A Blacksmith, but no Horses

In the end, not even much light: The decline of once thriving Detroit took decades, but now the city is flat broke. Problems in the auto industry, dwindling population and city government mismanagement all were to blame for the fall. What happens now is still an open question. A city of this size has never gone broke before.

The end came swiftly for Detroit. Kevyn Orr [the emergency manager of Detroit] was in a hurry. Such a hurry, in fact, that the date next to the lawyer’s signature on the bankruptcy petition had to be amended. They really didn’t want to file for bankruptcy until Friday, according to the Wall Street Journal, but the pressure on the lawyer trying to manage the misery was too great. Rumors of the impending bankruptcy leaked out, a pension fund had already filed suit to stop the proceedings and those responsible had to act. That’s why July 18 is the saddest day in the city of Detroit’s history: the day Detroit went broke.

Michigan Governor Rick Snyder was quoted as saying, “This was a difficult and painful decision, but I believe there are no other viable options”; $19 billion of debt and no way out. Kevyn Orr was just appointed by Governor Snyder in March to manage the city’s bankruptcy. Many called him the “Czar of Detroit” because of his remarkable capabilities. He wasn’t elected by the people, but he was given the power to cancel collective bargaining agreements, slash salaries and sell off municipal property. To the end, he negotiated with creditors and labor unions attempting to improve the city’s disastrous finances. In vain. But Orr’s critics should realize that Detroit’s fate wasn’t decided in just the last few months. The decline and fall took years, decades even. The numbers tell the story of misery. In its heyday —the middle of the last century when automobile giants General Motors, Ford and Chrysler gained Detroit the nickname “Motor City,” when the Motown label made the city into a music metropolis, the city had a population of nearly two million. Today, that’s down to 700,000 and possibly even less.

A One Hour Wait for Police

Eighty thousand buildings have been abandoned or have entirely deteriorated; 75 percent of the city’s children leave school without graduating. The unemployment rate has tripled since the year 2000. Every fifth person is unemployed. No major U.S. city has a violent crime rate as high as Detroit; when American citizens call the police, they can expect a response within 11 minutes. In Detroit, the wait is one hour. In the end, there’s not even much light: 40 percent of streetlights are out of order. The list of misfortunes just goes on and on. But what is to blame for the downfall?

The declining population has had dramatic effect on the city’s finances. Revenues have collapsed. Worse yet, the government was powerless to raise taxes because the legal supplemental revenue limits had already been reached. Other possibilities to raise revenues also dried up: The city’s bond rating had been lowered to “junk” status, making new sources of revenue virtually impossible to find.

But despite declining revenues, officials were still responsible for maintaining a huge metropolis — an impossible task as evidenced by the neighborhoods in ruins, broken streetlights and rusting police cars. Additionally, Detroit was still responsible for raising huge sums for social services and pensions, problems facing many other American cities as well.

But those in power don’t get off entirely free of blame. On the contrary, ongoing mismanagement contributed in no small measure to the bankruptcy. Up until last year, the city’s department of sewers had been obligated by law to have a blacksmith on the payroll despite the fact that horses had not been used in operations for decades. In 2005, a financial adviser looked into the city’s finances and discovered an item that had not been included in the budget: mandatory payments to retiree health care accounts. The mountain of debt got suddenly higher.

No Larger US City had ever Gone Bankrupt

As sad as it may seem, bankruptcy was nothing new for the citizens of Detroit. Prior to the collapse of public finances, the industrial city had suffered several other minor heart attacks: Right in front of its doors, both Chrysler and General Motors had slipped into bankruptcy. But those cases ended differently. Bankruptcy of entire municipalities is a rare thing and no city as large as Detroit had ever gone bankrupt before. Prior to Detroit, Stockton, California, had been the city with the largest population to do so and it was just half the size of Detroit. The city with the largest debt to declare bankruptcy was in Jefferson County, Alabama with $4 billion owed—just one-fifth of Detroit’s debt mountain.

Since there is no comparable case, it’s difficult to predict the outcome for Detroit. Emergency manager Orr has to demonstrate that Detroit falls under the provisions of Chapter 9 of the bankruptcy law, which is designed to assist communities in restructuring their debt. There’s a certain irony in the fact that Detroit must first establish that it’s truly broke and unable to pay its bills. One tour through the city should suffice. Of the eight cities to declare bankruptcy since 2010, two were unable to substantiate their inability to pay.

If Detroit succeeds in showing it can’t pay its bills it then has to begin reducing its debt. But where to cut? Municipal retirees can count on seeing their pensions reduced, creditors holding municipal bonds will probably see smaller returns on their investments. The big question is, who has priority? In the New York Times, bankruptcy lawyer Karol K. Denniston said “Detroit is going to be a huge test kitchen.” When the dust settles, if Detroit’s pension funds can be rescued it would make bankruptcy more attractive for many other cities. Other cities in danger of going under will be watching what happens in Detroit very carefully.

As quickly as Orr had wanted to finalize the preparations for bankruptcy, he now seems to have sufficient time. Nobody knows how long the process will last and many suspect it may take years. City employees have been notified in writing that for the time being everything will carry on as previously. Concerned citizens with questions have been advised there’s now a call-in line they can use. Orr guarantees that police and fire protection will still be available, and the city’s water won’t be shut off.