Detroit’s Long Road to the Bottom

Understanding the Motor City’s path to economic ruin.

Steven Greenhut | August 2, 2013

Californians frustrated by the state’s long-term fiscal situation sometimes throw up their hands and declare that things must get worse before they get better. Let the tax-and-spenders have at it, they say, and then voters eventually will wake up and change their ways. Unfortunately, “eventually” can be a rather long time, based on evidence from the municipal level.

Detroit has been in the national news after federal bankruptcy Judge Steven Rhodes last week froze three lawsuits challenging the decision by that city’s emergency manager to seek bankruptcy protection. The bankruptcy court has taken the exclusive jurisdiction to decide the matter. The judge’s freeze also applied to a lower-court ruling that rejected the Chapter 9 filing as unconstitutional because it would cut vested pension benefits for public employees.
Obviously, legally guaranteed benefits are, well, legally guaranteed. But when a company or municipality runs out of money, bankruptcy is the only option.
Detroit has an $18 billion shortfall, and no realistic way to dig out of its hole without being able to abrogate some of its pension and other debts. I recall the Scranton, Pennsylvania, mayor who cut his city workers’ pay to minimum wage. A court ordered him to pay their full salaries. He reminded the court that he would like to have the money to do so, but “I can’t print it in the basement.”
Detroit was a world-class city when World War II ended, but started fading soon afterward. As far back as 1961, Time published a feature article about the city’s declining economy, infrastructure, and public services.
These days, Detroit more closely resembles the dystopian movie The Road Warrior than it does a modern American city. Detroit doesn’t have urban sprawl. It has “rural sprawl,” remarked Michael LaFaive, a scholar with the Midland, Michigan-based Mackinac Center for Public Policy, a free-market think tank. Such large swaths of Detroit have become vacant that people are farming blocks from downtown. Forty percent of the traffic lights in the city aren’t working and it takes 58 minutes for police, on average, to respond to a call in the crime-plagued city, he added. The median square-footage cost for a house in Detroit is $13 (compared to around $350 in San Diego). Many neighborhoods and public streets are abandoned.
Things can get really bad and voters will not necessarily wake up. The bankruptcy court’s decision to allow the city to proceed was met with protests – mostly by city workers eager to pick what’s left of the bones of the city’s carcass. Even in Detroit, emergency measures are controversial.
LaFaive says the mess – caused by bad public policy – has been decades in the making. He points to crushing tax burdens, debt that is always at the legal limits, terrible misspending, and poor services that cause taxpayers to move to other places.
The main issue in Detroit’s bankruptcy is the same one in California’s municipal bankruptcies, in Stockton and San Bernardino. Can vested rights – i.e., pension benefits promised to employees by contract – be reduced even when a city runs out of money?
Stockton officials want to stiff the bond holders that provided the pension-obligation bonds that allowed them to prop up the system the last time the city ran out of cash, while continuing its pension payments to the California Public Employees’ Retirement System (CalPERS). A federal bankruptcy court will decide if the bondholders take a hair cut while sparing pain to CalPERS and pensioners.
San Bernardino had stopped making those CalPERS payments – prompting the pension system to seek legislation to make it easier to put a lien on city assets. (In Detroit, debtors want the city-owned Detroit Institute of Art to sell its priceless works of art, LaFaive noted.)
Both California cities are impoverished. Both have significantly cut back public services. One Stockton council member reminded the bankruptcy court that city workers didn’t receive Cadillac-style health care, but “Lamborghini-style” plans. Overspending on public-employee compensation remains the heart of the problem.
And it’s a problem throughout California, even in places where urban decay remains unimaginable. California is a long way from Detroit, but its desperate straits show that voters won’t necessarily wake up. It’s a long way down to hit bottom