I think this bankruptcy is an exciting thing for Detroit. The purpose of bankruptcy is a reboot and if anyone needs a reboot it's Detroit. Of course, Detroit isn't the only city going through or considering bankruptcy. Unlike most people, I view the nationwide phenomenon of municipal bankruptcies positively. Years of unsustainable policies have left the big cities of the U.S. in a financial state where they can no longer effectively provide services. In 2013, 40%+ of Detroit's revenues went to bond payments, pension benefits, and health benefits to retirees. This is money taken away from providing services to current residents of the city.
Bankruptcy will mean bond money will no longer be so easily forthcoming, but that's a good thing. Cities will be forced to grow within their means, and that pressure will force more prudent fiscal policy going forward.
It is my hope, and this is unpopular I know, that Detroit successfully unburdens itself from all obligations associated with pension plans. I certainly support pensions for people who dedicate their life to public service, but seeing cities and counties decimated by poorly managed pensions is crushing. Between early qualification, and 'punching' or otherwise basting your pension salary based on your last year worked, have been policies that have robbed other pensioners and citizens alike of benefits and services. Without a reasonable discussion about what can be expected of the taxpayers to bear, and what cannot, we will see more Detroits.
It will be interesting to see how pension liabilities and current pension guarantees are handled. This is a very large scale problem not just in Detroit but across America, where the retirement guarantees given to retiring politicians and government workers is very costly.
If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly. The irresponsible largess in the current government pension system needs to come to an end.
Hmm. I've been thinking about your comment for a while.
I don't see the feedback loop. In normal bankruptcies, or any other mistake in management, there's a feedback loop to help self-correct and prevent this from happening again. So politicians made a lot of promises they couldn't keep, got in bed with the folks running the city and created all sorts of sweetheart deals, made lots of speeches about making the city a better place and so forth while running it into the ground.
The lawyers come in, nullify the promises made to many of the participants, including bond holders and dedicated employees, all of whom acted in good faith. The politicians walk away. Heck, some of them are probably busy right now continuing to move up the political ladder.
So where's the feedback loop? The fact that bondholders will be more careful next time around? That's all I can see, and it's a very flimsy thing to hang that much optimism from. My bet is the state picks up the bonds, takes over managing the city budget, and gives everybody involved a 30-40% haircut. This may prevent the particular city named Detroit from repeating the same mistake for a few years, but it does absolutely nothing for all the other mismanaged cities. I'm not even sure Detroit will remain in the doghouse very long. In fact, from a certain political angle, looks like a very well-played strategy. At the end, all the players walk free and continue making speeches about how awesome Detroit is and "if they had only listened to me" things would have worked out.
Doesn't look too encouraging for anybody, but heck, maybe I missed it.
When a company is forced to reorganize due to bankruptcy often a change of management is required. However, the "management" of Detroit is elected by the people, and they will likely choose to simply send the same folks or the same sorts of folks back into power after this happens.
How is this a reboot? To me it seems more like the typical infinite "just one more last chance" that enablers give to drug addicts.
The city government is still corrupt and incompetent, and the remaining population is largely unemployable. Yes it's a good thing that the city is going from broke to just poor, but I don't know if it will every truly recover.
Can you really call municipal bankruptcy a nationwide phenomenon? You have: Jefferson County, Alabama that got mixed up in some interest rate swaps they had no business getting involved with; a couple of cities in California that got punished especially badly when home prices collapsed; and now Detroit which has been suffering from an ever shrinking tax base. I don't think you can really look at it and say there's a trend.
What I don't see in the comments yet: This is interesting not only for Detroit, but for the precedent it sets. There are 10 or 15 municipalities that will study how to screw the retirees & bondholders as thoroughly as Detroit plans to and then go down that path.
I have a hard time feeling sorry for bondholders in these situations. There is always some risk in lending money. Perhaps they should try and find more creditworthy institutions next time.
A lot of money in the US is being lent with the assumption that creditors will always be bailed out by the state or federal government; that mindset exasperates excessive borrowing and spending at the local level and encourages creditors to make risky loans. This is the textbook definition of a moral hazard.
I'm very liberal, but I don't see this as screwing the retirees. I think they got a better than they should have deal. The unions over-reached and they got rates of return that were unsustainable. We haven't even talked about the gaming of the system that happens (punching up salary for the last year, so their retirement benefit goes up).
The police chief in a town near mine retired on something like $300-400K and it was discovered that he had taken a job at another city, several hundred miles away.
There is so much corruption and abuse of the municipal retirement plans that I think a reboot is in order.
Note that much of Detroit's debt is insured by monoline insurers who viewed the probability of a majour U.S. city entering Chapter 9 in the way S&P and Moody's viewed a nationally correlated housing meltdown pre-2008. I have not yet seen how this bankruptcy will (a) affect the monolines' solvency, or, (b) change their behaviour around municipal credit wraps.
Apparently, one of the major reasons for bankruptcy has been population loss. Detroit has lost 250,000 people in the last decade. What has particularly happened in Detroit that has led to migration of population?
Detroit's de-population is a tremendously sad story. The city peaked in the heyday of the U.S. auto industry at 1.8 million people, and is now around 700,000. The decline of the U.S. auto industry meant jobs left the city, and along with those jobs most of the middle class people. This was compounded by white flight in the 1960's and 1970's (and as a result the city proper is 80% black even though the overall Detroit metro area is 70% white). Fully a third of households in the city are below the poverty line.
One thing to note is that many people moved outside of the city limits into the suburbs, which including Detroit has a population of something like 4 million people (ie. Wayne, Oakland, Macomb counties). The population of the city of Detroit proper is much less than that, like 750,000.
Michigan has a very strong "home rule" law which concerns the annexing of these suburbs which prevents Detroit from amalgamating these suburbs, which has led to decline in tax revenue for the city proper. As people move out to the suburbs, the city can't sustain itself due to declining tax revenue.
Many other cities have amalgamated recently. Toronto, for example.
Does anyone have any insight into how this affects residents of the suburbs like Livonia, Farmington Hills, Dearborn, Ann Arbor, Royal Oak, etc.? I've been visiting "Detroit" since I was a kid, but in reality was always staying with people outside Detroit proper.
Pretty sure they're all separately incorporated, so it wouldn't affect them directly. It will affect retires who moved out of Detroit into these cities and now rely on Detroit pensions.
Related to the other thread about San Francisco housing prices, in Detroit they should have hit rock bottom. Which would be good for cash-strapped startups trying to increase their runway.
I know nothing about crime rates, transportation and other amenities which could make life difficult. Is it that bad?
The cheap parts of Detroit are that bad. After a screening of BURN, an film following firefighters in Detroit, a firefighter commented 'A gallon of gas is much cheaper than a movie ticket.' There are blocks of houses where 0, 1, or 2 houses are occupied.
Downtown Detroit is safer and has better services, but it costs more than the rock bottom prices.
The deindustrialization and depopulation really hurt Detroit. But what also strikes me is the rapid change in racial demographics. In 1940, Detroit had a 90% white population and was the highest standard of living city in America. During the course of WWII, 350,000 blacks moved into Detroit. In 1943, the Detroit Race Riot caused by tensions between whites and blacks resulted in 43 dead, 433 wounded. In 1967 it happened again, this time 43 dead, 1189 injured, over 7,200 arrests, and more than 2,000 buildings destroyed. President Lyndon B. Johnson sent in the Army to quell it. In 2010, the demographics are 10% white and 82% black, and Detroit is a bankrupt wasteland.
Deindustrialization happened in other cities such as Pittsburgh - but they've recovered by transitioning into technology/medicine industries and the like. Pittsburgh has not seen a demographic shift like Detroit.
There's a 43 year gap between those stats. You've got the beginnings of a hypothesis, but I think you need a lot more data if you want to support it at all.
You should expect to see this more often than not. Cities in Florida are going through the same things, but just haven't defaulted yet. Expect it. Its going to be the norm.
most of this is due to the archaic pension system.
[+] [-] rayiner|12 years ago|reply
[+] [-] ChuckMcM|12 years ago|reply
[+] [-] fnordfnordfnord|12 years ago|reply
Yeah like kicking cans down roads with funny bond schemes http://blogs.marketwatch.com/fundmastery/2010/03/12/goldman-...
>pension benefits, and health benefits to retirees. This is money taken away from providing services to current residents of the city.
It's called paying your bills. Honoring commitments made to those retirees, some of which are current residents of the city.
[+] [-] Shivetya|12 years ago|reply
If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly. The irresponsible largess in the current government pension system needs to come to an end.
[+] [-] DanielBMarkham|12 years ago|reply
I don't see the feedback loop. In normal bankruptcies, or any other mistake in management, there's a feedback loop to help self-correct and prevent this from happening again. So politicians made a lot of promises they couldn't keep, got in bed with the folks running the city and created all sorts of sweetheart deals, made lots of speeches about making the city a better place and so forth while running it into the ground.
The lawyers come in, nullify the promises made to many of the participants, including bond holders and dedicated employees, all of whom acted in good faith. The politicians walk away. Heck, some of them are probably busy right now continuing to move up the political ladder.
So where's the feedback loop? The fact that bondholders will be more careful next time around? That's all I can see, and it's a very flimsy thing to hang that much optimism from. My bet is the state picks up the bonds, takes over managing the city budget, and gives everybody involved a 30-40% haircut. This may prevent the particular city named Detroit from repeating the same mistake for a few years, but it does absolutely nothing for all the other mismanaged cities. I'm not even sure Detroit will remain in the doghouse very long. In fact, from a certain political angle, looks like a very well-played strategy. At the end, all the players walk free and continue making speeches about how awesome Detroit is and "if they had only listened to me" things would have worked out.
Doesn't look too encouraging for anybody, but heck, maybe I missed it.
[+] [-] InclinedPlane|12 years ago|reply
How is this a reboot? To me it seems more like the typical infinite "just one more last chance" that enablers give to drug addicts.
[+] [-] smurph|12 years ago|reply
[+] [-] minimax|12 years ago|reply
[+] [-] jpdoctor|12 years ago|reply
[+] [-] nostromo|12 years ago|reply
A lot of money in the US is being lent with the assumption that creditors will always be bailed out by the state or federal government; that mindset exasperates excessive borrowing and spending at the local level and encourages creditors to make risky loans. This is the textbook definition of a moral hazard.
[+] [-] e40|12 years ago|reply
The police chief in a town near mine retired on something like $300-400K and it was discovered that he had taken a job at another city, several hundred miles away.
There is so much corruption and abuse of the municipal retirement plans that I think a reboot is in order.
[+] [-] JumpCrisscross|12 years ago|reply
[+] [-] denzil_correa|12 years ago|reply
[+] [-] wmil|12 years ago|reply
http://en.wikipedia.org/wiki/1967_Detroit_riot
Things got bad. The insurrection act was invoked. The US military was sent in. Black-white relations have been awful since.
Detroit has faced white flight like no other city. From 1.5 million in 1950 to 75 thousand in 2010.
http://en.wikipedia.org/wiki/Demographic_history_of_Detroit
[+] [-] rayiner|12 years ago|reply
[+] [-] paulfedory|12 years ago|reply
Michigan has a very strong "home rule" law which concerns the annexing of these suburbs which prevents Detroit from amalgamating these suburbs, which has led to decline in tax revenue for the city proper. As people move out to the suburbs, the city can't sustain itself due to declining tax revenue.
Many other cities have amalgamated recently. Toronto, for example.
Here's an interesting read: http://www.theatlantic.com/business/archive/2011/03/dont-shr...
[+] [-] HarryHirsch|12 years ago|reply
[+] [-] bagels|12 years ago|reply
[+] [-] toomuchtodo|12 years ago|reply
[+] [-] georgemcbay|12 years ago|reply
[+] [-] negativity|12 years ago|reply
[+] [-] aculver|12 years ago|reply
[+] [-] zaius|12 years ago|reply
[+] [-] outworlder|12 years ago|reply
I know nothing about crime rates, transportation and other amenities which could make life difficult. Is it that bad?
[+] [-] burkemw3|12 years ago|reply
Downtown Detroit is safer and has better services, but it costs more than the rock bottom prices.
There are people targeting start ups for Detroit though: http://detroitventurepartners.com/
[+] [-] astine|12 years ago|reply
[+] [-] andrewguenther|12 years ago|reply
[+] [-] prawn|12 years ago|reply
[+] [-] jlgreco|12 years ago|reply
[+] [-] jstalin|12 years ago|reply
Perhaps now Detroit (the city itself) will physically shrink to accommodate its ability to actually service residents.
[+] [-] djKianoosh|12 years ago|reply
[+] [-] znowi|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] eeky|12 years ago|reply
Deindustrialization happened in other cities such as Pittsburgh - but they've recovered by transitioning into technology/medicine industries and the like. Pittsburgh has not seen a demographic shift like Detroit.
http://en.wikipedia.org/wiki/Demographic_history_of_Detroit
http://en.wikipedia.org/wiki/Detroit_Race_Riot_%281943%29
http://en.wikipedia.org/wiki/1967_Detroit_riot
[+] [-] ryusage|12 years ago|reply
[+] [-] inzax|12 years ago|reply
most of this is due to the archaic pension system.