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May 12, 2014

"Detroit’s Message to Investors: There will be blood"

Steven Malanga writes a fine piece that not only summarizes the current state of play of Detroit's bankruptcy, but also reminds of the almost endless, heinous ways our political representatives avoid their legal and constitutional constraints

Orr’s gambit strikes at the heart of municipal finance. Though most states have laws or constitutional restrictions on borrowing, governments (and their financial advisors) have found ways to sidestep them. At least two-thirds of all municipal borrowing in the $3.5 trillion market now takes place outside the scope of debt limits, according to an estimate by Columbia University law professor Richard Briffault. He calls these transactions “non-debt debt.” In 2009, in one example, Arizona closed a budget gap by borrowing $1 billion, even though its constitution prohibits such debt. The state simply claimed that the transaction wasn’t borrowing but instead a sale of government-owned office buildings. Yet no real sale took place: the state retained control of the properties and instead sold certificates of participation for them. Arizona is repaying the certificate holders out of tax revenues but calling the payments “rent” (see “State Budget Bunk,” Winter 2011). The Goldwater Institute, a Phoenix-based think tank, estimated that Arizona will spend $1.6 billion to pay off the $1 billion sham sale.


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When I was in law school the professors all taught* us this serious, black-letter law as if it meant something. In the ensuing years I have observed that "the law" is often disregarded by governments, and our supine courts often fail to enforce it against governments. Judges are politicians in black robes and few are willing to hamper the business-as-usual ways of their fellow politicians, who appoint them.

*I use the word "taught" loosely. The so-called Socratic method used by the vast majority of law professors usually involves little to no actual teaching. But law professors as a class are conservative in this one respect: they inflict this method on their students as it was inflicted upon them in law school.

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