So many of these cities were treading water on these pension cliffs during the 90's and 2000's because the market yields were so strong.  By the time the market crashed and has since leveled off into "normal" returns, the yields are not keeping pace with the pension payouts, so tax payers are on the hook for the difference.

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In a real way it's a graphic example of how the same limitations differently impact the public and private sectors.

 

The thing that got the auto industry was contracts designed to maximize the work force (reducing efficiency) and the willingness of both labor and management to defer costs to the future through generous pensions.

 

This mindset spread from the private sector workers in the Detroit area to the public sector.

 

It didn't survive the private sector's encounter with competition that did things differently.

 

The public sector had no such competition.

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Ron Paul is launching a television channel and Detroit is first on the topical agenda. I'm betting that these aforementioned global, corporate issues will be the focus. Either way I'm so very tired of the same D vs R low value talking points. To save our cities we need fair analysis and healthy debate, not more political gamesmanship.

 

 

 

"Fair analysis."

 

"Healthy debate."

 

"National conversation."

 

"Reexamining/revisiting/re-whatever."

 

The codewords of the professional talker and wannabe puppetmaster.  Such phrases are meaningless.  Don't say we need a debate.  If you want one, begin one.  And when you do, you might find out that the debate has actually been going on for a long, long time before you decided that we needed to have one.

 

How condescending can you possibly be?

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And the Paul following's whole schtick is not condescending?  I agree that the debate has been going on for a long, long time.  It's nothing new, and Paul's perspective is nothing new or revolutionary by any means.

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I have never seen and do not anticipate seeing any compelling case that even a full repeal of NAFTA and its replacement with the most punishing tariffs on the planet would bring a single job back to Detroit.

 

Sirota is a little stronger when he starts talking about the stadium construction contract, and if he's correct that Orr has preemptively nixed any thought of using this bankruptcy to reject (cancel) that contract, I'm curious as to the reasoning behind such a decision and would start out from the position that it was probably the wrong one.

 

But as noted in that article and elsewhere, the pension obligations are approximately $3.5 billion of the $18 billion debt.  That number is large enough to be a significant part of the problem (which Sirota attempts to deny) even while it is nowhere close to the entire explanation, since there's still $14.5 billion more on top of that.

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The local elite did not stay as committed to Detroit as other cities. Certainly Cincinnati and Cleveland could have been more completely Detroit had their elites not continued to support the cities to one degree or another. The same is true of places like Buffalo. It is pretty easy to make a case that without the Loop, Chicago resembles Detroit far more than most would initially think.

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The local elite did not stay as committed to Detroit as other cities. Certainly Cincinnati and Cleveland could have been more completely Detroit had their elites not continued to support the cities to one degree or another. The same is true of places like Buffalo. It is pretty easy to make a case that without the Loop, Chicago resembles Detroit far more than most would initially think.

 

In particular, despite relations ranging between rivalry and antipathy between both cities and their suburbs, Cincy and Cleveland suburban congressmen (particularly Steve LaTourette) supported their respective cities.  Cleveland was also blessed to have Lou Stokes as its key representative instead of the ignorant sort of race baiters and socialists (Conyers comes to mind) Detroit traditionally elected.

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The local elite did not stay as committed to Detroit as other cities.

 

What makes you say that?  Ever been to the Detroit Athletic Club?  Detroit Opera House?  Detroit Fox Theater?  Detroit Institute of Art?  These are cultural institutions that are on par with any in America and are supported almost exclusively by the local elite...

 

How about Mike Illitch, owner of the Redwings & the Detroit Tigers, who's kept the franchises in the city and vowed to build new stadiums downtown, despite however many offers he's had to move the teams to other areas or even to the suburbs...?

 

 

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I have never seen and do not anticipate seeing any compelling case that even a full repeal of NAFTA and its replacement with the most punishing tariffs on the planet would bring a single job back to Detroit.

 

Sirota is a little stronger when he starts talking about the stadium construction contract, and if he's correct that Orr has preemptively nixed any thought of using this bankruptcy to reject (cancel) that contract, I'm curious as to the reasoning behind such a decision and would start out from the position that it was probably the wrong one.

 

But as noted in that article and elsewhere, the pension obligations are approximately $3.5 billion of the $18 billion debt.  That number is large enough to be a significant part of the problem (which Sirota attempts to deny) even while it is nowhere close to the entire explanation, since there's still $14.5 billion more on top of that.

 

14.5 billion is a staggering number, even for a large city.  To put that in perspective, that's the equivalent of 32 of Cleveland's new Convention Center or 72.5 Euclid Corridors.

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The thing with pension obligations is that they are always enormous.  The pension obligation for a single worker is massive because, even for one of those average folks making a pension of $19,000 per year, the way the accounting works is the time-adjusted value of the total you expect to need to pay that person for the rest of their lives.  With lifespans continuing to increase, you could be looking at $19,000 a year for 35 or even 45 years for someone who retires at 55.  The number of people living to 100 is a lot larger than it used to be.

 

I really want to know the breakdown of the rest of those debts, though.  People are spending so much time focusing on that $3.5 billion (whether saying that they need to never be cut or saying that they need to be the first things to go) that no one has even said what the other debts are for, other than that few hundred million are for a new sports arena.  And I agree that could go.  But that still leaves more than $14.0 billion that I haven't seen put in a chart or graph yet.

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14.5 billion is a staggering number, even for a large city.  To put that in perspective, that's the equivalent of 32 of Cleveland's new Convention Center or 72.5 Euclid Corridors.

Or the GDP of Jamaica....

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And the Paul following's whole schtick is not condescending?  I agree that the debate has been going on for a long, long time.  It's nothing new, and Paul's perspective is nothing new or revolutionary by any means.

 

Read again. Fair analysis and Healthy debate. Those were my words that were quoted. I took that personally.

 

 

 

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The local elite did not stay as committed to Detroit as other cities.

 

What makes you say that?  Ever been to the Detroit Athletic Club?  Detroit Opera House?  Detroit Fox Theater?  Detroit Institute of Art?  These are cultural institutions that are on par with any in America and are supported almost exclusively by the local elite...

 

How about Mike Illitch, owner of the Redwings & the Detroit Tigers, who's kept the franchises in the city and vowed to build new stadiums downtown, despite however many offers he's had to move the teams to other areas or even to the suburbs...?

 

I agree with you to an extent. While Mike Illitch is keeping those teams in Detroit, he has also been highly criticized because he has a really nasty habit of buying property, tearing down (sometimes historic) property and then sitting on it for decades with a parking lot until the city/state/county/someone else is willing to give him a large tax break or contribution to do a megaproject. Don't get me wrong, he is a vital partner for Detroit, but for a long time he has been almost an absentee landlord for a lot of downtown real estate.

 

In contrast, Dan Gilbert (owner of Quicken Loans, Cleveland Cavs, Rock Ventures, etc) has a tendency to buy properties and redevelop quickly on smaller scale, injecting new life into the central core of Detroit. Though even he has torn down some historic properties and gets some flak for building so many parking garages (though I would argue it is beneficial to build these parking garages so that development can take place much faster in the future).

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The thing with pension obligations is that they are always enormous.  The pension obligation for a single worker is massive because, even for one of those average folks making a pension of $19,000 per year, the way the accounting works is the time-adjusted value of the total you expect to need to pay that person for the rest of their lives.  With lifespans continuing to increase, you could be looking at $19,000 a year for 35 or even 45 years for someone who retires at 55.  The number of people living to 100 is a lot larger than it used to be.

 

 

You're not even accounting for the cost of living adjustments that are built into pensions...  a guy retires after 30 yrs working for the city at age 55.  He lives another 30+ yrs and gets 3% annual raises...  NOW do the math....

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Regardless of the math, it still is only less than 1/5 of the debt...... so why are we not examining the other 80%+?

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Regardless of the math, it still is only less than 1/5 of the debt...... so why are we not examining the other 80%+?

 

Go ahead & get us started.  What are the other debt obligations?  Where should the cuts be made?

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I wonder what options do retiree's have? Would they come to the city and ask for a buyout of their pension(bankruptcy approval though)? Or there is NOTHING they can do, but accept that their payments will be cut in half.

'

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I wonder what options do retiree's have? Would they come to the city and ask for a buyout of their pension(bankruptcy approval though)? Or there is NOTHING they can do, but accept that their payments will be cut in half.

'

 

Hurry up & take a lump sum payout?

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The thing with pension obligations is that they are always enormous.  The pension obligation for a single worker is massive because, even for one of those average folks making a pension of $19,000 per year, the way the accounting works is the time-adjusted value of the total you expect to need to pay that person for the rest of their lives.  With lifespans continuing to increase, you could be looking at $19,000 a year for 35 or even 45 years for someone who retires at 55.  The number of people living to 100 is a lot larger than it used to be.

 

 

You're not even accounting for the cost of living adjustments that are built into pensions...  a guy retires after 30 yrs working for the city at age 55.  He lives another 30+ yrs and gets 3% annual raises...  NOW do the math....

 

When you calculate a net present value (time-adjusted value calculation) of a future payment stream, you do take that into account, so I wasn't ignoring it.

 

Those calculations have incidentally gotten less forgiving in recent years, because the discount factor for future years is based on the expected rate of investment return between now and then.  That's always a little bit of art and a little bit of science, since you can't scientifically predict the future, but the old assumption of a CAGR of 10% may be weaker than it was.  The present value of a future obligation is higher if the growth rate is lower (because you need to invest more today to have enough money to retire the obligation when it is due).

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Lots of Ohio comparisions (in a positive light).

 

Could a Private University Have Made a Difference in Detroit?

 

http://www.theatlanticcities.com/jobs-and-economy/2013/07/could-private-university-have-made-difference-detroit/6350/

 

Detroit's bankruptcy filing last week and the decades of decline that preceded it have been a predictable political and historical Rorschach test. The right blames the city's demise on moral failures and weak character -- the banana-republic-caliber corruption and fiscal fecklessness of its politicians, the greed of its unions, the spinelessness of automobile executives who gave into them. To the left -- more inclined to see history as the product of "great forces" than "great men" (or terrible ones) -- the Motor City was swamped by powerful tides: racism, sprawl, and unbridled capitalism.

 

But what was distinctive about Detroit? Other cities struggled mightily to adapt to the decline of manufacturing. But only Detroit struggled mortally - at least in terms of municipal cash flow. Why do Detroit's troubles so vastly exceed not only those of Boston, New York, Philadelphia and Chicago, but Baltimore, Providence, Cleveland, Pittsburgh, St. Louis and Rochester?....

 

"The contrast with its neighbor to the south is revealing. The early 19th-century was a golden age of college-founding, and nowhere more so than in Ohio. In Rudolph's description, Ohio at this time was engaged in a kind of Weberian Olympics, with a melting pot of mostly Protestant sects competing to demonstrate their generosity and prosperity and, by extension, state of grace."

 

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^ HuffPo interview with the filmmaker:

 

KMc: What do you want audiences to take away from the film? Do you hope something happens as a result of the film?

 

Heidi Ewing: What we've seen so far, in places like Cleveland, Indianapolis, and Columbus, is that people see a metaphor for their own towns. I think that the film is a call for some kind of collective action in this country -- to rebuild our cities, to fix our schools, to fix the crumbling infrastructure that we thought was going to be fixed four years ago. Detroit can't do it alone; it doesn't have the resources. So I want people to care about the place, I want to shine a light on Detroit, and I also would like it to be used as an example of what can happen to a lot of other cities that deserve better.

 

Collective action is a tough thing, but I can't think of a more divided moment than right now. We're going to keep sliding -- Detroit will keep sliding, the country will keep sliding, and we'll just become a second-rate nation -- if we don't make some decisions as a country.

 

Detroit's a shocking place, and you want to shock people into reflecting: "Wait, I thought we were the greatest nation. What ever happened to American exceptionalism? Was that just bunk?" I would like Detropia to be a piece of art work that is in the canon of, "Come on, America. Let's wake up, guys." You can't just hope things away. All of us have to care, to really focus on our cities, because that's where most people live, and they're crumbling. And along with them are the futures of a lot of people. So it's a wake-up call, but no one film can do all that; we're just trying to be a part of the conversation.

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Lots of Ohio comparisions (in a positive light).

 

Could a Private University Have Made a Difference in Detroit?

 

http://www.theatlanticcities.com/jobs-and-economy/2013/07/could-private-university-have-made-difference-detroit/6350/

 

 

Interesting angle. I never realized the large part religious groups played into Ohio's wealth of colleges.

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Lots of Ohio comparisions (in a positive light).

 

Could a Private University Have Made a Difference in Detroit?

 

http://www.theatlanticcities.com/jobs-and-economy/2013/07/could-private-university-have-made-difference-detroit/6350/

 

 

Interesting angle. I never realized the large part religious groups played into Ohio's wealth of colleges.

 

That was an interesting read. Thanks for posting that.

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It was an interesting concept, but I thought the handwave of the public-private distinction was a little weak.  Much of what he states could very well have held true if UM had not decamped for Ann Arbor.  Detroit could have supported both UM and Wayne State; they're barely competitors at all, no more so than OSU and Columbus State.

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Wayne State is equivalent to Cleveland State not Tri-C, but your point still stands.

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In Detroit, Bad Policies Bear Bitter Fruit

by Edward Glaeser

 

"A city and its government are not the same thing. Thriving cities can have crappy governments; declining cities can have good leaders who manage their problems sensibly."

 

http://www.boston.com/opinion/2013/07/23/detroit-bad-policies-bear-bitter-fruit/PHY6nyuDHfvpr3qreIPahK/story.html

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This is the second article I've read in recent days to state that Detroit's unfunded pension liabilities are closer to half ($9 billion) of the $18 billion total municipal debt than the previously-reported $3.5 billion figure.  Anyone know what's behind each of those numbers?

 

If it's true that $9 billion of the debt is retiree obligations, that changes the picture for where the cuts are likely going to have to be focused, as opposed to if the retiree debt is really closer to $3.5 billion (not even 20% of the total).  I don't know how the news could be reporting numbers that far apart.  I understand that accounting for future liabilities does involve some haziness, but the $18 billion total figure had to come from somewhere and the pension debt had to be part of it, which means that the accounting for the pension liabilities had to have been done first to come up with that number.

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Pretty scathing review of the City's policies & procedures...  I can't imagine trying to do business in this environment

 

http://online.wsj.com/article/SB10001424127887323829104578623422748612116.html?mod=hp_opinion

 

Lessons From a Front-Row Seat for Detroit's Dysfunction

Running the city's transportation department was like being in the boiler room of the Titanic.

 

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