Detroit: In Debt and In Shambles

by Ben Nanamaker | June 25, 2013 8:29 am

Detroit has fallen into a pit from which it might not be able to emerge.

City emergency manager Kevyn Orr recently announced his plan[1] for restructuring the ailing city’s finances and debt. The news wasn’t good for city bondholders, employees or anyone else who has an interest in getting paid by the city, and in full.

Orr’s plan involves cuts to pensions and healthcare benefits and proposes paying less than 10 cents on the dollar to some creditors, and defaulting on $2.5 billion[2] in unsecured debt. It also would regionalize the city’s water and sewer system. Not surprisingly, Fitch and Moody’s downgraded Detroit’s debt[3] soon after the plan’s announcement, putting it well below investment grade.

And yet, even with this ambitious plan, the emergency manager still gives Detroit a “50/50” chance of filing for bankruptcy[4].

Detroit — once the fourth-largest city in the U.S. with a population of 1.85 million at its peak — has lost 61.4% of that peak population, or more than a million residents. No city has lost more people, and only St. Louis has lost more of its population as a percentage of its peak. Nearly 25% of Detroit’s residents left between 2000 and 2010.

What went so wrong?

Several factors have conspired to drag Detroit down and keep it there.

The automobile industry went through several busts in the following decades, dragging Detroit down with it each time. Race riots in 1967 led to “white flight” from the city core to the surrounding suburbs — what once was a predominantly white city became, over the course of 60 years, mostly black. More importantly, and more generally, those who could afford to move out of Detroit generally did, regardless of race, and many of the city’s businesses closed.

Perhaps even more damaging than the auto industry’s tumult and the unfortunate blowback from the 1967 race riots was poor financial planning on city leaders’ part. For years, they took out bonds at high interest rates to pay bills that the general fund couldn’t cover. Only now — with Detroit’s financial problems too large to ignore — has Michigan forced the city’s hand, starting with the appointment of Orr[5].

Oddly enough, Orr’s hiring points to another strange wrinkle in Detroit’s issues.

Before being appointed emergency manager, Orr worked on Chrysler’s bankruptcy case. Chrysler eventually was purchased by Fiat (FIATY[6]). The auto industry has always had its ups and downs, but for every valley it hit — the oil crisis and poor manufacturing choices in the 1970s and 1980s, Chrysler and General Motors’ (GM[7]) near-bankruptcy and subsequent bailout in 2008-09 — it managed to claw back from the brink.

Of course, the auto industry, while often synonymous with Detroit, isn’t just a Detroit industry. Many of the automotive assembly plants that are “in Detroit” are actually in Detroit suburbs like Wayne, Dearborn and Sterling Heights. And even if GM’s headquarters are smack-dab in the middle of Detroit, many of its workers come from the surrounding suburbs.

Generally speaking, the metropolitan Detroit area is doing all right economically. The auto industry has recovered, some of the nation’s best hospitals are in the area (Henry Ford, St. John, Beaumont), their universities are thriving, and plenty of entrepreneurs have found success in the area.

The city itself, however, hasn’t fully reaped these benefits. Detroit is a place that many people visit — to watch sports, to visit museums, to eat out — or work in, but they haven’t managed to convince enough people to move back in to build up the tax base.

The result of a mass exodus from a city built to support a population nearing 2 million people is a city far too large, physically speaking, to support. Detroit is 139 square miles, and that’s way too much space for a city that shows little signs of stemming the bleeding.

Detroit’s population loss isn’t evenly distributed, either. While parts of the city — particularly the downtown area, where the stadiums are and General Motors is headquartered — are mostly intact, others have been devastated by the mass emigration.

The decline in population not only takes away potential taxpayers, it also spreads out the city’s infrastructure, making it more expensive to provide basic services to its population.

The results have been disastrous.

There are 78,000 blighted and abandoned structures in the city, 38,000 of which are considered dangerous. About 40% of Detroit’s streetlights don’t work. Only 36 ambulances serve the city, the hydraulic ladders on fire trucks haven’t been inspected for years, and the average response time for a police call is 58 minutes.

Still, the city has been loath to do what other cities with shrinking populations in the United States have done — reduce the physical footprint as well. It was only in 2010 that Detroit finally started getting serious about removing many of its blighted structures, announcing a plan to raze 10,000 abandoned buildings.

Detroit’s best hope is to follow the example of two Rust Belt cities — Pittsburgh and Youngstown. Both were stung by the steel industries downturn in the ’70s and ’80s, and both took different but ultimately successful paths to navigating that.

Pittsburgh turned to high-tech industry and its strong research background, and reinvented itself into a vital 21th century city[8]. Youngstown, faced with a massive population loss rivaling Detroit’s in terms of a percentage of its population, has attempted to incentivize moving from otherwise abandoned streets to neighborhoods closer to the city’s core to save on utility and service costs.

It will take a little bit of both to bring Detroit back from the brink.

Endnotes:
  1. announced his plan: http://www.detroitnews.com/article/20130614/METRO01/306140057#ixzz2WCW04ToX
  2. defaulting on $2.5 billion: http://www.sfgate.com/nation/article/Detroit-defaults-on-its-unsecured-debt-4601960.php
  3. downgraded Detroit’s debt: http://www.reuters.com/article/2013/06/14/usa-detroit-fitch-rating-idUSL2N0EQ1LV20130614
  4. filing for bankruptcy: http://www.reuters.com/article/2013/06/11/detroit-bankruptcy-orr-idUSL2N0EN02320130611
  5. appointment of Orr: http://www.nytimes.com/2013/03/15/us/gov-rick-snyder-kevyn-orr-emergency-manager-detroit.html?_r=0
  6. FIATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIATY
  7. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  8. vital 21th century city: http://www.post-gazette.com/stories/opinion/perspectives/the-next-page-the-story-behind-pittsburghs-revitalization-360377/

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