- - Tuesday, May 6, 2014

Detroit is America’s canary in the coal mine. Now that the city has hit rock bottom and filed for bankruptcy, the responsible thing to do would be to leverage its assets to make creditors as whole as possible while also stabilizing its long-term financial obligations.

Once it emerges from the bankruptcy process, Detroit is no doubt going to need new bondholders to help the city get back on its feet. Yet willing investors may be hard to find if the city chooses to stiff its creditors.

Detroit is not the first municipal body to file for bankruptcy — several others have done so in recent years — but it is the largest. With numerous other jurisdictions feeling the weight of debt burdens created by decades of reckless government spending, a pattern that starts at the top thanks to Uncle Sam’s love of red ink, more are sure to follow. As Detroit goes through the bankruptcy process, state and local leaders face a choice between using bailouts and gimmicks to kick the can down the road or taking the opportunity to right its fiscal house. With tax-and-spend states like California and Illinois having dug themselves into similarly deep financial holes, Michigan’s chosen path may prove to be a harbinger of things to come across the nation.

One significant asset available to the city, and one that can be sold without compromising essential services, is the artwork held at the Detroit Institute of Arts. Emergency manager Kevyn Orr, however, wants to transfer it to a nonprofit in exchange for just $816 million — including $350 million in state aid, along with additional philanthropic contributions — as part of a so-called “grand bargain.” To blunt criticism of the deal, he solicited a low-ball estimate that valued the galleries at up to $867 million. This figure compares unfavorably to private bids, which have reached into the billions.

One bidder, the Art Capital Group, even offered to keep the art in Detroit as part of its bid to lend the city $2 billion with the art as collateral. However, the full value likely can’t be known until there is an open and competitive process aimed at maximizing the art’s return to the city. Doing so will not only better satisfy creditors, but also means more money in the pockets of city retirees.

Getting a fraction of the value from the institute’s art collection would be a sure sign that Detroit’s leadership again lacks the political will to put its fiscal house in order. Adoption of the bailout plan will also likely mean a poor credit rating for the city, increased future borrowing costs and a bleak financial future. Who will invest in a revitalization plan for Detroit after seeing creditors treated in this manner?

Oddly enough, it is Michigan’s Republican Gov. Rick Snyder and the Republican-controlled legislature pushing a proposal to bail out Detroit at the expense of taxpayers throughout the state. The bailout would be the first of its kind for distressed municipalities in the state in a generation, even among those under state receivership. It would also set a terrible precedent for future municipal bankruptcies.

Michigan taxpayers should not be asked after the fact to subsidize decades of profligate spending on the part of Detroit’s irresponsible and often corrupt government. Local and state leaders also shouldn’t sacrifice resources that could be used on infrastructure and service improvements in order to preserve a government-owned art gallery. Most of all, bondholders shouldn’t be forced to take a hit through shady deal-making.

With the rest of the country watching — including both current and potential bondholders of other municipalities teetering on the edge of the financial abyss — a show of weakness through adoption of Mr. Snyder’s bailout plan could start a domino effect. If other irresponsible governments don’t want to see their bills coming due before they’ve mustered the ability to pay, they should pray for a sudden burst of fiscal prudence in Detroit and rejection of the city’s latest cockamamie scheme to avoid financial responsibility.

Andrew F. Quinlan is the co-founder and president of the Center for Freedom and Prosperity.

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