Fifty years of Democrats running the city of Detroit led to it filing for bankruptcy last week. Unsustainable demands from its 48 unions gradually drove out private industry, as government became the largest employer. Its shrinking tax base can no longer support the massive pension debt obligations and still provide a minimum level of city services. Nearly half of the city’s debt is to underfunded pension plans and retirees.
Mitt Romney presciently warned in 2008 that if the government bailed out the automakers, it would ultimately destroy Detroit. “Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.” Obama and the Democrats in Congress didn’t listen and chose to bail out GM and Chrysler.
Detroit reached its zenith in the 1950s. It was the fourth-largest U.S. city and had one of the country’s highest per capita incomes. A manufacturing capital, the city provided 75 percent of the production for World War II. GM CEO Dan Akerson laments,"If you go back to the early '60s, Detroit was the Silicon Valley of America. If you were an engineer, you wanted to be in Detroit."
Tax revenues began falling as the population decreased from 1.8 million in the 1950s to 700,000 today. Wealthier people moved out of the city and into the suburbs. Conservative states friendlier to business and less subject to burdensome government regulations and union demands, like Alabama and South Carolina, provided incentives for automakers to build factories there instead, and the Big Three started relocating their plants out of Detroit beginning in the late 1960s. The size of the U.S. auto industry shrunk as Japanese cars started dominating the market. GM is the only auto company with headquarters left in Detroit, and its research and testing centers, which provide thousands of jobs, are located outside of the city. GM opened another new plant in Shanghai last month. Ford was never located in Detroit, but in nearby Dearborn. GM and Chrysler filed for bankruptcy in 2009, despite the bailouts. Ford, which refused government bailout funds, did not file for bankruptcy.
Unlike other cities which found new industries to replace their failing ones, Detroit never moved on. Instead, the city’s reaction to the shrinking tax base was to build fancy new buildings, which only dug it deeper into debt. It became difficult for Detroit to provide basic services such as law enforcement and trash pickup due to the escalating costs of union contracts and benefits, especially health care, which became worse under Obamacare. The city of Detroit and its school system are now the biggest employers in the city, dwarfing GM and Chrysler. Yet the city is now supporting more retirees than it has workers, with 18,000 retirees to the city’s 10,000 active public employees.
Detroit has been operating in the red for nine years, and in 2012 its fiscal deficit was $327 million. The city owes $18 billion to over 100,000 creditors, the biggest ones being pension systems. Its unemployment rate is at 18 percent. There are around 80,000 blighted or abandoned buildings. Forty-seven percent of Detroit’s taxable properties were delinquent in 2011, according to Reuters. Half of the street lights don’t work. Schools have been closing, and only seven percent of the city’s eighth graders are proficient in reading. The average police response time is 58 minutes, compared to the national average response time which is 11 minutes. Detroit has the highest crime rate in the U.S. of large cities, nearly three times the rate of Cleveland. Only 8.7 percent of violent crimes are ever solved.
Compounding the problem is that people have been deserting the city in pockets, yet city services must still service the entire 140 square miles. Detroit is larger than Boston, San Francisco and Manhattan combined.
There has been plenty of corruption contributing to the fiscal crisis. Mayor Kwame Kilpatrick was forced to resign in 2008 over a sex and perjury scandal that cost the city almost $9 million.
Unable to come to an agreement with the unions on reducing pension payments, or the bondholders, the city filed for bankruptcy last week, the largest U.S. city to file for bankruptcy ever. A bankruptcy judge issued an opinion last week stating that the bankruptcy petition must be withdrawn because it violates the state constitution. The state constitution prohibits decreasing the pension benefits of public employees. The State Attorney General intends to appeal on behalf of the governor.
If the bankruptcy is allowed to proceed, it will need to be determined who gets paid first - beneficiaries of pension funds or bondholders. Either way, many people are going to lose money they thought they had earned. Bond owners will only see pennies to the dollar on their investments. The most likely outcome is that a judge will decide who loses the most, and nothing will ever happen to punish the city. Most city officials will keep their jobs, and continue the pattern of mismanagement, allowing the cycle to repeat itself in the future.
This is a poor fix. When a city files bankruptcy, all of its top management should be fired, so the gross mismanagement is not repeated. Sadly, liberals in Congress write much of the bankruptcy code, and would rather stick it to the unlucky recipients of their disastrous policies, than change their disastrous policies.
If the bankruptcy is not allowed to proceed, the city will be forced to hobble along indefinitely as it attempts to settle with creditors on its own. Meanwhile, many basic city services will remain suspended or sporadic, and the city will be forced to choose whether to stop paying pensions or bondholders.
There is one other possible outcome. The Obama administration and Congress could attempt to bail out Detroit. This would be horrible, though, considering how broke the federal government is, and would set a terrible precedent for other financially irresponsible cities. The financial disaster would be pushed off onto the federal government, speeding up its own inevitable crash.
Big cities controlled by the Democrats like Chicago, Oakland and Santa Fe are now headed towards similar disaster, buried under unsustainable pensions, some up to five times their operating revenue. Chicago just took a steep credit rating hit, as Moody’s lowered the city's credit rating by three levels. Since 2010, 23 cities and municipalities have declared bankruptcy. The mayor of Detroit, Democrat Dave Bing, says there are over 100 major urban cities that are going down the same path as Detroit. Steven Luetger, senior managing director of fixed income for Mesirow Financial Holdings Inc., observed that whether it’s Detroit or Chicago, “there doesn’t seem to be any sense of cost discipline in either city.”
Obama warned voters if they voted for Romney, Detroit would go bankrupt. He tweeted on October 17, 2012, “When Gov. Romney said we should just let Detroit go bankrupt, we said thanks but no thanks.” Looks like he was right, I voted for Romney, and now Detroit is filing bankruptcy.
Obama ran on a platform of hope and change, promising blacks he would make them better off. In reality, they’ve been hit the hardest by disastrous liberal policies. Detroit is going bankrupt, contrary to Obama's spin last fall. The biggest victims of the left’s disastrous mismanagement of big-city governments have been blacks - eighty percent of Detroit is black. The left uses blacks and makes them worse off than they were before.
Detroit is our canary in a coal mine; if the left can ruin a city like Detroit with no consequences and a license to do it again, it is just a matter of time before the misery spreads to all our large cities controlled by Democrats. Americans who value their standard of living should see the writing on the wall and leave big Democrat-controlled cities for more conservative states. The country cannot afford overly generous pensions to government employees, and until the pensions are brought in line with the private sector, Americans in large cities controlled by Democrats will suffer – and may even spread their misery to the rest of us if the federal government bails them out.