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Could a Detroit happen to a UK local authority? Steve Bundred.

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1 Could a Detroit happen to a UK local authority? Steve Bundred

2 New York Daily News 30 October 1975 “he … (Ford’s Treasury Secretary, William E Simon) … barely believes in government at all, except for police and fire protection – and he’s not sure about fire” New York City Council Trades Union Leader Victor Gotbaum

3 A brief history of US municipal bankruptcies First legislation was enacted in 1934 during the depression – later declared unconstitutional by Supreme Court Municipal Bankruptcy Act 1937, arrangements now provided for by Chapter 9 of the Bankruptcy Code Use of Chapter 9 is rare but not unique – fewer than 500 since 1937, more common among utilities and revenue-producing bodies Previous peak was 18 in 1991 but there were 217 from 1991-2012, including 20 in 2012

4 How does Chapter 9 work? Purpose is to provide temporary protection from creditors –Always heard by senior appeal court judge –But courts are less involved than in corporate bankruptcy cases –Councils remain in control of their own affairs, but must file a debt adjustment plan within a specified time Debt restructuring –Refinancing loans, extending maturities, reducing principal and interest due –Adjustment of burdensome non-debt contracts (subject to court approval), repudiation of collective bargaining agreements and pension commitments –But no provision in law for enforced liquidation of assets and distribution of proceeds to creditors Role of US Trustee –Appoints the creditors committee and works with debtor and creditors to prepare the plan which must be “in the best interests of creditors” –Doesn’t run the council, but several states (including Michigan) can and do impose Emergency Managers on struggling councils as a condition of support

5 What causes US municipal Bankruptcies? Venality and hubris –Jefferson County, Orange County Misfortune and incompetence –Vallejo All of the above –Detroit And what prevents them? –NYC, Pittsburgh

6 Some facts about Detroit Population has fallen from more than 1.8m to around 600k in 50 years Council has 21,000 pensioners but only 9,700 employees It is projected to have negative cash flow of $200m this year, with debts of around $18bn There are also unfunded pension liabilities of $3.5bn and healthcare liabilities of $5.7bn Detroit has the highest violent crime rate of any US city and the overall crime rate is five times the national average 40% of the city’s streetlights are not working There are 78,000 abandoned homes and factories

7 And some images of Detroit

8 The impact on communities, employees and pensioners Vallejo –Half of fire service and a third of police laid off, salaries and pensions cut –Prostitution, increase in neighbourhood watch schemes from 4 to over 300 Jefferson County –No longer any police response to RTAs, dead livestock left in streets –One of two prisons mothballed, prisoners sleeping on the floor –Elections cancelled. Jobs, salaries and pensions slashed; hours increased Detroit –Creditors to receive 20c for each $1 of debt –Police and fire pensioners to lose 10% of their income other pensioners 34% –An end to future inflation increases for all pensioners –Council’s water and sewerage department to be sold –40% job losses already in schools and police, stations now shut after 4pm

9 Some general lessons from the US experience Leadership matters. So too does collaboration between different tiers of government –Sudden economic change does not make failure inevitable, but struggling US cities have needed visionary leadership and state or federal support Thriving cities need a clear identity –Generally defined by their city centre, economic activity focused in out of town developments makes it harder for cities to adapt to change When hard decisions have to be taken, communities adapt –Vallejo’s police cuts and growth of neighbourhood watch schemes show that people will provide some public services for themselves if they have to US political systems make it easier for corruption to occur –Very powerful mayors, political control of policing, weak public audit

10 And some concluding observations Could it happen here? –No and yes. Corruption is not yet a major problem in the UK and Govt would probably not allow debt default –But many UK council have similar financial problems and are having to make similar hard decisions –And statutory NHS failure regime with recent dissolution of Mid-Staffs shows Govt is willing to tolerate some failure of public services Are public sector pensions sustainable in the long-term –Unfunded pension liabilities were central to all the US failures. Not directly relevant to UK local govt but teachers etc schemes are unfunded and despite recent changes there are still big issues surrounding public sector pensions in the UK for the longer-term What is an essential service? –UK local govt needs to get better at explaining tough choices it has to make –Changes to original NHS failure regime demonstrate highly political nature of these decisions –So what’s wrong with letting voters decide?

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