Detroit was once known as the "Motor City." Thanks to foreign competition, overly generous pension promises, and bad business and government decisions, it's now known as "Bankrupt City." And how it survives its current financial mess may serve as a test case for the country.
While GM's and Chrysler's bankruptcies captured headlines, the city's Chapter 9 filing may be a bigger deal. Detroit is by far the largest city to seek bankruptcy protection in American history. It owes more than $18 billion, with about half of its liabilities due to promised retirement benefits it no longer can afford.
The bankruptcies of Detroit, GM and Chrysler are forever linked. In 1950, about 200,000 Detroit residents worked in manufacturing. Today, it's less than a tenth that, according to Forbes magazine. At one time, the city boasted a population of nearly two million. Now, that number is down to 700,000, and city officials are trying to figure out how to shrink the city's sparsely populated areas. The city has closed nearly 70 percent of its parks and reduced its police force. Two out of five street lights don't work.
Could other cities follow Detroit's lead? Laws vary from state to state, but it's legal in Florida under certain conditions. Municipal bankruptcies are rare in history and didn't increase through the Great Recession, according to George Mason University's Center on State and Local Leadership. Researchers there say 262 entities filed for Chapter 9 bankruptcy between 1980 and 2012, but only 43 of those were general purpose governments such as cities and counties. The rate was higher in the early 1990s. Moreover, the number is dwarfed by the 134,000 bankruptcy filings by businesses since 2010 alone.
On the other hand, five other Michigan cities have reached such fiscal distress that they are under emergency management. Meredith Whitney, founder of Meredith Whitney Advisory Group, and author of the book "Fate of the States," says other municipalities could do as Detroit has done. The Wall Street Journal recently reported on the problems that Chicago, Philadelphia and Oakland are having meeting their pension obligations. They're not as severe as Detroit's, but they're troubling.
Solutions? Detroit had no choice but to declare bankruptcy and hope the courts pave the way. Other cities may have to follow its lead, but let's hope it doesn't become too common because the ripple effect would be immense. According to the Securities and Exchange Commission, municipal bonds in America are a $3.7-trillion market. That market is composed of individuals who believe they have made one of the safest investments possible outside of locking their money in a safe and burying it in the backyard. Doubt would be devastating.
Moving forward, cities and counties should learn from Detroit's example. Both Detroit's government and its auto industry got into trouble because they promised too much to too many people and then couldn't fund those obligations when times changed. Governments at all levels are still making too many promises to employees. It's time to ask how good a deal taxpayers are getting when someone works in a nonessential desk job for 30 years and then retires on a pension for the rest of his life. Outside of the very rich and people who work for the government, almost no one else gets to do that anymore.
There's a reason private companies have stopped offering their workforces lifetime guaranteed pensions: It's unaffordable. In fact, it contributes to bankruptcy. Detroit's auto industry began learning that lesson years ago. The city is learning it now. When will the rest of us learn, and will it be in time?