Features » August 12, 2013
Is There Detroit After Bankruptcy?
Why shock therapy won’t reverse the Motor City’s decline.
If recent history of municipal bankruptcy is any guide, Detroit's short-term future is bleak. When Vallejo, Calif., filed for bankruptcy in 2008, things got worse, fast.
Detroit—Sandy Mills, 59, has been waiting 15 minutes for her bus to arrive, and she’s tired of it all.
Detroit’s bus system is notorious. Mills says she once camped out for two-and-a-half hours.
“It’s horrible,” Mills says. “The only time [the buses] are serviced properly is if they’re broken down.” When she worked at the Detroit Free Press, she felt so unsafe due to violence along her route that she started shelling out for a taxi.
Mills, born and raised in Detroit, is on her way back to her home on the city’s northwest side after stopping at a downtown temp office. The job she hopes to land pays $10 an hour—40 percent less than what she earned as a customer service rep at the Free Press before being laid off in 2008. Since then, she’s found only part-time temporary work and has been forced to rely on unemployment assistance time and again.
If she gets a steady job and manages to set aside some savings, she has one plan in mind: Get out. Not just out of Detroit; out of Michigan entirely.
“I’m done,” she says. “I’m totally done. Nothing’s working.”
Pinpointing a single source for the decline of what was once the nation’s fourth-largest city is a fool’s game. Detroit’s depopulation and long-term debt obligation have tangled roots: longstanding mismanagement and corruption, suburban sprawl enabled by America’s highway boom, increased crime due to police cutbacks, the 1943 and 1967 riots spurred by racial tensions and a racist police department, and municipalities across the metro area that scorn regional planning.
Top that off with the decline of the auto industry and Michigan’s deflating economy throughout the 2000s, which spurred the state to renege on a revenue-sharing deal with the city, costing Detroit an estimated $700 million, and it is easier to understand why Detroit filed the largest municipal bankruptcy in U.S. history this July.
“We are finally at a point where we simply can’t kick the can down the road any further,” Detroit Emergency Manager Kevyn Orr told the media a day after he initiated the process to seek Chapter 9 protection.
Orr, a Washington, D.C. bankruptcy lawyer, was appointed the city’s emergency manager in March by Gov. Rick Snyder (R). He’s offering Detroit’s unsecured creditors a dime on the dollar, proposing to cut municipal employee’s pensions and benefits, and plans to privatize entire city departments.
Detroit’s coffers are bare. Its longterm debt load, Orr says, hovers anywhere between $18 billion and $20 billion, and operation deficits have been unchanged for years. In addition, since 2000, the city’s population has declined by about 200,000, to 687,000, and interim census estimates indicate that people continue to flee. During the same period, budget shortfalls forced cuts in city services. The police force, for instance, shrank by roughly 35 percent, from 4,000 to 2,600 officers.
But down the road from where Mills sits, in bustling Campus Martius Park, young employees of downtown Detroit’s biggest employers are having a great time at the feel-good “Live Downtown Games,” which include obstacle courses, table tennis and volleyball. The lively scene—complete with an artificial beach, a tiki bar and pop-up food carts—is part of a program that offers employees financial incentives to shack up in a downtown home or loft.
This area is buzzing, and the downtown and midtown investment booms show no signs of slowing. A new $650 million sports arena and entertainment district has talking heads chirping about a Detroit revival. Rental and commercial space are nearing 100 percent occupancy as people from surrounding suburbs flood into this 7.2-square-mile slice of Detroit’s sprawling landscape. For some, summer 2013 is dawning in a rosy haze of optimism.
This is Detroit today: a city of paradoxes.
Exactly what is in store for Detroit won’t be known for weeks, as the bankruptcy case wends its way through a court that must first determine if Detroit is even eligible for protection.
To most spectators of the city’s unraveling—residents and outside observers alike—an emergency manager, and now bankruptcy, is the dose of harsh reality Detroit needs. After decades of mismanagement and missed opportunities, restoring fiscal order has been deemed the ultimate, and only, prerogative. Fix the debt and move on.
For some of the city’s corporate leaders, bankruptcy is even a welcome development. For example, as Quicken Loans founder Dan Gilbert continues his aggressive real-estate buying spree downtown, he’s preached a message of let’s-get-it-over-with-and-blast-through-to-the-other-side.
“I think [the bankruptcy will] be relatively short,” Gilbert told the Detroit News in June. “It’s been hanging over us for years. Now we’ll finally get key problems addressed.”
Straightening out the city’s finances is vital in the short term to avoid exacerbating current trends such as unpaid furloughs for city employees and wage cuts, some as much as 20 percent since 2010. And perhaps fiscal austerity is the only politically palatable path.
But bankruptcy is another Band-Aid on problems that have persisted for years. The much-touted solution has only a slim chance of reversing the city’s decades-long decline. Other options do exist that could rein in financial problems and allow the region to grow—but they’ve never been put on the table. A regional authority with a broader tax base or the kind of New Deal-style jobs program that Obama and some in Congress have touted could provide an influx of cash to buoy Detroit.
For now, the bankruptcy experiment will play out. And it won’t be the young people living and working in Detroit’s gentrifying midtown and downtown who will be affected. It’ll be the residents of the eviscerated neighborhoods, of whom 80 percent are black, and the thousands of current and retired city employees—those still residing in Detroit, some in the surrounding suburbs; middle-aged and older—who punched the clock day-in and day-out.
Michigan’s unique emergency manager legislation was established in 1990. Under the law, fiscal turnaround artists—previously called “emergency financial managers”—could be appointed by the state to restructure a city in dire financial straits. Only an emergency manager could petition to bring a municipality into bankruptcy.
The original emergency manager legislation was widely criticized as toothless legislation that didn’t empower the appointees enough. After Snyder won the governorship, one of his first actions was signing Public Act 4 of 2011, giving emergency managers the added authority to modify collective bargaining agreements with public-sector unions.
Chris Savage, proprietor of the Ann Arbor, Mich.-based Eclectablog.com, wrote in The Nation that the law grants emergency managers unprecedented powers: “Under PA 4, [emergency managers] can ‘exercise any power or authority of any officer, employee, department, board, commission or other similar entity of the local government whether elected or appointed.’ ”
A referendum to repeal PA 4 was approved by voters in the November 2012 election. But the Republican-controlled legislature quickly crafted and approved a bill that was virtually identical but exempt from popular control.
Some say it’s about time the state got involved in addressing the financial problems of Detroit, a longtime Democratic stronghold. Eric Lupher, local affairs director for Citizens Research Council, a nonpartisan policy research group, contends that Detroit has qualified for an emergency manager under the 1990 law for years. “The state has chosen, mostly for political reasons, not to get involved,” he says. “The state has some culpability in this, letting things get worse and worse.” Lupher’s mention of “political reasons” refers to former Gov. Jennifer Granholm (D), who avoided discomfiting Detroit Democrats while she was in office from 2003-2011, as city conditions worsened.
Two years ago, Snyder declared bankruptcy to be a non-option for cities in Michigan under his watch. Today, he says it’s Detroit’s “only viable” option. “This is the time to say enough is enough in terms of the downward decline of Detroit,” Snyder told the media a day after the July 18 Chapter 9 filing.
But if recent history of municipal bankruptcies is any guide, the city’s short-term future is bleak. When Vallejo, Calif. filed for bankruptcy in 2008 after accumulating a $16 million operating budget deficit, things got worse, fast. Road maintenance was cut by 90 percent. Fire and police department staffs were cut in half. The number of police officers fell from 155 to 90, and dispatchers from 24 to 14. Response times sometimes stretched for hours. Bloomberg reports that Vallejo exited bankruptcy in 2011 “with a skeletal workforce … and a surge in prostitution, while forfeiting its ability to issue debt for five years.”
Robert Brooks, finance professor at the University of Alabama, told Reuters in July that a company in bankruptcy and a city in Chapter 9 face similar challenges: “Like any company, you have to grow, or you are going to die.” A study from Standard & Poor’s showed Vallejo generated $34 million in savings in bankruptcy court, but the savings were almost entirely negated by expenses related to the bankruptcy itself. “Now two years after emerging from Chapter 9, it has yet to balance its budget, and the police force is roughly half its previous size,” Reuters reports. “Vallejo remains shut out of the municipal bond market and cannot raise money to address much needed infrastructure repairs.”
John Pottow, a professor at University of Michigan Law School and a bankruptcy expert, says Detroit’s bankruptcy will continue “a trend [of steep decline in basic services] that began years ago.”
Travel out from the city’s core—just half a mile from some spots of downtown— and you find jaw-dropping blight and near-vacant blocks. Some city parks are blanketed with vegetation. A volunteer group calling itself the Mower Gang has begun maintaining some patches where neighborhood residents haven’t addressed the tall weeds themselves.
If Detroit is found to be eligible for bankruptcy, police cuts are also a possibility, which would only slow response times that currently average 58 minutes. In 2012 the city’s murder count rose to 386, the highest in two decades. With 54.6 murders for every 100,000 residents, Detroit has the second-highest rate of any U.S. city. (Flint, Mich. is first.)
Orr has a long-term plan to restore public services. After suspending payments to unsecured creditors in June, he hopes to recoup $1.25 billion through creditor negotiations that can reinvested public services over 10 years. Considering, however, that estimates peg the legal costs of a bankruptcy at $100 million, and, according to Orr, it will take more than $80 million to fix the city’s information technology department—including the tax collection system—the math starts to get hazy.
Pottow says the only ways Detroit can address its operating budget and deficient services is by raising taxes or cutting expenses.
For now, it can’t raise taxes; the city has already reached the statutory limit imposed by the state. And as Governing Magazine points out, even if state legislators authorize higher taxes, it’s doubtful whether residents could afford to pay them. “Nearly 40 percent of Detroiters live in poverty, more than 2.5 times the national rate, and there’s also a sense that higher taxes—especially given the poor quality of city services— would further deter people from moving to the city,” Governing writes. “Orr says raising new revenue is ‘not a viable option.’ Attorneys for the city also say selling off city assets won’t do much to plug Detroit’s fiscal hole.”
That leaves cutting expenses, and city services are a likely target. Orr is already in the process of transferring trash pickup and electricity to the private sector. He’s proposed spinning off the city’s water and sewage department into a regional authority. He could also free up millions more if he finds a company willing to take over operation of the city’s bus services.
Privatizing bus operations would have one immediate impact: higher bus fares for residents dependent on the system as their primary mode of transportation. Orr says in his June 14 restructuring proposal to creditors that Detroit’s bus fares are “relatively low” and, suggests hiking them in the future to generate revenue. Once more, that’s where that Detroit paradox emerges: the more severe the cuts, the greater the impact on residents, especially for those who simply have no other option but to rely on city services. Detroit’s name is synonymous with the automobile, yet 60,000 of the city’s 349,000 households have no access to a vehicle.
Lupher, of Citizens Research Council, thinks that while privatization would cause Detroit to “lose some ability to handle things internally,” it could save services that would otherwise be cut entirely.
But privatization raises a number of concerns, says Brendan Fischer, general counsel with the Center for Media and Democracy. “If you’re selling off public services to for-profit companies, the primary concern [becomes] maximizing profits rather than serving the public’s interests,” he says. “In many cases, it results in lower-quality services [and] higher fees.”
Detroit’s public schools provide an example of privatization already at work. In 2011, Snyder authorized the creation of a state-run district, the Educational Achievement Authority (EAA), to oversee 15 of the city’s lowest-performing public schools. Some of these are run directly by the authority, while others are run by charter school operators or contracted private entities, which have full authority to educate at their own discretion, the district’s chancellor told Crain’s Detroit Business.
EAA chancellor John Convington, who received a four-year, $1.5 million contract, previously worked as a turnaround expert for Kansas City’s flailing schools. Under his watch, the Kansas City school system saw no progress and lost its accreditation. The EAA, which has been operating since September 2012, has already been criticized for hiring inexperienced teachers, 1 in 8 of whom quit before the school year was finished. The EAA schools have also had numerous technical issues with regard to test taking, and an increased number of disciplinary incidents. The Detroit News reports that in the second quarter of the 2012-2013 school year, the 8,000-student district had 5,200 reported incidents including truancy, drug possessions and firearm possessions. Yet legislators in Lansing are considering expanding the district to oversee an additional 35 schools.
Squeezing the middle
The after-effects of Detroit’s financial turmoil for current city employees and pensioners have been documented at length since the city’s bankruptcy filing, as have the possible outcomes of some the proposals Orr has detailed in his restructuring plan.
For instance, turning over the water and sewage department to a regional authority, which some argue is a pathway to privatization, could include layoffs. A 2012 report recommended slashing the departments’ staff by 80 percent.
“I’m a worker and I believe in going to work,” says Raymond Love, 43, a wastewater treatment sewage operator at Detroit’s Water and Sewerage Department who has worked for the city for 12 years. “I was told this is a job you could raise a family on, this is a job you could retire on.”
Not only have Detroit’s restructuring efforts put Love’s job possibly in jeopardy, but his retirement is also on the line. Orr has been clear: City employees’ pensions will be cut. To what extent is not yet known. This will affect 21,000 public-sector retirees and 9,700 current employees—some of whom were prohibited from participating in the Social Security system—who are counting on their pensions, which average $1,600 a month, when they retire.
Mike Mulholland, a former Detroit water and sewer department employee who now works as secretary and treasurer for AFSCME Local 207, which represents Love, is equally dismayed. “I could’ve worked somewhere where I could’ve [earned] more,” Mulholland says. Mulholland, 65, retired in February after nearly 30 years on the job and receives $1,600 a month from his pension.
For years, he lived in what he describes as a nice, middle-class neighborhood on the city’s east side. But comfort faded when the economy entered a recession in 2008 and his previously intact neighborhood came unhinged. “It just went to hell,” he says, describing a house next door that was abandoned for two years, stripped to the bone by scrappers. After conditions became intolerable, Mulholland says, he sold his home for $5,000—one-twentieth of its previous value.
The buyer paid in twenty-dollar bills. “You think I asked where that guy got that money or what he was doing? Hell no, I just took it,” Mulholland says.
The threat to his pension worries him. “I’m retired. I’m not gonna be able to get a job at 65. It’s over. I’ve had a back operation… What am I gonna do?”
Love also frets about the future. “Everyone got plans in life,” he says. “Everyone got futures to look toward. Having an uncertain future is my biggest fear. I don’t want to be looking for a job.”
Young urban pioneers
It’s become easy for reports on the city’s situation to get bogged down in the minutiae of the emergency manager law, or in short-sighted debates over what single problem caused the city’s downfall.
In truth, no matter how many factors led to Detroit’s downward spiral, there’s one simple, glaring fact now driving it: Since 2007, Detroit’s median household income has fallen by $5,000 to $25,000—less than half the national median income of $51,000.
“The income levels are reaching a point where you can’t squeeze any more blood out of the turnip,” says Wayne State University law professor John Mogk. That’s why, despite fears of gentrification from some, the new money being pumped into the city’s downtown and midtown appears promising to many—in effect, a blood transfusion for the turnip.
Andy and Emily Linn, a brother-sister entrepreneurial duo who own the midtown shops City Bird and Nest, see a big role in the future for the cohort of twenty-something urban pioneers who have moved to the area. Born and raised in the city, they’ve operated the boutiques, which feature local art, housewares and handmade goods, since 2011.
“People are excited to see younger people just excited about the city,” says Emily, 35. Near their storefronts, the bars fill up almost every night, a handful of coffee shops are in close proximity, food options are vast and a future streetcar line along Woodward will run the length of the corridor between midtown and downtown. Here, optimism for the city’s future is brimming. It’s a two-square-mile textbook example of a so-called “walkable city.”
Census figures from 2010 that revealed Detroit’s population shrank 25 percent over the previous decade also indicated that the downtown saw a 59 percent increase in the number of college- educated residents under 35.
So, the wishful thinking goes, as downtown and midtown grows denser with new apartment buildings and businesses (something Andy Linn said is his biggest hope for the next few years), the revitalization will radiate further into the city because, eventually, the appropriate spaces won’t exist to facilitate future development. But, as it stands now, the juxtaposition of blighted neighborhoods against the downtown and midtown area pushes an already tired cliché and narrative of Detroit becoming ever-more-delineated into a Dickensian, two-tiered city.
And then there’s the question of whether the influx of millennials living in the city’s core will stay. While public services there have been scaled back but remain functional, a middle-class young couple is unlikely to send their children to one of Detroit’s dismal public schools.
No outside solutions?
Snyder and the Republican legislature have made it clear that emergency managers are their solution to Michigan’s financially plagued cities. And Snyder has said repeatedly that the state will not “bail out” Detroit. The message is clear: Cut back, restructure city government and reinvest with what is saved.
But that solution has another fundamental flaw: Bankruptcy and austerity-by-fiat don’t directly address the city’s population deficit. Privatizing education, slashing union contracts and cutting public services won’t entice middle-class residents.
If Orr’s proposals to revamp city services and attract new residents and businesses don’t stabilize Detroit’s income slide and population free fall, they could become monuments to folly. With one-third of the city’s residents in poverty, Detroiters don’t have the money to maintain the city’s retail outlets, transportation system, city infrastructure or housing stock, Mogk says. As George Galster, author of Driving Detroit and Wayne State urban studies professor, recently wrote in Detroit Free Press: “Any future scenario wherein the city relies only on its own income and property tax revenues and further budget-cutting while it shrinks is doomed.”
Another option is for Detroit to seek outside financial aid through regional initiatives to boost funding, an effort that would have to be state-driven. Margaret Dewar, professor of architecture and urban planning at the University of Michigan, says, “Regions that have done really well have tended to say, ‘We want to have regional solutions, not just have every city on its own.’ ” She cites Metro, the regional government in Portland, Ore., and Minneapolis-St.Paul’s Metropolitan Council as successful examples of how a regional tax base can work.
Metro represents 25 cities and three counties surrounding Portland. Its seven- member council handles planning, solid waste and recycling, finance and administrative services, regional parks, green spaces, and the Oregon Zoo. Similarly, the Metropolitan Council represents seven counties and handles public transportation, waste water services, public parks and trails.
Dewar says this style of governance provides “regional cooperation about taxes they share,” which intends to prevent the entire region from impoverishing the central city. She continues, “The cities [Portland, Minneapolis and St. Paul] have remained strong, so they’re the biggest contributors to the regional tax sharing fund.”
But in metro Detroit, where some suburban officials push for more sprawl and cry foul when a business relocates to the downtown district, regionalism is deemed a pie-in-the-sky idea. It was only when Orr announced that the Detroit Institute of Art’s prestigious collection might have to be sold to appease creditors that the entire state woke up and realized everyone has some skin in the game.
Initiatives do exist at the federal level that could help boost the city’s median income level. U.S. Rep. John Conyers, Jr. (D-Mich.) has proposed a federal jobs program targeting areas in dire need of employment, like Detroit. “The most palpable issue facing [Detroit] has been the chronic lack of access to sustainable employment,” Conyers told In These Times in a statement. The bill would create 3 to 6 million full-time, market-wage jobs nationwide in the first two years. People would be put to work building new roads, schools and parks. It would help support the hiring of new teachers at schools and provide staff for public-health and blight-removal projects.
But that’s all hypothetical. For the moment, the help Detroit will receive right now—emergency managers, bankruptcy— is here.
So sure, take care of those “unmanageable” pensions that former city employees receive, and attempt to get a handle on the astounding long-term debt by privatizing or outsourcing services like the water and sewage department (which Orr says could save the city up to $70 million annually) or trash pickup (reportedly an additional $15 million).
But what if Detroit ends up in a financial crisis again, unable to divest itself of its debt? What if none of this reverses the population trend and its median income remains stagnant? What’s the plan at that point?
What are you going to sell off when there’s nothing left to sling?
ABOUT THIS AUTHOR
Ryan Felton is a staff reporter at the Oakland Press in Pontiac, Mich. He lives in Detroit and occasionally blogs at Jalopnik Detroit.