“Detroit’s recovery plan has implications for all of America”

[Detroit’s recovery plan] calls for a 10-year, $1.25 billion investment in public services that would remake Detroit’s institutions, root and branch. The only way to finance this plan for rebirth is to seek concessions — deep concessions — from the public-employee unions and private investors that have claims on the city in the form of pensions and municipal bonds.

This is where the rest of the country acquires more than just a rooting interest in Mr. Orr’s plans. It matters not only whether he succeeds but also how. We refer to the possible default on some or all of Detroit’s $530 million in general-obligation debt, which Mr. Orr’s plan contemplates.

Backed by a jurisdiction’s “full faith and credit” — that is, its taxing power rather than revenue from a specific income-earning asset — general-obligation bonds have been considered the least risky in the $3.7 trillion municipal bond market, upon which so many state and local governments rely. As a result, general-obligation bonds enable cities and towns to borrow relatively cheaply. The Detroit precedent could undermine that, if it hasn’t already. And when borrowing costs go up, so do taxes — or else services shrink.

via Detroit’s recovery plan has implications for all of America – The Washington Post.

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