Municipal Debt and Congressional Hypocrisy

Since the City of Detroit made history by declaring the largest municipal bankruptcy in the nation’s history, there has been much talk about credit ratings, debt burdens and the legalities of bankruptcy, which allows those who declare it to take time to restructure their financial obligations and, often, to repay less than what was previously owed. With much of the news media focused on the joyous event of the birth of the royal baby in the United Kingdom, focus on President Obama’s upcoming speeches on the economy has taken a back seat.

The nation has experienced some good news recently: unemployment claims have decreased, housing starts and sales have been increasing and jobs have been returning. However, the economy is still in a precarious position; missteps can trigger a backslide. What could happen begins and ends on Capitol Hill: when Congress returns from its August recess, over (1) raising the debt ceiling, and (2) tougher automatic, across-the-board budget cuts ($109 billion starting Oct. 1) from the sequester.

Source: Forbes Magazine, 05/12

Source: Forbes Magazine, 05/12

The Republican Party is in control of the House and, recently, Speaker John Boehner made it clear that the GOP has no intention of compromising on the debt ceiling or the sequester. In fact, he’s asking for aggressive spending cuts as the price to be paid for raising the debt ceiling. We’ve been here before: yes, the nation needs to manage its spending but (a) the rate of spending is at its lowest level since Eisenhower was president and, more relevant to this particular issue, (b) raising the debt ceiling does not add to new debt — it simply allows the government to pay its bills, the debt already incurred and authorised by congress. In refusing to pay its bills, congress is admitting to being either (a) a bunch of willing deadbeats, or (b) lawmakers who are willing to tank the American economy solely to retain power for their wing of congress by allowing this financial slide to take place under the watch of a Democrat.

GOP HypocrisyIf Detroit doesn’t pay its bills, it’s deemed to be an irresponsible entity incapable of managing itself. And, as is the case with personal bankruptcy filings, even after the restructuring takes place the financial markets will punish the city with a lower credit rating — thereby making borrowing more expensive  for a long time to come — and this will further exacerbate the city’s fiscal woes. On the other hand, if the irresponsible members of Congress threatened to not pay debts already accumulated by the United States thereby potentially throwing the financial markets into a tailspin, it’s considered by some legislators as ‘just politics’ with lawmakers leading towards  more responsible spending. And there’s the hypocrisy.

A federal judge will be hearing arguments today as to whether or not Detroit’s city manager can legally proceed with the bankruptcy petition. Detroit must prove that it is both legal –given some claims that the city didn’t make a good faith effort to negotiate with its creditors — the employee pension funds, and the city’s $18 billion of debt and unfunded liabilities, including $5.7 billion in liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability. Unfortunately, as Detroit moves on to begin the process of resolving its problems, there is no hearing that calls on  members of Congress and forces them to consider the ramifications of their actions. There is no judge to make a determination as to whether or the US Congress is shirking its responsibilities by way of its record-breaking gridlock and obstruction, and no hearing will be held to hold lawmakers accountable — unless Election Day counts.