Monday, July 22, 2013

Detroit

If you want to get to Toledo, Ohio - as I did last weekend to visit my mother - you need to fly into Detroit.

For decades, Toledo's economy was tightly tied to the auto industry in Detroit.  My hometown was known as "The Glass Capital" because companies like Owens Illinois manufactured the glass that was used in the manufacture of cars.  When the auto industry in Detroit collapsed, so too did the economy in Toledo, and Toledo's airport was eventually closed due to lack of interest several years ago.

So it was an eerie feeling to fly into Detroit Metropolitan Airport last Friday.  For the record, despite the financial woes of the city, Metro Airport is every bit as modern and well-maintained as any.

After months of fruitless negotiations, Detroit declared bankruptcy last week, throwing a shudder in the municipal bond market.  Few cities have declared Chapter 9 bankruptcy; the New York Times last week said that "just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s."

One of the interesting twists in this process is the attempt Detroit's emergency manager Kevyn Orr to make the creditors of Detroit's general obligation bonds unsecured creditors.  Generally the term "general obligation" means that bond holders have first claim to any tax revenue, but Mr. Orr is arguing that the pension obligations of Detroit should take precedence.  From what I read over the weekend, lawyers are divided as to the validity of Mr. Orr's position.

I could go on, but I thought it would be useful to highlight a few articles about Detroit.

First, from the Times article last week:

Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction....

About 40 percent of the city’s streetlights do not work, a report from Mr. Orr’s office showed. More than half of Detroit’s parks have closed since 2008.
Then there's Times columnist Paul Krugman contrasting the dire straits of Detroit with Pittsburgh.  Pittsburgh too was once home to heavy industry in the form of its steel plants, but when the downturn hit Pittsburgh was able to turn itself around:
As late as 2005 or 2006 — that is, until the eve of the Great Recession — you could argue that there wasn’t a whole lot of difference in aggregate performance between greater Pittsburgh and greater Detroit. Obviously, however, Detroit’s central city has collapsed while Pittsburgh has had at leastsomething of a revival. The difference is really clear in the Brookings job sprawl data (pdf), where less than a quarter of Detroit jobs are within 10 miles of the traditional central business district, versus more than half in Pittsburgh.
At this point, as the chart above makes clear, Pittsburgh is showing a lot of resilience; it seems to have managed to diversify its economy, and in fact is more than matching national employment performance. Detroit, despite the auto rescue, isn’t — and, of course, its center did not hold.
It’s hard to avoid the sense that greater Pittsburgh, by taking better care of its core, also improved its ability to adapt to changing circumstances. In that sense, Detroit’s disaster isn’t just about industrial decline; it’s about urban decline, which isn’t the same thing. If you like, sprawl killed Detroit, by depriving it of the kind of environment that could incubate new sources of prosperity.

Finally, Steven Rattner - who headed the Obama administration's largely successful efforts to revive Detroit's automakers - argues in last week's New York Times that government intervention is again called for, despite that obvious reluctance to bail out a city famous for financial chicanery:
Detroit faces greater challenges than the automakers because the structure of its obligations is quite different from those of General Motors and Chrysler.
Detroit owes approximately $5.3 billion on debt that has first call on all water and sewer revenues, which means the holders of that debt have to the right to take as much of the water and sewer fees (after operating expenses) as are needed to service the debt.
The bulk of its obligations are to the grossly underfunded pension plans and for retiree health care costs — nearly half of the city’s total liabilities. The city has suggested that it cut these by 90 percent. Although retirees don’t have a lot of legal rights in the bankruptcy process, it is difficult to imagine — on either a human or a political level — an exit from bankruptcy that would include reductions of this magnitude.
The first duty to help lies with the state: Gov. Rick Snyder has made clear that Detroit’s success is key to Michigan’s success.
For starters, if the state assumes responsibility for the $1.25 billion in reinvestment spending that Detroit’s emergency manager, Kevyn Orr, has included in his proposed budget, the city could use those freed-up funds to trim the potential pension reductions of retirees. And the Obama administration should comb through its urban programs to try to allocate more funds to a city that is truly in distress. (If I thought it could pass Congress, I’d happily support a special appropriation, but the politics of any spending are toxic in Washington these days.)
I don't know how this will all play out, but to state the obvious:  It's a shame.