Last week, the City of Detroit and the governor of Michigan asked the U.S. Bankruptcy Court to shelter the city from its creditors and its labour unions and start a process of negotiation that would lighten its burdens and bring it back to solvency.
The request for bankruptcy protection marked a sad milestone in the long decline of a great and wealthy city. The greatness and the wealth are still nearby, but they have slipped away to the far suburbs, outside Detroit city limits. The swelling debts and shrinking revenues of the city have to be brought into proper balance, but that is only one aspect of Detroit's problem. Bankruptcy court is probably not the right forum for writing the grand plan that will put Detroit back in business.
Bankruptcy itself is not necessarily the end of the line; it can be a step toward a solution. General Motors and Chrysler, which were major pillars of the Detroit regional economy, were bankrupt in 2008 and 2009. After emerging from bankruptcy smaller but stronger, they are doing fine today -- under new ownership in Chysler's case. Ford, the other Detroit-centred industrial giant, avoided bankruptcy but went through a similar restructuring and is now consistently profitable. For those firms, bankruptcy was not a solution in itself but rather provided the impetus and the opportunity for a fresh start.
Years of decline in Detroit have produced a spiral of deterioration wherein cuts in civic services produced poor living conditions and unsafe streets so that people who had the chance to move elsewhere did so and the tax base declined further. The worse things got, the worse things got. The city borrowed to meet its operating costs, and gratified its employees with unrealistic pension promises. Each successive mayor and council left it for some future mayor and council to finance the debts and the pension promises.
The state-appointed financial trustee of the city has been warning for months that the creditors and the unions must either scale back their claims or take their chances with a bankruptcy process. Gov. Rick Snyder concluded last week that amicable negotiation was getting nowhere. He endorsed the trustee's bankruptcy petition.
The Detroit commuter shed is a rich market. The Detroit Red Wings, serving an ex-urban fan base, are financially one of the strongest franchises in the National Hockey League. The Detroit Tigers, selling baseball entertainment in the same wide market, are in excellent financial shape. Detroit and the State of Michigan have to find a way to sell the city's services in that same wide market and draw revenue from the region of which Detroit is the ailing heart.
One common device is a regional government such as the old Winnipeg Metropolitan Corporation. Another is annexation of suburbs. Another is tax-sharing through state agencies.
But the ex-urbanites will not consent to annexation, regional government or tax-sharing unless they see that the process will benefit them. If they are asked to shovel money into the bottomless pit of an urban disaster area, they will more likely hold on to their money and let Detroit rot away.
Therefore an early step should be a regeneration plan involving plausible steps that bring people to live and pay taxes in well-served, well-protected Detroit residential neighbourhoods. This will take a long time, because the city has a terrible reputation -- already among the people who left and now among all those who read the newspapers. But without some such steps, the downward spiral is likely to continue. The worse things get, the worse things get.
The sad case of Detroit can be a warning to other cities that imagine operating costs can be financed by borrowing. It is a warning that chickens do eventually come home to roost. Elected officials can hope that roosting time comes after their terms of office are over. Those outside city hall have no such opportunity for evasion.