A City of Two Tales

In the 1950s, Detroit was a bustling post-War city pumping out cars for a newly mobile America. With about 1.8 million people, the city was America’s poster-town for prosperity and growth. Even in the 1970s, it claimed a population of 1.5 million even as a few locals headed to the ‘burbs for a better quality of life. Still, Detroit bustled and bloomed. Then foreign competition in the automotive industry and increasing global competitive produced lower output from the automotive giants and their vendors… generating white flight… and black flight… and flight flight. In the late 1990s through the 2010 census, the population fell a staggering 25% as Detroit faced massive losses, resulting in the bankruptcy reorganization of General Motors and Chrysler.

Housing prices plunged. Poverty rates soared. Slums literally fell down, many having to be razed. Manufacturing centers were abandoned and began deteriorating fast. Demand for social services, schools, police, fire, infrastructure repair remained high. But with job loss, property devaluation and population decline, long before the Sequester, Detroit lost the revenues it needed to maintain those citizen demands. The city was heading rapidly towards a full bankruptcy. Detroit is defined by poor minorities, controlled by Democrats in a state that has shifted towards the Republican conservatives who control the state capitol.

Using a state insolvency law, in early March Republican Governor Rick Snyder appointed an emergency manager to take over control of the fiscally decimated city. This new executive has “sweeping powers to merge or eliminate city departments, call for the sale of city assets, and adjust contracts with labor unions. That move has created new uncertainty for some entrepreneurs about what exactly that may mean for business.”  New York Times, March 4^th. Detroit would be slowly brought to heel; state bailouts would be replaced by a new austerity program. Elected Democratic city officials screamed like stuck pigs.

It’s a really cheap place to live, if you can tolerate crumbling neighborhoods and very cold weather. And it is becoming a pretty reasonably-priced city for businesses looking for growth opportunities and reasonable labor costs. The Ford Motor Company is optimistic, and Blue Cross Blue Shield (above picture) even moved into a major downtown facility. Pockets of success, new chi chi shops and upgraded hotels have begun to spring up in small pockets of the city. Still, many in Detroit still live in a very downscale and hopeless environment.

“But so much misery also brought newcomers: out-of-town investors who learned of properties for sale at prices unimaginable in other cities and young entrepreneurs, artists and musicians who said they valued Detroit, in part, for its grit and its seeminglywide open spaces, the very elements that had made some people flee. Business incubators, like TechTown, began emerging, and Michigan business executives began reinvesting in the city, among them figures like Dan Gilbert, the founder of Quicken Loans, who has bought building after building downtown. 

“Meanwhile, Detroit’s car companies have experienced what had once seemed like the unlikeliest of comebacks after the financial crisis. General Motors and Chrysler emerged from bankruptcy filings and government bailouts to far more upbeat signs — and with investments in Detroit. Not long ago, Chrysler moved its regional marketing team into a downtown building here, and an assembly plant in the city, Jefferson North, was retooled to produce a new version of the Jeep Grand Cherokee sport utility vehicles, among the company’s hottest sellers.”

The duality of Detroit is reflected by business growth and new upscale living in some pockets of the city, a growing and thriving gathering of the next Detroit “sound” musicians and cutting-edge fine artists in others, while the vast majority of residential communities illustrate the dire condition of this once great metropolis. Yet as we look to cast a judgmental eye on this prodigal city, dropped to its knees by a changing economy, we should keep in mind that there are $2 trillion of unfunded government pension obligations at the state and local level all across the United States. Simply put, most municipalities simply cannot pay for what they promised in better times in the new downsized economy that is our going-forward reality.

It’s high time that the federal law addressed this pension obligation malignancy as an issue that merits its own provision in the nation’s bankruptcy laws beyond the current provisions of Chapter 9 (that covers general municipal bankruptcy). New standards that balance the legitimate interests of retirees against the municipalities’ and states’ reasonable ability to fund without decimating the local economy are absolutely required. Unions will scream, but it is better to create an environment where pensions remain viable (if lower or postponed) as opposed to forcing increasing numbers of cities and other local governmental subdivisions into full bankruptcy with even more devastating results.

States and cities facing economic disaster short of full insolvency should have recourse to a system that lets them be able to reorganize their pension obligations. Retirement plans should carry the same transportability from job to job as in the private sector, and while retirement in dangerous “uniformed services” might be permitted after shorter terms of service than in safer jobs, no one should be able to collect a pension absent a disability until at least age 60 for uniformed services or 65 for other activities, ages that can be adjusted upwards as our life expectancies increase. We can expect some parallels in federal pensions and Social Security if Congress ever can make decisions again. It’s time to empower these local governments with the tools they need to survive.

I’m Peter Dekom, and the big reset that we all need to transition into a downsized future may be painful, but we cannot ignore that reality any longer.