How Detroit is impacting the rest of the state’s finances

Sep 11, 2013

A few days ago, Michigan Radio’s Sarah Cwiek reported a story worth thinking about. The market for municipal bonds has nosedived since Detroit announced its intention to file for bankruptcy in July.

Now, if you would like a clear and concise explanation of how the bond market works … good luck with that. But essentially, communities sell bonds to raise money, bonds they pay off gradually with interest over time. They are a traditional and time-honored way of raising money for civic improvements.

There’s also been an understanding, at least since the Great Depression, that money owed to bond holders -- especially the holders of general obligation bonds -- was sacrosanct. No matter how hard things were, the bond holders had to be paid. Well, that’s not happening in Detroit, which, as all the world knows, has filed for bankruptcy.

Emergency Manager Kevyn Orr isn’t honoring Detroit’s general obligation bonds. And that has investors across the state spooked. Battle Creek and Genesee County have pulled back from plans to sell new bonds. So has affluent Oakland County. In fact, the value of all the municipal bonds sold in the state last month was the lowest in ten years. Something is clearly going on.

That doesn’t mean this is all about Detroit. As Sarah Cwiek reported, interest rates might be a problem, and there are lots of other things that can impact any actual or proposed bond sale.

But the situation in Detroit is clearly a factor. Even before Orr made his decision not to give the Motor City’s bonds higher status than the claims of other creditors, experts were predicting Detroit’s troubles would impact the bond market, along with everything else. And in a way, that’s a good thing.

What is puzzling is that for years, many people in this state have acted and behaved as if the agonies of Michigan’s largest city had nothing to do with them. I’m not just talking about the bond market, or in places as far removed from Motown as Battle Creek.

Visitors are often struck by the fact that people live in mansions in Grosse Pointe that are scarcely a block from urban devastation and squalor. My own comfortable suburban house is scarcely two miles from a stretch of Eight Mile Road that features strip clubs and streetwalkers. But we travel by routes that ensures we don‘t see them.

What is perhaps even odder is that we have long known that Detroit is home to many thousands of desperate people that are largely uneducated, unemployed and largely unemployable, lacking skills and sometimes even basic literacy.

Yet millions of other Michiganders believed this had nothing to do with them, and did not threaten their security or prosperity. For a long time, Michiganders have behaved like an athletic, otherwise healthy man who discovers he has cancer of the liver. The rest of him may be just fine, but within seven months he’ll still be dead.

Frankly, it is only fitting that Detroit’s agony has impacted the bond market elsewhere in the state. If this causes investors to reflect that we are all in this together, and that Michigan can never achieve real prosperity until Detroit is fixed, that will be a payoff in itself.