A New Chapter in the Life of the Motor City

Unfortunately, that new chapter is municipal bankruptcy under Chapter 9 of the U.S. Bankruptcy code, the biggest by any American city… over $18 billion in debt. Detroit is the poster child for hyper-accelerated decline based on global changes. As the U.S. automotive industry lost market share to foreign competitors, ultimately resulting in the bankruptcy of two out of the three largest American automakers, as manufacturing in general moved substantially offshore and as fleeing populations left scores of abandoned buildings in their wake, the city’s livelihood and tax base vaporized.

Back in the post-WW II car boom in the 1950s, Detroit boasted a population of 1.8 million. By 2000, that figure had eroded to under a million, and between 2000 and 2010, the city lost another quarter of a million residents. It’s down to 700,000 plus or minus these days, and many of the remaining residents are either low paid workers or simply unemployed, living on or below the edge. 28.3% of all residents, ages 18 to 24, haven’t graduated high school, and job prospects throughout the city are beyond bleak (the official unemployment rate sits slightly above 10%, but so many are so out of the job market, they aren’t even counted anymore).

Long before the Great Recession, property values plummeted, and entire blocks of crumbling and vacant businesses and residences had to be leveled to stem the devastation. With lower wages, fewer workers and horrific declines in real estate – you can still purchase a 2,500 square foot home in some parts of Detroit for $10,000 (but you really wouldn’t want to live there!) – every form of tax based eroded while the demand on the criminal justice system and social services just escalated. It’s the most violent city in the United States, a definition for hopelessness that is more “third world” than an American tradition.

In March, the Michigan hired Kevyn Orr, a lawyer with extensive experience in bankruptcy (he handled the Chrysler bankruptcy), to take over administrative control over the city on behalf of the state. He began a series of very frustrating discussions and negotiations with municipal unions, pension funds and major creditors. Clearly, the city could not afford to pay its bills, but he could not secure sufficient concessions to keep the city going without a drastic change. They were even using monies raised from several earlier bond issuances to fund the 10,000 city personnel payroll… the tax base was woefully insufficient.

The risks of a Chapter 9 were anything but subtle. Orr had “[laid out his plans in June meetings with debt holders, in which his team warned there was a 50-50 chance of a bankruptcy filing. Some creditors were asked to take about 10 cents on the dollar of what the city owed them. Underfunded pension claims would have received less than the 10 cents on the dollar under that plan… Detroit’s budget deficit is believed to be more than $380 million. Orr has said long-term debt was more than $14 billion and could be between $17 billion and $20 billion…

“Orr was unable to convince a host of creditors, the city’s union and pension boards to take [such] pennies on the dollar to help facilitate the city’s massive financial restructuring. If the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment… ‘Only one feasible path offers a way out,’ Gov. Rick Snyder said in a letter to Orr and state Treasurer Andy Dillon, approving the bankruptcy.” Washington Post, July 18^th.

Michigan circuit judge “Judge Rosemarie Aquilina said [the city’s bankruptcy] petition, filed on July 18^th, violated the state's laws and constitution because it threatened pension benefits” (BBC, July 19^th) and stayed the proceding. Michigan’s attorney general immediately filed an appeal. It seems unlikely that a state court could preempt federal bankruptcy law, but we will certainly know very soon.

Is Detroit an indicator of the expected fortunes of the nation as whole, the future of our rust belt, or just a long-term march down a precipitous slope that was decay unique to the Motor City? The pension issue among state and local workers across the land, estimated to represent $2 trillion unfunded dollars, suggests that at least one of Detroit’s issues will be faced almost everywhere very soon.

I’m Peter Dekom, and exactly when are we going to deal with the big pension issues that are everywhere in the United States?