Detroit, the fourth largest city in America, filed for the largest municipal bankruptcy in U.S. history on Thursday after steep population and tax base declines sent it tumbling toward insolvency. The filing means that if the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.
By filing for Chapter 9 on July 18th, Detroit sought protection from all its creditors, including pensioners and government employees. Change will not be felt for at least the next six months. But Kevin Orr, the emergency manager appointed by the Governor of Michigan, Rick Snyder, says future and present retirees will definitely see cuts to the unfunded portions of their pensions. Their health-care benefits are also likely to be squeezed.
Detroit's Debt
Detroit's long-term debts are estimated at $18.2 billion. Of this, about $9.2 billion is in unfunded retirement benefits. Since 2008, the city has spent around $100m more each year than it has brought in. Recent attempts to fix its finances have been thwarted by a feeble economy, a shrinking population and rapidly increasing legacy costs. Property-tax revenues have declined by 20% since 2008, and income tax by 30% since 2002.
Photo courtesy: NY Daily News
The city's fiscal crisis has been simmering for decades. Fifty years ago, GM, Ford and Chrysler assembled nearly all the cars sold in America, making Detroit a very rich city. At that time, Detroit was home to 1.8m people. Today only 700,000 remain, many of which are indigent and poorly educated"”82% have no more than a high-school diploma. The city sprawls over an unmanageable 140 square miles (larger than Boston, San Francisco and Manhattan, together) and necessary services to barely-populated neighborhoods are difficult even if the city government were well-run, which it is not.
Automakers not to Blame
Though many analysts blame the deterioration of Detroit's ‘Big Three' auto makers for the city's decline, others disagree. The car manufacturers have indeed struggled over the years with foreign car competition. However, the truth is that the auto industry which is now posting strong domestic profits as demand for local cars rises has not been very connected financially to the city proper and its operations for decades.
According to Jennifer Bradley of the Brookings Institution, one of the largest think-tanks in the nation, the main problem is that the leaders of Motown have run up debts that a shrinking population could simply never pay off. Those debts forced the city to raise taxes and cut services. Detroit lost a lot of its appeal and much of the population left for the loftier suburbs. Only 30% of the jobs within the city are held by residents, and 61% of Detroiters who work do so outside the city.
Optimistic Business Leaders
Many business leaders, as well as Governor Snyder are optimistic that the bankruptcy will mark the end of Detroit's decline. For the moment, police, fire, water and sewerage will be unaffected by the filing. A recent deal with Bank of America, a secured creditor, has also released casino revenues of $11m a month, to keep the city running.
In fact, the future of the city is contingent on the deal Mr. Orr can cut. Orr argues that, if the city is to recover, it must invest $1.25 billion in restoring services such as the police and firefighters, remedying urban blight and modernizing the city's rundown IT systems. Neither the state nor the federal government has offered a bailout. Mr. Orr says Detroit must solve its own problems.
Despite the challenges, Orr promises that improved services are what the city needs to turn around the bankruptcy. Detroit's debts have been put while Orr does battle with major banks and bondholders, city unions and pension and retiree groups to drastically cut Detroit's debts and pension and health care liabilities in bankruptcy proceedings that could take years to conclude.
Orr's team is also focusing on restructuring how the city operates, cutting down where needed and investing in public services. In what Orr noted one significant example of improvements he has already implemented. The Detroit Police Department will soon get 50 new squad cars, replacement bulletproof vests and two new devices Motor City cops have never had: electric stun guns and on-body video cameras.
Despite the hardships caused by this bankruptcy, with strong management and initiative, Detroit should be able to weather this storm and come out stronger and with clearer visions.
A Strong Message for Struggling Economies
Orr's team is also focusing on restructuring how the city operates, cutting down where needed and investing in public services. In what Orr noted one significant example of improvements he has already implemented. The Detroit Police Department will soon get 50 new squad cars, replacement bulletproof vests and two new devices Motor City cops have never had: electric stun guns and on-body video cameras.Despite the hardships caused by this bankruptcy, with strong management and initiative, Detroit should be able to weather this storm and come out stronger and with clearer visions. This process can stand as an example for several European cities that are floundering under heavy debts and urban blight. For starters, Orr's commitment to soldiering on without assistance is a noble trait that should not go unnoticed. Though a floundering city isn't as tenuous as a struggling country, such strength of character is commendable, and in an era where Eurozone leaders are whining and begging for bailouts, this determination should serve as an example for others.
Moreover, the lack of bailout possibilities for Detroit may actually put the city at an advantage over its struggling European counterparts, as Orr will not be required to answer to any higher powers - he will have much more freedom to lead the city to a new era without political infighting and bureaucratic delays.
There's no question that Detroit has a long road ahead (so does the Eurozone). But when faced with the worse of two evils, Orr's way definitely seems a bit more promising.