There is an unsettling aura of silence these days about the background to the City of Detroit bankruptcy case: We know how Detroit got into bankruptcy but we do not know what happened along the road to the bankruptcy, according to a guest writer post yesterday in the Detroit Free Press. We know that in 2005-06, Detroit borrowed some $1.5 billion to shore up shortfalls in its revenue, and in 2009, restructured the terms of repayment of that borrowing. Finance officials of the city, as well as outside financial advisers, lawyers and bankers, participated in the borrowing. All this at a time when, in the view of now-retired Bankruptcy Judge Steven Rhodes, who presided over the chapter 9 case, the city had no way of repaying the borrowed money. It appears that, today, the State of Michigan lacks a mechanism to review the legitimacy of a municipal borrowing before debt instruments are issued. It is fair to say that the state steps in only and after the barn door is closed and the horse has escaped. In other words, it is only after a municipality loses its financial footings can the state take action. What is now needed is a postmortem of why and how, as the City of Detroit declined in population, revenue and expenses, it continued borrowing money until a point in time that only bankruptcy could save it from a financial disaster.
