Detroit’s bankruptcy reflects an intergenerational debate that until recently has largely been one-sided. Thomas Jefferson–who’s exhortations against public debt are oft-cited by various Tea Party groups–argued that the “laws of nature” impose no legal or moral obligation on a generation to “acknowledge the debt” of its predecessors, and that “although, like some other natural rights, this has not yet entered into any declaration of rights, it is no less a law, and ought to be acted on by honest governments.” (At his death, Jefferson left an estate that was heavily in debt, and his surviving daughter had to rely on charity.) Yet, since the founding of our nation, present generations have–by definition–indebted their future generations without their consent, and municipal bankruptcies have been rare. Although a city or town’s debts are not personal obligations of its taxpayers, its taxpayers in effect pay off the accumulated debts of that municipality’s prior generations. This practical intergenerational debt obligation can be seen as fair, because future generations reap—in both tangible and intangible ways—some benefits of the activities funded by that debt (e.g., new or improved public buildings, streets, utility infrastructure, parks, and recreational facilities, or redeveloped business zones or other commercial areas that attract tourists and other economic activity). Plus, each generation, itself, may need to borrow money for its own expenses or needs, and could not do so without its own creditors’ confidence in being repaid, based on past history.
Either by voting at the ballot box (to elect representatives to raise taxes, lower spending, or take other action to reduce debt obligations, or voting out of office those who fail to do so) or voting with their feet, municipal taxpayers have legal means of protection against prolonged and ruinous indebtedness incurred by their forebears. Detroit’s bankruptcy filing is another legal option for some municipalities. (Chapter 9 of the United States Bankruptcy Code permits municipalities to file for bankruptcy protection in order to restructure their debts, but only when permitted by its state’s law. Currently, only fifteen states permit their municipalities to do so without state approval.) In a good economy, the federal or state governments might provide some form of economic aid to temporarily help cash-strapped cities. In a prolonged bad economy, especially after the flight of individual and corporate taxpayers outside of the geographic limits of the city’s taxing authority (Detroit lost 25% of its population in the past decade), we may have just seen the tip of the municipal bankruptcy iceberg. Moody’s just downgraded Chicago’s debt… // Michael J. Racette