Why Detroit’s Economic Ills Are Not Contagious

Don’t believe the hype that Detroit’s filing for bankruptcy last week will trigger a wave of municipal copycats.

“There are over a hundred major urban cities that are having the same problems we're having,” Detroit Mayor Dave Bing warned ABC News on Sunday. “We may be one of the first. We are the largest, but we absolutely will not be the last.”

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On Tuesday, famed Wall Street analyst Meredith Whitney wrote in The Financial Times,  “As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the US municipal market – which is what the bond-peddlers are now telling their clients.”

But to both its pride and chagrin, there is no other place in the country like Detroit, a conclusion backed by urban experts and municipal bond ratings.

No other U.S. city has come close to matching Motown’s financial disaster. Detroit mixed urban decay, population loss, and vanishing auto jobs with a parasitic city government. The problems festered over five decades into an $18 billion debt that the state-appointed emergency manager Kevyn Orr hopes to whittle away with Chapter 9 proceedings.

Past plans to jolt life back into the city were flops. The casinos turned out to be a bad gamble. Within eight years of Comerica Park becoming the Detroit Tigers’ new home, its namesake bank had decamped to Dallas. Green shoots do exist—such as the investments made by Quicken Loans chairman Dan Gilbert—but they are still too shallow to root an entire economy.

“I don’t think Detroit is the first in a series of dominoes,” said Jennifer Bradley, a fellow at the Brookings Institution and co-author of the new book, The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy. “The stuff that happened in Detroit—there was more of it, and it was more intense. … Detroit is just Detroit.”

Between 1970 and 2009, just 54 municipalities filed for bankruptcy—and only four were cities or counties. Some cities will go broke, although few of them ever seem to follow the exact same path toward insolvency. “What we find in all of those cases is that there are very unique circumstances,” said Christiana McFarland, research direct at the National League of Cities.

None of the 20 largest U.S. cities has a junk bond rating, except for Detroit. Standard & Poor’s recently downgraded Detroit from a “CC” to “C,” which reflects its filing of a bankruptcy petition.

All of the others have ratings between a gold-plated AAA to A-, all safely investment grade.

Phoenix, an epicenter of the housing bust, has preserved its AAA. If these cities were at an immediate risk of default, their ratings would be closer to Detroit’s. S&P evaluates municipal credit based on four factors: the economy; financial performance; debt burden, and management. Stuck with a shriveling population of 700,000—down from a peak of 1.85 million—and persistent city budget deficits, each of these factors worked against Motown.

“Detroit is a special case in terms of the cities we have,” said Jane Ridley, S&P’s primary credit analyst for Detroit. “It was more of an ongoing downturn.”

Other cities did verge on urban hellscapes as their populations began to flee during the middle of the 20th Century. New York City—rated AA—flirted with bankruptcy in 1975 only to rebound into the desirable locale portrayed in TV shows such as “Sex and the City.” Chicago (A+) and Philadelphia (A-) have similarly gentrified several of their neighborhoods.

Many major inner cities have slowed the loss of population, if not reversed it. Universities, hospital systems, and entrepreneurs have partnered to establish new industries that helped stabilize rustbelt cities such as Pittsburgh and Cleveland.

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But Detroit never recovered from the loss of autoworkers since the 1970s. It currently contains about 32,300 motor vehicle manufacturing jobs, down from 69,400 in 1990, according to the Bureau of Labor Statistics. Foreign competition ate into the market share of General Motors, Ford and Chrysler. New auto factories opened outside of the industrialized heartland in the Deep South.

In his 1998 book, Cities in Civilization, Sir Peter Hall, who is best known for developing the concept of enterprise zones to revitalize cities, wrote of Detroit: “[I]t has become an astonishing case of industrial dereliction; perhaps, before long, the first major industrial city in history to revert to farmland.”

That prediction was made 15 years ago. And what was Detroit Mayor Bing’s initial pre-bankruptcy push to salvage the city? Urban farming.

One of the continuing fears is that unfunded pension obligations will push cities into bankruptcy. A survey released this year by Pew Charitable Trusts of 61 municipal retirement program found a $217 billion funding gap.

In April, the ratings agency Moody’s put 29 cities—including Las Vegas—on watch because of their obligations to city retirees. It downgraded Chicago and Cincinnati this summer because of unfunded pensions.

Generous pension benefits helped to push Stockton, Calif. into bankruptcy, but it continues to function with voters expected to decide this November on a tax increase to expand the police force.

Of Detroit’s $18 billion in debt, about half—$9.2 billion—came from shortfalls in pension and health care benefits. Even if Detroit had managed its pension system better, the city would still be swimming in crises.

The 2008 housing bust magnified the financial problems of many cities, since their pensions depended on stock market returns and their tax base on homes gaining in value. Cities began cutting back on services and layoffs, with local governments in total cutting 538,000 jobs over the past five years, or about 4 percent of their workforce.

But as economic growth has improved in recent months, many cities have seen their tax revenues rebound in a way that could enable them to tackle long-term financial problems. According to year-over-year data tracked by Joe Kalish of Ned Davis Research, total tax revenue for local government has increased 5.1 percent to $1.421 billion.

Perhaps most overlooked, many cities have developed reasonably functioning governments. Detroit suffered under the tenure of Kwame Kilpatrick, whose stint as mayor ended in 2008 with a criminal conviction. The Brookings Institution’s Bradley noted that the mayors and city councils she has worked with seem devoted to spurring economic growth, since voters evaluate them based on their results. The attitudes in city halls has become much less toxic than those on Capitol Hill.

“When we work in cities, we can’t tell necessarily who is a Democrat and who is a Republican,” Bradley said. “They’re not putting that in partisan terms. Washington is wrapped up in debates and discussion that often seem to be more about scoring political points. The people we work with in cities and municipalities are passionate about their place. Their cities have to do well for them to do well.”