Can Bankruptcy Boost Broke Detroit?

Jul 19, 2013

Transcript

MICHEL MARTIN, HOST:

This is TELL ME MORE from NPR News. I'm Michel Martin. Later we'll head into the barbershop as we do just about every Friday. We'll hear from the guys on why financial planning advice from McDonald's to its employees fell flat and other news of the week, that's later. But first, we turn to Detroit. The city declared bankruptcy yesterday, making it the largest municipal bankruptcy in this country's history. It all comes after decades of decline from the city's bloom years as the center of the nation's auto industry.

To learn more about how this happened and what might happen next, we're joined by Rochelle Riley, she's a columnist with the Detroit Free Press. Also with us is Michael Pagano, he's dean of the University of Illinois at Chicago's College of Urban Planning and Public Affairs. He's co-author of the National League of Cities' annual report on fiscal conditions. He's been looking at finances in America's big cities for more than twenty years. Welcome to you both. Thank you both so much for speaking with us.

ROCHELLE RILEY: Thank you.

MICHAEL PAGANO: Thank you for the invitation.

MARTIN: Rochelle Riley, this is new but not necessarily unexpected. In fact, you wrote last February and said, when I wrote last February that bankruptcy was the city's only option to emerge from sixty years of fiscal wilderness, nobody called me crazy, but many folks didn't believe it would happen. What about now, Rochelle? What's the mood?

RILEY: There is still discord and people who think that this is not the way to go, that there's some other way to do this, it's a shoe that's been waiting to drop for half a century. But there are still folks, particularly the unions and folks who are concerned, rightly so, about pensions, that there must be something else that can be done.

MARTIN: Dean Pagano, was there something else that could have been done, in your opinion?

PAGANO: Oh, I don't know. I think the city has been trying to work through this impending crisis now for at least the last five years and probably more like 20 years. It seems to me that they've explored as many options as they possibly could and they've reached a point of deadlock.

MARTIN: Can you talk, Dean Pagano, about what led to this? I mean, just put this into some context here.

PAGANO: Sure. The city of Detroit, like most municipalities around the country, are required to balance their budgets, and therefore they have to create a budget each year that matches their expenditures with their revenues. And every city is different in how it puts together its revenue structure, the city of Detroit imposes a property tax. And, as we know, property values, especially after the real estate bust a few years ago, have plummeted.

But they've been declining in Detroit for even longer than that because of the depopulation of the city. Property values have declined and therefore property tax receipts have been fairly stable or declining as well, this at the same time as the costs of running the city were increasing. The inability of the city to reach some agreement to hold costs down or reduce costs as the population declined is one of the shortcomings of the city. But it's also a city that the boundaries haven't changed.

So even as the city shrunk by over half in the last couple of decades, the size of the city is one of the largest in the country. The size of the city remains the same, which means that the city has to patrol, provide public safety, to the same size, geographical space, but with a much smaller population size.

MARTIN: Rochelle Riley, does the city feel this way? I mean, you noted yourself that, Dan Gilbert the founder of Quicken Loans, has invested a lot of money into the city. He's remaking downtown and more than 30 buildings that he owns or controls there, that there are still concerts happening and sporting events happening and things of that sort. Does it feel like things are falling apart?

RILEY: Well, there have always been two Detroits. And there's the Detroit that is about to build a $650 million arena and retail and residential space in the center of the city and there are still neighborhoods, like Dean Pagano said, that are almost vacant, you may have one house for 10 or 11 streets, but that one house still expects fire and police patrols and coverage. The city still operates like it's, you know, a city of 2 million people when it's a city, probably, closer to 650,000 people. And it has, in addition to not having the money from property taxes and income taxes to pay the bills, done some things that are just poorly - it's a sign of poor management.

For instance, the long-term liabilities surpassed $12 billion a while back, nearly what it cost for the American taxpayers to bail the entire auto industry out of trouble. And there are things that the city was not able to do over the past 10 years, almost 20 years now. For instance, the district courts only collect about 6 or 7 percent of the fines that are owed when most municipalities collect 60 percent. So the courts owe almost $200 million to the city. And then the city also borrows money to balance the budget, which you can never do. So that borrowing came due.

MARTIN: And of course, each of these decisions has been greeted with tremendous controversy, like closing schools even though they're under enrolled, you know, very emotional decisions. Rochelle, of all of the - you know, you've written quite a bit about, you know, the ups and downs over the years - what do you think has been the most painful part of it for - speaking as - I know, speaking as you said, that there's more than one Detroit. People can live very different lives even within close proximity to each other. But what do you think has been the most painful part of this in recent years?

RILEY: I think the greatest tragedy for me is that people don't get a sense of the beauty of Detroit and the spirit of its people and what it's really like. If all of the stories that you hear are negative and if all that's in the news - and I mean all of the news, every nightly news program, the front of every paper in the country - is talking about Detroit and bankruptcy. In the meantime, there are still all these other things that are happening that make people excited, the makeover that's going on in the city, the fact that there are waiting lists for a lot of the new housing in the midtown and downtown areas.

So that's the saddest thing that, you know, there are people who think that I'm nuts to be in Detroit and, you know, what are you doing there? I'm there because it's the great American city that helped win World War II and can make itself right again if people are willing to do it.

MARTIN: So Dean Pagano, you talk a lot about legacy costs and we've talked a lot about, you know, pensions and retirement benefits and the legacy cost of having a city of the size that it is, even with a lot fewer people. What happens now to those costs? Does the city have to still pay those pension benefits and retirement costs? Is there a way that the city's footprint can be shrunk by fiat, even if people haven't been able to agree through the political process to do it?

PAGANO: Well, I think the courts will help us figure this out. If the courts accept the Chapter 9 filing then the city will have to work with the unions on legacy costs, with the bondholders on payments owed to the holders of Detroit debt, and to everyone else. So the legacy costs are something that the city is going to have to work through in the future. Part of the challenge, of course, is that these legacy costs were - are really agreements that the city had with its - usually with its work force and with now bondholders of infrastructure, that the city would pay them in the future for investments that are made today.

So we hire somebody today and tell them, if you stay for 30 years you will receive this kind of retirement. The individual takes that agreement and then the city no longer has the funds to do that. It's not unlike private corporations, but the difference is in the public sector, the city, in Chapter 9 can't just sell its assets to pay off and to liquidate its debt because it is required to provide essential services to its citizens. So it can't address the legacy costs by just say, selling the water plant or the firehouse. There may be assets it can sell, but it still has to provide those core services. It's a different kind of challenge and it's one that will - the way the city works through that challenge will probably be different than any other city that is - or any other local government that is confronting the same kinds of problems of shrinking revenues and increasing demands.

MARTIN: Speaking of other cities, are there implications for other municipalities?

PAGANO: For...

MARTIN: For Detroit having taken this step, being the largest municipality to this point, are there implications for other places or is just Detroit's situation so distinct - it just speaks for itself?

PAGANO: Detroit speaks for itself. It's clearly the outlier, especially among the largest cities and certainly among almost all America cities. Very few even entertain the opportunity of going to Chapter 9 'cause you really don't want to be there. There are only a handful of cities that are there now and they didn't want to be there and I think those that are there now wish they hadn't because of the costs, the litigation costs, as well as the cost savings aren't what they thought.

So I don't think this is a harbinger of future filings by other municipalities. They'll continue to do what they've done best, and that is they've balanced their budgets, they've had to lower expectations in terms of service delivery or increase revenues through fees and taxes. And they have to address what has become the real 800 pound gorilla in the room, and that is that they cannot continue to make promises and concessions that have implications 20 and 30 years from now. This is 20 or 30 years from now from the earlier concessions and now we're paying the cost.

MARTIN: Rochelle, final comment from you. When the mayor talks about this, he almost talked about this like stages of grief. I mean, he was kind of urging acceptance, but obviously people have to work through kind of a lot of grief and, in some cases, rage. Even though, as you've pointed out many, many times, this has been looming for quite some time now. What kind of conversations do you think people are going to be having next week about this? A month out from here? When we get a little bit farther from the shock of the news?

RILEY: I think there are still people who are in denial. They're talking about the fact that the Michigan Constitution does not allow for you to not give pensions when you have promised them, which means there's going to be a lot of time in the courtroom. I spoke with Kenneth Klee, who's the lead attorney in the Jefferson County, Alabama case. He said this is probably going to take three years and it will be very transparent.

So residents will watch this happening to them, but that the bankruptcy would bleed dollars out of the city to pay the professionals, the attorneys, the consultant, and the emergency manager. So they will watch all of this money being spent, knowing that some of it will come, not all of it, but some of it will come from their livelihoods. And these are older residents who don't work anymore, who are wondering how they're going to make ends meet. So there's denial and rage and then at some point, there's going to be a great sadness that people will have to work through.

MARTIN: Rochelle Riley is a columnist with The Detroit Free Press. She was with us from member station WUOM in Ann Arbor. Michael Pagano is dean of the University of Illinois at Chicago's College of Urban Planning and Public Affairs. He joined us by phone. Thank you both so much for speaking with us.

PAGANO: Thank you so much.

RILEY: Thank you. Transcript provided by NPR, Copyright NPR.