Part II: Detroit, MI, and the Largest Municipal Bankruptcy in U.S. History

To understand the fall of Detroit, one must understand the storied history of the Rust Belt.

The fate of Detroit is not so unlike other cities in the Midwest that felt the drain of opportunity as heavy manufacturing firms relocated to other parts of the country and the world. Detroit, as well as cities like Cleveland, Chicago, and Pittsburgh, were the heart of industry in the United States well into the 1950’s. These cities prospered while manufacturing remained supreme.

But then manufacturing began to change: international competition began undermining American prices, assembly lines began automating to lower costs and improve efficiency, and factories began realizing that they could get cheaper labor out west, or even outside of the country. As a result, many firms began to leave the industrial heartland for cheaper prospects abroad.

The fate of Detroit is very much unlike Cleveland, Chicago, and Pittsburgh, however, in that those cities managed to draw upon secondary sectors, like service, to keep their economy going. Many of these cities were hit hard, and to this day still suffer an economic hole where manufacturing used to be, but they have garnered enough economic activity in other sectors to keep themselves afloat. Detroit, however, still relied upon their single manufacturing sector, the automobile industry, for primary economic support well into the 2000s - up until the auto industry in Detroit collapsed in 2009.

Further exacerbating this problem was a racial schism that drove affluent, white residents to the suburbs. This 'white flight' was a phenomena experienced by all cities in the mid-1900s; Detroit's experience, however, took on a very specific rigor and flavor. Many white and black Southerners moved to Detroit in the hopes of finding work in the booming auto industry. These individuals brought with them deeply-held opinions about race, initiating decades of mounting racial tensions. Many of Detroit’s mayors – Republican and Democrat alike – championed policies to keep white and black residents separate, or to drive white and black residents out of the city. Detroit experienced the violence du jour that permeated the post-war and Civil Rights era, but tensions came to a head in the violent 12th Street Riot: a "conflagration [that] lasted four terrifying days and nights, left scores dead and hundreds injured, thousands arrested, untold numbers of businesses looted, hundreds of buildings utterly destroyed and Detroit’s reputation in tatters,".

After that event, white Americans, middle-class African Americans, and business owners fled to the suburbs to escape the city's violence and crime. Poverty skyrocketed as the affluent and middle-class left, starving the city of a sufficient tax base to support the public services its residents desperately needed.

More business left with every economic bust, and no new businesses tried to move in. As a result, Detroit got stuck in the perpetual cycle of a failing single-sector economy.

By 2013, Detroit was financing their day-to-day operations through unsecured debt - debt which was not backed by a dedicated revenue source - while offering insufficient help to the 39% of residents living below the poverty line, and the 29% of residents that were unemployed. Detroit had little base from which to collect taxes: incomes were low, averaging $26,000 a year, and the average value of home property was a meager $50,400. Put in relief, Michigan's average household income and property value were nearly double that of Detroit: $48,000 and $121,000 respectively. The city suffered a crime rate five times the national average. Residents had to wait over an hour for police to come when they called. Almost 40% of all streetlights were broken. They already spent 42.5% of their total revenues on debt service; they anticipated that number would balloon to 65% by 2017.

By Detroit’s measure, by the time they filed for bankruptcy in 2013, they owed approximately : The federal courts granted Detroit its bankruptcy petition, and by November 2014, Detroit had come to a consensus with it’s over 52 creditors on a path forward. This deal trimmed $7 billion off Detroit’s almost $18 billion debt outstanding. Creditors owning secured debt through water, utility, and property tax bonds were forced to make concessions on how much money they would get back for their investment, despite their bonds being protected by the full faith and credit of the state. Pensioners were forced to make concessions on the value of their pensions and OPEB benefits, despite the state and federal contract clause.
 * 1) $7.3 billion in traditional debt instruments – bonds, notes, certificates of participation
 * 2) $6.4 billion in OPEB liabilities
 * 3) $4.6 billion in pension liabilities
 * 4) $300 million in other liabilities

In theory, Detroit’s bankruptcy was a national lesson for all stakeholders that municipality obligations are equal: bonds and benefits are the same in the eyes of court. In practice, however, people with sympathies and constituencies create the plan for path forward, which means that some groups will inevitably come out ahead of others.

In the Detroit plan pensioners still get about 95.5% of their pension dues, save for those who worked in public safety, who still receive 100% of their pension benefit. Pension cost of living adjustments have been reduced, however, and pensioners had their OPEB benefits slashed to around 10% their prior levels. Detroit’s general obligation bondholders get 66% of their money due – including those who own pension obligations bonds. Those holding certificates of participation only get 14% back, plus access to development deal packages to offset their monetary loss.

Many bondholders and investors have claimed that Detroit pensioners received a more generous package than they; the monetary value of pensions barely got hit. Moody’s Ratings Agency sees this as a continuation of a startling trend where, when a municipality goes belly-up, investor rights are subordinated to pensioners. This is problematic because, without guarantee that investors will get their payout, they will likely limit the amount they choose to invest in municipal bonds. Less investment can undermine a municipality’s ability to garner enough funding for the projects it needs to keep its city afloat.

Conversely, pensioners feel they are getting shafted: they’ve lost their retiree health insurance, they get less to live off of than they’ve been promised, and they no longer receive cost of living adjustments: the only tool keeping the purchasing power of their pensions stable. Detroit pensioners, like the rest of the residents in the city, have very little. A public servant that dedicated 40 years of service to the Detroit, and ended their career making $60,000, could expect to receive an annual $45,000 pension in 2011. Put in relief, retired police officers in Detroit received around $30,000 per year, while retired police officers in Chicago received around $55,104. Taking more from that already comparatively small amount could mean the difference between a livable pension and poverty.

Detroit highlights a growing schism in municipal politics: who is supreme, the bondholder or the pensioner? Without the bondholder, there is not enough money for the government function. Without the eventual pensioner, there is no mechanism through which the government can use that money to function. Both are integral components for a healthy and thriving municipality.

This schism is riddled with questions of equity, social justice, and politics. For now, the answers to these question are being cobbled together, one bankruptcy deal at a time.

Once cobbled, however, these answers have far-reaching implications for the future of municipal governing nationwide.

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