A slow slide to hasty bankruptcy
Detroit’s long march toward bankruptcy took nearly half a century to complete before it ended in a rush to court.
Kevyn Orr, the city’s emergency manager, rushed to file Detroit’s Chapter 9 bankruptcy petition minutes before a state judge said he would have issued a temporary injunction to block the move. The municipal unions had asked County Circuit Judge Rosemarie E. Aquilina to bar the bankruptcy because, the unions contend, it would result in a reduction in retiree benefits in violation of the Michigan constitution.
Aquilina ordered Orr to withdraw the bankruptcy petition and ruled that the state law authorizing it was unconstitutional. Michigan officials immediately challenged Aquilina’s order, sending the question of whether Detroit qualifies for federal bankruptcy proceedings to the Michigan Court of Appeals.
No one really knows how the bankruptcy case will play out, assuming it proceeds, though it’s a pretty safe bet that the city’s current and future retirees will see reduced benefits and municipal bondholders (or their insurers) will bounce back. . relatively little of what is owed to them.
Although city and county bankruptcies occur, on average, once or twice a year, and although we have seen several recent filings in California alone, there is no roadmap for what will happen in Detroit’s case.
It’s not just that there’s never been a bankrupt city this big in this country: With around 700,000 residents, today’s greatly diminished Detroit still has double the population of previous record holder Stockton, California. The real problem is that most cities go bankrupt when their liabilities become too great for the population and tax base to support, so they need to lighten their debt load. Once this adjustment is complete, those cities can resume normal operation.
In Detroit, at least within its current boundaries, it is not clear that there is a viable city to save.
I can recite some of the sad statistics here, but you probably already know the basics. Detroit’s population has shrunk by more than 60 percent since its 1950 peak. About 90 percent of its manufacturing jobs are gone; while the city continues to be home to the headquarters of General Motors, Chrysler and Ford are based in the suburbs, and Detroit-labeled cars are made virtually everywhere except Detroit.
About a third of city-owned parcels are vacant or abandoned. Half of the streetlights don’t work, nor do more than half of the ambulances. There are two retired city workers who collect pension and health benefits for every active worker who is supposed to serve the city’s residents. Despite a small and resurgent downtown, the city’s residents are much poorer and therefore more deprived than in most other places. These are not the kinds of problems that a federal bankruptcy judge can fix.
So what happens after the bankruptcy court reduces Detroit’s liabilities? What is it about Detroit, besides its professional sports teams (which obviously get most of their revenue from fans who live out of town and advertisers who want to reach them), that attracts a new industry, new positions of work and new residents? How can a city so decrepit, so hollow, a city that exists more on the map than in real life, become self-sufficient?
At a minimum, I suspect substantial state and federal guarantees will be needed before Detroit regains access to the credit markets. One of the biggest controversies in Detroit’s bankruptcy will be how much private municipal bond insurers will be able to collect from the city’s assets or future income. I assume that Detroit’s future debt issues now cannot be secured without the backing of higher authorities.
So far, those authorities seem prepared to offer little more than warm words of encouragement. In what may be a new low of empty political verbiage, the White House issued a statement, not on behalf of the president, or even his press secretary Jay Carney, but signed by spokeswoman Amy Brundage. “While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover, revitalize and maintain its status as one of the America’s greats.” cities,” Brundage wrote. This is what happens when there’s really bad news and the boss says, “Keep him as far away from me as possible.”
And while the governor of Michigan. Rick Snyder authorized Orr to file for bankruptcy, that’s a far cry from declaring that taxpayers in places like Ann Arbor and Dearborn and Grosse Pointe will ever be part of Detroit’s financial solution.
This is the intractable problem facing Detroit, and one that a bankruptcy court also has no power to solve. American cities are designed to grow; they are not designed to shrink. Starting in the 1950s, and at a much faster pace after the 1967 race riots and the long decline of US automakers, all the things that once made Detroit a major city moved out. outside the city limits. Most of the people followed him. The people who moved didn’t want to be a part of Detroit then, and they certainly don’t want to be a part of it now. If Detroit is viable, it is only as part of a larger region, but its political boundaries are fragmented and ossified. Detroit cannot grow to recover its tax base.
If you can’t grow, the only other option is to shrink. In the old frontier, settlers sometimes had to be called within the walls of the nearest military post when the farms they occupied were too difficult to defend. But how do you remember the handfuls of residents scattered in the empty spaces of the old streetscape, one or two homes per block? How do they offer police, fire and sanitation services at a sustainable cost?
These are the issues that Detroit has filed with the bankruptcy court. They are unlike any other municipal bankruptcy in living memory.
If Detroit were a corporation, it would be reorganized or liquidated. In a reorganization, creditors would take over most of the company’s stock. The analogy here would be to give creditors most of the city’s assets, probably starting with large tracts of vacant land and abandoned property. Creditors would also gain management control, so they could put those assets to work in any way they chose. The bankruptcy court may not have this power in a municipal Chapter 9 case.
The other analogous company would be the liquidation. The company, in this case the city of Detroit, would cease to exist as a corporate entity and its assets would be sold to pay off creditors. This doesn’t seem to be an option in Chapter 9 either. At least not yet.
Detroit is an extreme case, even given the sorry state of government finances in much of America. I expect there will be quite a few more bankruptcies in the coming years, most of them with problems more similar to Stockton (focusing on the cost of unfunded retirement obligations) than Detroit. Eventually, a state may need relief, which will be an even bigger problem because states are not covered by bankruptcy law.
However, just because Detroit is extreme doesn’t mean it’s unique. There are other cities on similar paths, many in the old Rust Belt. Detroit will only show us the limits of the tools we have to fix these places. If we are smart, we will get a better set of tools as soon as possible.