When Detroit became the largest city in the his­to­ry of the Unit­ed States to file bank­rupt­cy in 2013, a ques­tion quick­ly emerged: Which city would be next?

The $198 million shortfall could have been addressed fairly easily—in part, simply by undoing state actions that had pushed Detroit into bad financial straits in the first place.

Because con­ven­tion­al wis­dom held that bloat­ed pen­sions had bank­rupt­ed Detroit, the con­ver­sa­tion revolved around oth­er cities with large pen­sion short­falls, such as New York, Philadel­phia and Jack­sonville, Flori­da. Anti-union politi­cians used the oppor­tu­ni­ty to hold up Detroit as a boogey­man. Bruce Rauner, then a Repub­li­can can­di­date for Illi­nois gov­er­nor, ran a cam­paign ad in 2013 that said, ​“Detroit just declared bank­rupt­cy, and if we don’t change direc­tion, Illi­nois is next,” explic­it­ly invok­ing the state’s unfund­ed pen­sion lia­bil­i­ty as the rea­son (it should be not­ed that this claim was untrue, as fed­er­al law bars states from fil­ing bankruptcy).

All of this uproar rest­ed on a basic false­hood in the dom­i­nant pub­lic nar­ra­tive around Detroit: that pen­sions played a key role in dri­ving the city bank­rupt. But those who stud­ied the bank­rupt­cy close­ly know that the reverse is true: The city filed bank­rupt­cy so that it could cut pensions.

Detroit’s bank­rupt­cy was not borne out of finan­cial neces­si­ty and was not a fore­gone con­clu­sion. It was a polit­i­cal deci­sion made by state offi­cials. Gov. Rick Sny­der and the Michi­gan Leg­is­la­ture chose to push the dis­tressed city over the edge in order to accom­plish two oth­er­wise dif­fi­cult polit­i­cal goals: slash­ing pen­sions and region­al­iz­ing the Detroit Water and Sew­er­age Depart­ment. It was dis­as­ter cap­i­tal­ism at its finest.

Aus­ter­i­ty hawks are now hop­ing to use the Detroit play­book in oth­er cities to force the pub­lic to accept extreme mea­sures to fix bud­get crises. And the bond mar­kets seem to have final­ly set­tled on an answer to that ques­tion about which city will be the next Detroit: Chica­go. Moody’s Investor Ser­vice, one of the three major cred­it rat­ing agen­cies, just down­grad­ed Chicago’s cred­it rat­ing to junk lev­el — the munic­i­pal equiv­a­lent of a sub­prime cred­it score, cau­tion­ing poten­tial lenders that the city may not be able to pay them back — mak­ing it the low­est-rat­ed major city in the coun­try after Detroit.

Chica­go is not an obvi­ous choice. It remains the third largest city in the coun­try, has a thriv­ing down­town and is home to some of the largest and most prof­itable cor­po­ra­tions and wealth­i­est peo­ple in the world. Chica­go clear­ly has mon­ey, even though its dis­tri­b­u­tion is wild­ly unequal.

But as was the case in Detroit, the talk of a Chica­go bank­rupt­cy has lit­tle to do with the city’s finan­cial health and much to do with a broad­er polit­i­cal agen­da to oblit­er­ate the social safe­ty net and slash pen­sions. Even though there are numer­ous rea­sons why Chica­go is not going bank­rupt, the fact is that there has been a sus­tained effort by politi­cians like May­or Rahm Emanuel to cre­ate a finan­cial cri­sis and then use the threat of bank­rupt­cy in order to ush­er in deep and painful cuts, just as the Right was able to do in Detroit.

Chica­go is the test case for whether the Detroit play­book can be run in oth­er, more pros­per­ous cities. If it suc­ceeds there, cities across the coun­try will like­ly emu­late this strat­e­gy to bal­ance bud­gets on the backs of work­ing-class com­mu­ni­ties while let­ting banks, big cor­po­ra­tions and the rich off the hook.

The Detroit playbook

Most of us learn about bank­rupt­cy through games like Monop­oly or Wheel of For­tune, where being bank­rupt is syn­ony­mous with being broke. But when it comes to munic­i­pal­i­ties, not only is bank­rupt­cy a choice, it is a polit­i­cal choice. Elect­ed offi­cials decide whether to do it, when to do it and how to do it, and their pri­ma­ry rea­sons for doing it do not even have to be financial.

Munic­i­pal bank­rupt­cy is also unique in oth­er ways. In a cor­po­rate bank­rupt­cy, for exam­ple, a com­pa­ny can be liq­ui­dat­ed and all of its assets can be sold off to pay its cred­i­tors. How­ev­er, as a mat­ter of prac­ti­cal­i­ty, a city can­not be liq­ui­dat­ed. Detroit is not Cir­cuit City. If all its assets were sold off — streets, bus­es, police and fire sta­tions — what would hap­pen to the peo­ple who con­tin­ued to live there post-bank­rupt­cy? Because munic­i­pal bank­rupt­cies are premised on the notion that cities should sur­vive their bank­rupt­cy and one day even thrive, the goal is not to oblit­er­ate a city in order to pay down its out­stand­ing debt.

Under Chap­ter 9 of the Unit­ed States Bank­rupt­cy Code, munic­i­pal­i­ties may file bank­rupt­cy if they are unable to pay their debts as they come due. In order to emerge from bank­rupt­cy, they don’t need to be able to pay all of their out­stand­ing debts right away, but rather to pay their bills on time. Just as a home­own­er with a 30-year mort­gage only needs enough mon­ey to make each month­ly pay­ment, cities sim­i­lar­ly just need to be able to pay their bills, one bill at a time.

Dur­ing Detroit’s bank­rupt­cy pro­ceed­ings, Emer­gency Man­ag­er Kevyn Orr, who had been appoint­ed by Sny­der to run the city dur­ing its fis­cal cri­sis, repeat­ed­ly assert­ed that the city had $18 bil­lion in out­stand­ing debt, so as to imply that the city had to come up with $18 bil­lion in sav­ings to get out of bank­rupt­cy. This was not true.

First of all, that $18 bil­lion num­ber itself was inflat­ed using non-stan­dard account­ing assump­tions and by includ­ing debt that did not actu­al­ly belong to the city itself, such as the debt of the Detroit Water and Sew­er­age Depart­ment. But more impor­tant­ly, the $18 bil­lion fig­ure was irrel­e­vant for the pur­pos­es of Chap­ter 9 bank­rupt­cy, since there was nev­er any expec­ta­tion that the city pay all of its long-term debts imme­di­ate­ly. What mat­tered, accord­ing to an analy­sis by the think-tank Demos, was the $198 mil­lion cash flow short­fall that the city faced that fis­cal year. Detroit’s expens­es were $198 mil­lion more than its rev­enues, so it could not pay its bills as they came due.

The $198 mil­lion short­fall could have been addressed fair­ly eas­i­ly — in part, sim­ply by undo­ing state actions that had pushed Detroit into bad finan­cial straits in the first place. For exam­ple, Detroit had tak­en a major finan­cial hit over the course of 2011 and 2012, when Sny­der and the Michi­gan Leg­is­la­ture decid­ed to cut annu­al state rev­enue shar­ing with the city by $67 mil­lion. Restor­ing that fund­ing would have filled one-third of the city’s short­fall. Sec­ond, there were state-imposed restric­tions on the city’s abil­i­ty to raise local tax­es, dat­ing back to the 1990s. Lift­ing those restric­tions would have allowed the city to raise tax­es and bring in new revenue.

Or the leg­is­la­ture could have passed a law requir­ing sub­ur­ban employ­ers to auto­mat­i­cal­ly deduct city income tax for reverse com­muters who lived in Detroit. The city instead had to rely on reverse com­muters to vol­un­tar­i­ly pay their tax­es. Accord­ing to a study com­mis­sioned by the Mayor’s Office, in 2009 alone, Detroit lost $142 mil­lion as a result of this loop­hole. But instead, the $18 bil­lion fig­ure was held up to cre­ate a greater sense of urgency in order to jus­ti­fy dras­tic cuts at the expense of pub­lic employ­ees and wrest con­trol of the water depart­ment from the city.

Con­ser­v­a­tives in Michi­gan had long been scape­goat­ing Detroit’s pen­sion oblig­a­tions as the source of its fis­cal prob­lems, and Sny­der began enact­ing poli­cies to under­mine pen­sions his first year in office. How­ev­er, the Michi­gan Con­sti­tu­tion, like that of many oth­er states, pro­tects gov­ern­ment work­ers’ pen­sions from cuts — since pen­sions are, after all, deferred wages for work that has already been done. Fed­er­al bank­rupt­cy law, how­ev­er, does not pro­tect pen­sion­ers when a city declares bank­rupt­cy. Detroit was a test case for whether munic­i­pal­i­ties could get around their state con­sti­tu­tions by fil­ing bank­rupt­cy under Chap­ter 9. In 2013, dur­ing Detroit’s bank­rupt­cy pro­ceed­ings, a fed­er­al judge ruled that they can, because fed­er­al law trumps state law.

Then there was the Detroit Water and Sew­er­age Depart­ment (DWSD), a source of polit­i­cal pow­er for the major­i­ty African-Amer­i­can city, which many white sub­ur­ban res­i­dents had grown to resent. White sub­ur­ban vot­ers are an impor­tant con­stituen­cy for Sny­der, who needs them to make up for his low approval rat­ing in Detroit, Michigan’s largest city.

The elec­tion of Cole­man Young as Detroit’s first African-Amer­i­can may­or in 1973 accel­er­at­ed white flight out of the city. Even though most of Detroit’s white fam­i­lies moved to the sub­urbs, they were still depen­dent on the city-run water depart­ment, which serves most of south­east­ern Michi­gan and 40 per­cent of the state’s pop­u­la­tion. This cre­at­ed a lot of ten­sion. When­ev­er there were ser­vice prob­lems or rate hikes, sub­ur­ban res­i­dents blamed it on the mis­man­age­ment by what they believed to be cor­rupt and incom­pe­tent city offi­cials. While cor­rup­tion was a real prob­lem in Detroit, includ­ing in the DWSD, these charges often fed off racial tensions.

Through bank­rupt­cy, the state was final­ly able to take con­trol of the water depart­ment out of Detroit’s hands and region­al­ize it. In one stroke, Sny­der had achieved two long-sought polit­i­cal goals.

The next Detroit?

Politi­cians have been rais­ing the specter of a Detroit-style bank­rupt­cy in Chica­go for a cou­ple of years now— most recent­ly in the may­oral runoff elec­tion this spring, when Sen. Mark Kirk com­ment­ed that Chica­go could end up like Detroit if May­or Emanuel lost. But the threat nev­er seemed cred­i­ble to most peo­ple who were actu­al­ly famil­iar with Chica­go, because Chica­go appears to be a fun­da­men­tal­ly pros­per­ous city. Then, in May, Moody’s Investor Ser­vice down­grad­ed the cred­it rat­ings of both the City of Chica­go and Chica­go Pub­lic Schools to junk lev­el. Sud­den­ly, the threat seemed much more real.

The down­grades could force the city and the school dis­trict to hand over as much as $2.5 bil­lion in ear­ly pay­ments and penal­ties to banks on var­i­ous finan­cial deals. The city was forced to pay penal­ty inter­est rates on a $674 mil­lion bond offer­ing, which will cost tax­pay­ers an extra $70 mil­lion. The down­grades them­selves were a direct response to an Illi­nois Supreme Court deci­sion affirm­ing the state constitution’s pro­tec­tion of gov­ern­ment work­ers’ pen­sions, effec­tive­ly pro­hibit­ing the state and local gov­ern­ments from slash­ing pen­sions to bal­ance their bud­get. May­or Rahm Emanuel would not be allowed to cut pen­sions and pay debts. Chica­go seemed to be run­ning out of options. Talk of a bank­rupt­cy sud­den­ly no longer seemed so farfetched.

Except that it is, because the polit­i­cal will is not there. Emanuel does not want his lega­cy to be that he bank­rupt­ed the third largest city in the coun­try. Even though wealth and income are very unequal­ly dis­trib­uted across the city, Chica­go still enjoys a healthy tax base and, unlike Detroit, has no statu­to­ry lim­its on its abil­i­ty to raise local tax­es (although it can­not imple­ment a city income tax with­out state autho­riza­tion). Chica­go will not go bank­rupt because the may­or will raise tax­es if nec­es­sary to avoid that fate.

There is one oth­er big rea­son why Chica­go will not go bank­rupt: It can’t. Under Illi­nois state law, munic­i­pal­i­ties are not allowed to file bank­rupt­cy. Chap­ter 9 delin­eates the process for munic­i­pal bank­rupt­cy, but it is up to each indi­vid­ual state whether to let cities use that process. Michi­gan does. Illi­nois, like 25 oth­er states, does not.

As was the case in Detroit, politi­cians are invok­ing bank­rupt­cy in Chica­go to cre­ate pub­lic sup­port for slash­ing pen­sions. Like Michigan’s, the Illi­nois Con­sti­tu­tion also pro­tects gov­ern­ment work­ers’ pen­sions. There was a bill in the Illi­nois Leg­is­la­ture this ses­sion to allow munic­i­pal bank­rupt­cies, and its chief pro­po­nents made no secret of the fact that their goal was to let cities use bank­rupt­cy to get around the state constitution’s pen­sion pro­tec­tions. Elect­ed offi­cials from small­er cities, such as Rock­ford May­or Lar­ry Mor­ris­sey, her­ald­ed the munic­i­pal bank­rupt­cy bill as a god­send that would allow them to ​“set aside the unman­age­able and unsus­tain­able labor con­tracts and pen­sion agree­ments with which local tax­pay­ers have been sad­dled across the state.”

The bill was sup­port­ed by Illi­nois Repub­li­can Gov. Bruce Rauner, who advo­cat­ed the use of bank­rupt­cy to help munic­i­pal­i­ties deal with their bud­get woes. Of course, he, too, was tak­ing a page out of the Detroit play­book. He cre­at­ed a finan­cial cri­sis for cities across the state by propos­ing a 50 per­cent reduc­tion in munic­i­pal­i­ties’ share of state income tax rev­enue. Like state offi­cials did to Detroit, Rauner inflict­ed finan­cial hard­ship on cities and then dan­gled bank­rupt­cy in front of them as the solution.

The munic­i­pal bank­rupt­cy bill did not pass before the end of the ses­sion on May 31, but even the threat of such leg­is­la­tion can be a pow­er­ful tool for offi­cials to strength­en their hand in con­tract nego­ti­a­tions with pub­lic sec­tor unions and con­vince the broad­er pub­lic to accept an aus­ter­i­ty agenda.

The preda­to­ry lend­ing cri­sis no one talks about

Aus­ter­i­ty hawks have done a great job of sell­ing bud­get short­falls as the result of reck­less over­spend­ing by incom­pe­tent and cor­rupt gov­ern­ment offi­cials. As a result, the solu­tion gets framed as a choice between cut­ting pen­sions or slash­ing the social safe­ty net. Work­ing-class com­mu­ni­ties lose either way, while the 1% remains untouched.

But the real prob­lem with pub­lic bud­gets is that there is not enough rev­enue com­ing into pub­lic cof­fers. Since the Rea­gan Rev­o­lu­tion, there has been a sus­tained effort to dele­git­imize gov­ern­ment and sup­press tax­es. Tax rates for cor­po­ra­tions and top income-earn­ers have declined at pre­cise­ly the moment that the Unit­ed States has seen the most explo­sive pop­u­la­tion growth, leav­ing all lev­els of gov­ern­ment unable to afford to pay for the basic ser­vices that com­mu­ni­ties need to func­tion. As a result, gov­ern­ment bor­row­ing has skyrocketed.

While it is sound pub­lic pol­i­cy to use debt to fund long-term cap­i­tal projects, it is deeply prob­lem­at­ic when gov­ern­ments are forced to bor­row mon­ey to deal with rev­enue short­falls. It is even more prob­lem­at­ic when they are doing so as a result of a con­cert­ed effort to sup­press tax­es by the same banks and peo­ple they are bor­row­ing from. Banks and the wealthy cre­at­ed a cri­sis by lob­by­ing hard to sup­press tax­es, and then they use that cri­sis to enrich them­selves — a page right out of the Detroit playbook.

When cities and states bor­row mon­ey by issu­ing bonds, the lenders are typ­i­cal­ly high-wealth indi­vid­u­als, who pur­chase the bonds to get a tax break. It is a per­verse sys­tem through which, rather than pay­ing their fair share in tax­es, the wealthy are instead able to lend that mon­ey to us, charge us inter­est for it, and then claim a fur­ther tax break on it.

The banks that under­write munic­i­pal bonds also prof­it by sell­ing cities addon prod­ucts like inter­est rate swaps. As munic­i­pal debt explod­ed, from $361 bil­lion in 1981 (about $940 bil­lion in today’s dol­lars) to $3.7 tril­lion in 2012, banks start­ed tar­get­ing cash-strapped cities with more and more of these add-ons, which had high costs and hid­den risks, were over­ly com­plex and were often designed to fail. They were preda­to­ry finance deals, much like the preda­to­ry mort­gages tar­get­ed at cash­strapped home­own­ers. Some of these prac­tices were ille­gal, while oth­ers were mere­ly uneth­i­cal. The effect was that banks col­lect­ed bil­lions in fees from bor­row­ing that was neces­si­tat­ed in the first place by their refusal to pay their fair share in taxes.

At the same time that this was hap­pen­ing, anti-gov­ern­ment con­ser­v­a­tives start­ed sound­ing the alarm over ris­ing gov­ern­ment debt in order to make the case for pri­va­tiz­ing ser­vices. This allowed many of the same cor­po­ra­tions that had lob­bied for low­er tax­es to then prof­it off the rev­enue cri­sis they had helped cre­ate by lit­er­al­ly buy­ing up pub­lic assets, such as toll­ways and park­ing meters, and then charg­ing us to use them.

Because state and local gov­ern­ments did not have enough tax rev­enue com­ing in, they often opt­ed for ​“pen­sion hol­i­days” to make ends meet, skip­ping pay­ments to the pen­sion fund. Over time, this cre­at­ed large unfund­ed pen­sion lia­bil­i­ties. In effect, cities and states bor­rowed mon­ey from pen­sion­ers to make up for rev­enue short­falls. Now aus­ter­i­ty hawks are using these unfund­ed lia­bil­i­ties to argue for slash­ing pen­sions, even though it was their own anti-tax poli­cies that caused the problem.

A pro­gres­sive playbook

We need to flip the Detroit play­book on its head to cre­ate a new class of win­ners: work­ing class com­mu­ni­ties. We must reject the par­a­digm in which Moody’s points a gun to our head and forces us to choose between clos­ing schools and throw­ing seniors under the bus. We can­not allow aus­ter­i­ty hawks to man­u­fac­ture crises in order to push rad­i­cal­ly regres­sive agen­das that bal­ance the bud­gets on the backs of those who can least afford it.

We need to define the ​“aus­ter­i­ty” prob­lem as what it is — a lack of rev­enue caused by the refusal of Wall Street banks, big cor­po­ra­tions and mil­lion­aires to pay their fair share in tax­es— and put forth solu­tions to make them pay. This includes pro­gres­sive rev­enue mea­sures: We can pass a mil­lion­aires tax and a finan­cial trans­ac­tions tax, close cor­po­rate tax loop­holes and end sub­si­dies for prof­itable com­pa­nies. It also includes poli­cies to stop Wall Street from goug­ing tax­pay­ers, like rene­go­ti­at­ing preda­to­ry bank­ing fees and tox­ic finan­cial deals, and cre­at­ing pub­lic banks to cut out Wall Street altogether.

We must reframe the choice for elect­ed offi­cials as one between the 99% and the 1%. Will Chicago’s May­or Emanuel close anoth­er 50 schools to bal­ance the Chica­go Pub­lic Schools bud­get, or will he sue the banks that like­ly broke fed­er­al law by sell­ing the school dis­trict preda­to­ry inter­est rate swaps that have cost hun­dreds of mil­lions of dol­lars? Will Rauner cut state aid to cities in half and force them to slash essen­tial pub­lic ser­vices, or will he fight for a mil­lion­aires tax? Whose side is he on?

A quick Google search shows that near­ly every major city in Amer­i­ca has been called ​“the next Detroit” at some point in the last two years. The Right plans to use the Detroit play­book across the coun­try to force the gen­er­al pub­lic to accept uncon­scionable cuts to pub­lic works while let­ting the true cul­prits off the hook. We need to expose the peo­ple and cor­po­ra­tions who are prof­it­ing from the crises that they cre­at­ed, and force them to pay their fair share.