Essay(400 words)

IF DETROIT IS DEAD, SOME THINGS NEED TO BE SAID AT THE FUNERAL

WILLIAM K. TABB Queens College

ABSTRACT: A growing literature has long proclaimed the city of Detroit to be “dead.” Of course cities, unlike sentient beings, do not actually die even if they dramatically lose industry and population and the local government its ability to meet basic needs. How their continuing crisis is addressed depends on how competing interests are able to tell their story. This essay evaluates the most significant of these competing and complementary stories and evaluates state-appointed Emergency Financial Manager Kevyn Orr’s plan of adjustment that would cut the pensions of city workers and reduce payments to some bondholders by large amounts. What would happen will be settled in the years to come as court challenges are addressed. This essay evaluates explanations and who and what is to blame. It provides an alternative focus to the “Detroit is dead” literature and raises concerns absent from the dominant narratives of what is justified in a just settlement.

INTRODUCTION

When it comes to urban problems, “Detroit is consistently close to the bottom of the league tables” (Reese, Sands, & Skidmore, 2014, p. 113). Two decades ago Ze’ev Chafets (1990, p. 119), a self-described native son of “Murder Capital U.S.A,” called Detroit “America’s first Third World city.” That year the 1990 Census, comparing the 77 U.S. cities with over 200,000 residents, ranked Detroit first in poverty, or looked at from the bottom of the rankings, it was the bottom. The city had the highest percentage of households receiving public assistance payments, the city with the proportionately fewest able to support themselves, another indication of last place. It was at the bottom in terms of the median value of owner-occupied homes. A generation later these statistics persist; half the children in the city are still growing up in poverty and, according to the FBI Uniform Crime Report database, Detroit still has the highest crime rate of any other large American city, the bottom rank in pubic safety. It remains the poorest large city in America. (An exhaustive recitation of the city’s difficulties from eroding tax base to non-functioning street lights, unemployment, dysfunctional infrastructure, equipment available to police and fire fighters, and other particulars are catalogued in “Declaration of Kevyn D. Orr” (2013).)

A powerful consensus, expressed by an ever-lengthening bookshelf bearing titles such as Detroit: An American Autopsy, The End of Detroit, Lost Detroit, and The Ruins of Detroit, suggests that the city is “dead.” In what can be read as a valentine of lament, George Galster (2012) tells us Detroit has been “suicidal.” He portrays it as moving inevitably toward an end state of “mortropolis.” Peter Eisinger offers a similar post-mortem: “There is no more compelling story today of the dark side of America’s urban experience than the slow death of the city of Detroit” (2014, p. 1). Of the many writers who partake in the “dead Detroit” discourse, Eisinger is one of the few who makes the important point that urban death is not identical to biological death. The city does not disappear. Seven hundred thousand people still live there and, as in many other deindustrialized cities, selective

Direct correspondence to: William K. Tabb, Queens College, CUNY, 65-30 Kissena Blvd., Queens, NY 11367-1597. E-mail: [email protected].

JOURNAL OF URBAN AFFAIRS, Volume 37, Number 1, pages 1–12. Copyright C© 2015 Urban Affairs Association All rights of reproduction in any form reserved. ISSN: 0735-2166. DOI: 10.1111/juaf.12173

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revitalization is possible over time. What is unlikely, unless there is a substantive change in national priorities, is that the low-income, crime-infested, government-abandoned neighborhoods will be incorporated into any such felicitous urban “rebirth.” Standard explanations for Detroit’s death come from conservatives, and in a counter-story from liberals. Both conclude that not much can be done for Detroit.

This essay interrogates issues assumed, and ignored, in both mainstream bankruptcy narratives. Throughout, attention will be paid to political choices made, choices that go unrecognized and those that in retrospect are now considered inevitable, and so not really choices at all. Unlike the “Detroit is dead” literature, I argue that while the city may be more extreme in the extent of damage, it is part of a wider phenomenon of painful urban austerity (Peck, 2012). The absent center of the Detroit story is the ongoing distributional struggle in our cities and local jurisdictions that is revealed in an examination of this particular high-profile case. These outcomes in Detroit and similarly afflicted cities are the result of political choice made far beyond city limits. While the article focuses on the issues surrounding Detroit’s bankruptcy, most commentators have invoked its story for larger purposes. These inevitably color the narrative. As Joshua Akers writes, “In most popular accounts and critiques, the city of Detroit serves as a scrim . . . onto which the hopes and ills of the commentator are projected” (2013, p. 1075). We start by reviewing some of the most common of such stories.

TALES OF A DEATH FORETOLD

Urban realities are conditioned by changing national priorities. In the 1960s the federal government, led by a liberal-labor coalition, responded to the voting strength of the industrial belt by advancing urban policies that included categorical grants in areas important to the health of cities, with revenue sharing based on the acknowledgment that many cities could not meet the basic needs of their citizens solely from self-generated revenues. It was understood that continuing to raise local taxes would lead to further erosion of the tax base as businesses and better-off individuals left high- tax jurisdictions, and that therefore revenue sharing was justified to address urban problems. But with deindustrialization and federal programs subsidizing highway construction and home buyers, troubled cities of the Northeast and the Great Lakes region continued to lose population and electoral clout to their suburbs. As the South and West grew, urban federal spending was reduced and programs dismantled (Tabb, forthcoming). A long period of austerity urbanism brought a sense of inevitability and helplessness to places like Detroit.

The dominant explanation of Detroit’s demise is that local elected officials, and the voters who elected them, were unwilling to make the hard choices necessary to address their changed circum- stances. Stepping back from the details (which will be considered subsequently), the failure of Detroit elucidates contrasting conservative and liberal diagnoses of what ails America. It is possible to see Detroit’s bankruptcy as a result of an inevitable failure of liberalism, with its penchant to interfere with market forces. Michigan is the home of what had been the strongest labor union in the country. A major force from the New Deal through the Great Society (Amberg, 1994), the United Auto Work- ers (UAW) was in the forefront of lobbying for progressive social and economic legislation and of providing support for politicians who backed such legislation; much of it was adopted in Washington and in large cities with progressive governments. The charge is widely made that Michigan politi- cians beholden to the UAW introduced and pushed policies favoring unions and municipal workers to the point of fiscal irresponsibility (see for example Ditmar 2009). There are those who blame the union for pricing Detroit out of world auto markets, bankrupting Chrysler and General Motors, and then using its influence to persuade Barack Obama to bail them out (Styn, 2013). Republican presidential candidate Mitt Romney endorsed such a view, declaring that, “The president gave the [auto] companies to the UAW” (Politifact, 2013).

A counter-narrative reminds us that by the 1960s the multi-story, huge plants in the city had become obsolete, replaced by far larger single-story plants built outside the city, often in areas with lower wages and a non-union local labor market. Plants that remained were upgraded, using labor-replacing technologies. It has also been argued that Big Three management, comfortable with its long-standing oligopolistic position, made cars that were believed by consumers to be inferior to the higher-quality

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and lower-cost imports when the latter became available. To analysts on the left, it is disingenuous to blame urban disinvestment on the workers for the lack of competitiveness of cars built in Detroit or on the politicians, no matter how venal. These were not the main causes of the city’s problems. The alternative story tells of the permanent displacement of workers as a result of technological change and globalization of production that induced white flight from the city. Blacks were almost totally barred from moving to the suburbs by hostile white residents, creating the situation of concentrated black poverty in a diminished Detroit. It was George W. Bush’s administration that initiated the rescue of the auto companies, and the Obama White House that agreed to plant closings and moving production to China and elsewhere to lower costs. The UAW had to agree to major wage and benefit cuts.1

While much of the discussion continues to be motivated by making points in support of a larger political narrative, whether one accepts the conservative or the liberal story, the bottom line for both is that Detroit ends up in the same desperate position. The city had reached the end of the line. Conservatives dismiss giving aid out of hand. Liberals regret that not much can be done. Either way, Detroit is left for dead. And yet cities, unlike people and other sentient beings, rarely die. For a city, the question is different: What happens after its former rationale for existence is gone? The deterioration is painful and the suffering can persist for decades, but real people and spaces continue to be present; some neighborhoods do better than others. History continues. It is possible that over time Detroit, or at least its core and some select areas, will revitalize, as has happened in other deindustrialized cities. Admittedly, such a possibility is denied in most of this literature where there is broad agreement that what sets Detroit apart “is an inability to recover” (Reese, Sands, & Skidmore, 2014, p. 113). But should it be set apart so easily at a time that news reports speak of a wave of municipal bankruptcies “moving across the country” (PBS News Hour, 2014) and property taxes, the major source of local revenues, are limited in many jurisdictions by continuing problems for so many mortgage holders? Zillow’s Negative Equity Report (2014), based on third-quarter 2013 data, reports that one in five American homeowners, or almost 10 million households, have a mortgage that remains underwater, holding back a market recovery. Five million households have gone through home foreclosure since the real estate market collapse began in 2007. Local governments in a large number of places are feeling the pain.

It is true that as Detroit’s bottom ranking suggests the “worst in show” narrative makes the city an outlier. But while Detroit is the greatest failure among America’s troubled large cities, it is far from the only locus of concentrated urban poverty, fiscal crisis, and hardship. The Comprehensive Annual Financial Reports for the years of the Great Recession and recovery (2007–2011) undertaken by Pew’s American Cities Project examine the fiscal condition of the cities at the center of America’s 30 most populous metropolitan areas. They call attention not only to present but to future pressures on urban economies, detailing a number of factors—from inadequate property tax collection to the fiscal constraints at the state and federal levels—that impact aid to cities. “[T]o an already shaky fiscal picture,” Pew researchers predict still more serious problems ahead. And, if the problem is a general one, there are national consequences that isolating Detroit should not be allowed to obscure. “Addressing demands for local services, claims on existing revenue from unfunded liabilities, and other commitments with fewer dollars will mean tough choices for local leaders and have serious implications for the national economy” (Pew Charitable Trusts, 2013, p. 3). If Detroit is “dead,” there are many cities in dangerously poor health, and the cumulative consequences for the nation merit careful attention rather than obituaries.

Looking at city-by-city evaluations, Richard Wolff (2013) offers the wry suggestion that:

Detroit’s struggle with bankruptcy might find some relief, or at least distraction, by presenting its desperate economic and social conditions as a tourist attraction. “Visit Detroit,” today’s advertise- ment might begin, “see your region’s future here and now: the streets, neighborhoods, abandoned buildings, and the desolation. Scary, yes, but more gripping than any imaginary ghost story.”

Chris Isidore (2013) of CNNMoney captures a common pessimism about how our political system responds to urban fiscal problems when he writes: “It’s virtually impossible that Congress would

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approve a Detroit bailout this time around, especially with so many other local governments around the country facing their own financial problems.” The votes are simply not there, and have not been for some time. (For a comprehensive view of the parameters see Emily Johnson, 2014.)

Troubled cities lost population and electoral clout to suburbs and, as the South and West grew in voting strength, their representatives in Washington declined to help shrinking cities in other regions. Data from the Center on Budget and Policy Priorities show that federal spending between 1981 and 1992 (adjusted for inflation) was reduced 82% for subsidized housing, 63% for job training and employment services and community development, and 40% for social service block grant funding (Johnson, 2002). This disinvestment problem has been building for some time. A 1991 survey of 50 large cities by the U.S. Conference of Mayors similarly found that during the 1980s, city budgets increased by 95% but the federal contribution to those budgets fell from 17% of spending in 1980 to 6% in 1990 (on federal aid to states and local governments in this period see Hinds and Eckholm, 1990).

Central to these changes was a shift from a public philosophy—in which the spatial unevenness of resources to meet local needs was addressed through revenue sharing—to a belief that all jurisdictions must meet spending demands out of locally-sourced resources. If basic public goods could not be provided by city governments, the localities themselves were blamed for incompetence and lack of foresight, and left “to die.” While they tell different stories, to a remarkable extent conservatives and liberals agree that in the end Detroit’s decline is a result of circumstances that cannot be reversed.

It is certainly true that Detroit will never resemble what it was in the heyday of the auto industry, but as other former industrial cities from Chicago to Pittsburgh have demonstrated, the death of industry does not mean that a new economic base cannot be created, allowing a different city to evolve—even if in such success stories city finances remain tenuous and conflicts between downtown interests and the neighborhoods can cause continuing tensions. To say that Detroit is dead may be too pessimistic when one considers the prospect for a selective revivification. There are new investments being made in the city that promise to make it, or at least parts of it, viable again. This prospect is difficult to evaluate.

What might be called the pro-renew growth coalition is engaged in a public relations campaign celebrating the city’s alleged comeback, an effort that has been declared by pessimists as a challenge “perhaps not seen since the Edsel” (Yaccino, 2014). Boosterism after all can be expected from politicians (Stabenow & Levin, 2013). But there is also a developing literature that celebrates dynamism in shrunken cities, including Detroit. Brookings Institution scholars capture such optimism when they look at the city and see “a passionate network of visionaries and stubborn CEOs” catalyzing innovation and collaboration in Detroit. They argue that “Detroit is drawing a new geography of innovation” and that “Detroit is an incredible living laboratory where the future of American cities is being demonstrated” (Katz & Bradley, 2013, pp. 116, 138, 140).

The revival story celebrates Dan Gilbert, who moved his company, Quicken, to downtown Detroit where he owns millions of square feet in dozens of buildings that have been repurposed. Similarly, Peter Karmanos brought Compuware and thousands of its employees to a new downtown office building. Such narratives make much of the presence of a successful Whole Foods and find other signs of new life in the city, or at least its downtown and midtown areas. Others suggest that over time the city’s remaining assets, along with rock-bottom land costs, can attract revitalizing investment to at least parts of Detroit, as has happened in other depressed cities. A regrowth coalition can seize the opportunity and find allies in the larger metropolitan area where shared benefits are possible. The jurisdictional divides that limited regional cooperation in the past may be overcome by a new sense of mutual interest (Hall & Jonas, 2014).

The limited spillover of such redevelopment has been noted in studies of other cities involved in similar revitalization schemes. Their limits by now are well-understood (Smith, 1996); for example the harbor development in Baltimore is a success in revitalization. But cable TV’s The Wire illuminates a different story, an” uncompromising autopsy . . . a failed experiment, where every glimmer of possibility leads down a fast track to disappointment and ruin” (Gottlieb, 2014, p. 27); death of a city imagery.

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Evaluations of planning efforts by Detroit-based foundations and the activities of private investors reveal a bifurcated literature. On the one hand are the signs of economic development in corporate relocations, financial repopulation incentives, and public-private partnerships (Solomon, 2014); on the other, there is a continued exercise in social exclusion: “urban shrinkage as a performance in whiteness” (Pedroni, 2011). The final establishment of a regional transportation agency (in 2013, on the 23rd try since the 1970s) may provide for greater metro Detroit integration. But urban revival optimists maintain a narrow focus which demonstrates little attention to the neighborhoods that are ignored in their plans.

The optimists see rebirth in the city’s future. The pessimists are skeptical. The concern here is not to prognosticate. Rather it is to suggest that the question, “Is the city alive or dead?,” misses the more complicated story of the here-and-now of the bankruptcy proposals the appointed Emergency Financial Manager has made, the response from creditors and citizens, and the way the story of the bankruptcy is being told. These too are matters that need to be better understood both for what they say about Detroit—past, present and future—and for the precedent that will be set for cities facing similar difficulties. The details reveal a great deal that illuminates the “death” of the city.

(RE)FRAMING DETROIT’S BANKRUPTCY

The law under which Governor Rick Snyder appointed a financial manager for Detroit was unpopular—and not only among Detroit residents. In 1990, the Michigan legislature enacted Public Act 72, which empowered the state to appoint an emergency manager to intervene in municipalities facing financial crisis. In 2011, the governor and legislature enacted Public Act 4, which gave an appointed emergency manager the authority to unilaterally modify, reject, and terminate municipal contracts. In a March 5, 2012 referendum Michigan voters rejected PA 4. After the Michigan Court of Appeals ruled in favor of the rejection, the legislature enacted Public Act 436, effective March 28, 2013. Like PA 4, it gave emergency managers the right to override contracts. A provision in the new legislation immunized the law from public referendum. On February 19, 2013, under PA 436, a Financial Review Team appointed by Governor Snyder to examine the city’s fiscal situation found Detroit to be in a state of emergency. The Local Emergency Finance Assistance Loan Board installed a manager, Kevyn Orr, on March 14, 2013.

In an interview with the Wall Street Journal (Finley, 2013), Orr made clear his orientation when he spoke of Detroit’s resistance to what he thought needed to be done. He described Detroit as having been “dumb, lazy, happy and rich.” The city now needed to pay for its lack of foresight. To Orr and perhaps many readers of the Wall Street Journal, it was understood that with both industry and population having left the city, bankruptcy was the only realistic solution. Public employees (who were by implication “dumb, lazy, happy and rich”) would have to lose benefits they were legally entitled to receive.2 While inevitable, protests were, from Orr’s perspective, a waste of time. The emergency manager wanted to keep discussions “practical”; as the protesting workers saw it, such reasonableness was a product of the domination of finance capital, with democracy an inconvenience. Orr countered that, “Instead of engaging in a war of words, even if you have to do that for public consumption, come to me confidentially with a counter-proposal. I haven’t heard that” (Associated Press, 2013). From his and the governor’s perspective, such harsh austerity was a given. This attitude is of course similar to that of the troika functionaries in the face of widespread protests in Greece, Spain, and elsewhere. As in the case of Europe, analysis by those suspicious of the “technical claims” made by officials enforcing discipline and austerity offers a counter narrative.

Media consideration of Detroit’s bankruptcy has for the most part accepted the seemingly obvious necessity of the imposition of external control over the city, voiding the democratic rights of citizens. The rationale is that the actions taken by an appointed manager will be those that the city should have taken, but did not. These decisions are controversial by definition. The imposed program protects some interests at the expense of others. In a profoundly important way it determines ownership and asset claims. In each of these cases, it is claimed, austerity will be temporary and restart growth after legacy debts have been removed. There is widespread skepticism that this will be the case. Moody’s

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Investors Service, for example, notes in a 2014 evaluation that Detroit’s operating restructuring “faces high hurdles” (Shepardson, 2014).

It is important to understand how the same neoliberal policy regime that enabled significant debt to build up now imposes a solution to the crises produced by that unpayable debt (Tabb, 2014). The headline figure of $18 billion that Detroit owed creditors was presented as the necessity for declaring bankruptcy. There are, however, other views based upon alternative numbers which query the need for bankruptcy and the solutions seemingly made necessary by it. David Sirota (2013) offers one such counter-narrative:

[T]he right blames state and municipal budget problems exclusively on public employees’ retire- ment benefits, often underfunding those public pensions for years. The money raided from those pension funds is then used to enact expensive tax cuts and corporate welfare programs. After years of robbing those pension funds to pay for such giveaways, a crisis inevitably hits, and workers’ pension benefits are blamed—and then slashed. Meanwhile, the massive tax cuts and corporate subsidies are preserved, because we are led to believe they had nothing to do with the crisis. Ultimately, the extra monies taken from retirees are then often plowed into even more tax cuts and more corporate subsidies.

As Sirota suggests, examining spending and tax forgiveness decisions helps us understand the fuller nature of Detroit’s fiscal problems. Former Detroit News columnist Bill Johnson, writing in Crain’s Detroit in a 2011 article entitled “Detroit’s Corporate Welfare Binge,” provides numbers on how much the city spent in subsidies that have had dubious returns. Michigan spent at least $6.65 billion in a recent year on corporate subsidies—the equivalent of 30 cents per dollar of the state budget (Story, 2012). Cancelling subsidies to businesses not yet paid by the city and state, restoring state aid, and a bridge loan would make bankruptcy unnecessary.

Tax expenditures redistribute wealth in ways that are often not understood by tax payers. This is because the return to such expenditures is rarely measured; rather it is simply asserted to be beneficial. A review of the optimal contracting provisions where funds subsidize the transference of property rights; the costs, benefits, and extent to which giveaways are justified, reveals a zero sum game in which one jurisdiction’s victory comes at the expense of others (Chirinko & Wilson, 2008). Using data on industrial property tax abatement from 152 communities in the five counties surrounding Detroit from 1983 to 2002, researchers found that the benefits to jurisdictions offering such incentives are quite small relative to their cost. Tax abatements offered in competing communities do not appear to influence a jurisdiction’s industrial property value growth (Kang, Skidmore, & Reese, 2013). A comprehensive examination of thousands of local initiatives nationwide (with more than 150,000 in the data base) found that states, counties, and cities give companies more than $80 billion a year to attract and hold employers and jobs. The cost is no doubt higher since even the most careful compendium will miss many instances that are granted but not priced.

No comprehensive survey exists of the number of jobs actually created; neither the granting authority that claims it has spent money and attracted jobs, nor the companies involved who may not deliver on numerical targets, have interest in follow-up. In regard to Detroit: what is clear is that the auto industry pioneered such negotiations with local authorities over potential plant location; that “even today, GM is the top beneficiary, public records indicate.” It was followed closely by Ford and Chrysler. Over the years, corporations have pitted local officials against one another to get the most lucrative packages. “States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors” (Story, 2012). As Doug Winters, the attorney for Ypsilanti Township—a satellite city for Detroit’s auto industry that granted GM more than $200 million in incentives—commented to an investigator, “They had put basically a stranglehold on the entire state of Michigan and other places across the country by just grabbing these tax abatements by the billions” accompanied by “a very thinly disguised threat that if you don’t give us these tax abatements, then we’ll have to go somewhere else” (Story, 2012). Needless to say, such arrangements increase fiscal stress.

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Without outside intervention or the restructuring that would follow from bankruptcy, Detroit was projected to have close to a $200 million negative cash flow in Fiscal Year 2014 ($198.5 million as projected in the city’s “Proposal for Creditors”), according to the financial manager’s estimate. Some of the obligations merit particular interest. Orr had set the cost of terminating the city’s ill-considered interest rate swaps at $345 million, a figure seen as inflated by observers in order to strengthen the case for default. Days before filing its bankruptcy petition the number was lowered to $250 million, months later to $220 million, and finally to $165 million. Judge Steven W. Rhodes of the United States Bankruptcy Court judged even that number too high (Walsh, 2014a). This was because, as Turbeville (2013) writes, “A strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.” Judge Rhodes’ opinion lends support to the argument that the swap contracts appeared to be illegal to begin with and should therefore be invalidated.

Protestors outside the court carried signs making an additional connection: “Bank of America Owes Detroit for destroying our neighborhoods!” Given the cost of acceding to bank claims, the judge’s pronounced skepticism, and the widespread protests, a very different approach came to be taken by Orr. He brought suit against the banks, claiming the deal was done “at the prompting of investment banks that would profit handsomely from the transactions” (Walsh, 2014b). In what presaged a historic challenge to Wall Street, the city sought to cancel the swaps, arguing that they were illegal from the outset—sending shudders through the municipal bond and financial product markets. What is at stake are competing interpretations of what fairness demands and the law allows. The decision of whether the interest rate derivatives the city was encouraged to buy by the banks were on their face fraudulent, as the emergency financial manager now declares (following judicial and community pressure), will in part be decided on the basis of understandings regarding the role of the financial sector.

The real estate crash that produced the Great Recession, precipitated as it was by the financial institutions, was painful for communities across the United States, most definitely including Detroit. In order to keep the subprime bubble going, mortgage originators sought out additional low-income homeowners and urged them to remortgage their homes irrespective of their ability to service the loans. The incentive was that these mortgages would be bundled into collateralized debt obligations and passed on. The mortgage originator received payment up-front, with the risk shifted onto those who purchased the derivatives. The consequence of the collapse of the real estate bubble was that many of these underwater mortgages went into default and real estate tax collection, a crucial source of city revenue, fell. One may argue that the fall in property tax revenues caused by the subprime crisis, not the 2013 pension expenses, caused Detroit’s default.

According to Census Bureau data, non-seasonal vacant properties increased 51% nationally, from nearly 7 million in 2000 to 10 million in April 2010, with 10 states seeing increases of 70% or more. High foreclosure rates contributed to these additional vacancies. There was a redirection of public attention to the magnitude of government—away from the cause of these deficits and from the plight of 10 million people who lost their homes after 2007 as a result of the subprime mortgage collapse, foreclosures, and evictions. Because so much else had gone wrong in Detroit, politicians and academics tend to overlook the essential role that banks played in its collapse.

Racial segregation and the number and rate of foreclosures across the Detroit metropolitan area— and in metropolitan counties in the Midwest—have been correlated (Darden & Wyly, 2010). Seg- regation was found to be an important contributor to the foreclosure crisis, even after controlling statistically for other relevant variables from housing conditions to credit worthiness (Ruch & Massey, 2010). African-American neighborhoods were targeted more aggressively than others for predatory loans. At the height of the bubble nearly 50% of all loans going to African-Americans were catego- rized as subprime. The collapse of the bubble led to “the largest loss of wealth for these communities in modern history” (2012 National Fair Housing Alliance report, as quoted in Gottesdiener, 2013). Much of the transfer occurred through illegal practices by banks subsequently required to pay out large, if not sufficient, settlements for inducing people to incur financial obligations they could not possibly meet and causing many to lose their homes in fraudulent foreclosures. The culpability of the banks and the extent of their mistreatment of homeowners are well documented (Tabb, 2012).

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A similar discussion needs to happen around the issue of city pension obligations and the bankruptcy. The aforementioned $18 billion is long-term debt and therefore not to be confused with the current shortfall. Wallace Turbeville (2013), a former Goldman Sachs investment banker, tells us that this figure is “irrelevant to analysis of Detroit’s insolvency and bankruptcy filing, highly inflated and, in large part, simply inaccurate.” The real situation is that the city needs to address its cash flow shortfall which the emergency manager puts at only $198 million, an amount that may also be inflated because it is based on, as Turbeville argues, “extraordinarily aggressive” assumptions.

As is common, and perhaps even unavoidable, the emergency financial manager was chosen from a firm that represented banks in bankruptcy proceedings. Orr’s background was seen as a factor, for example, in his claim that Detroit’s pension liabilities accounted for $3.5 billion of the city’s debt. This was an amount more than three and a half times the amount reported by the actuary of the Retirement System of the City of Detroit, a discrepancy that raises questions in the minds of critics as to how objective he would be in submitting a restructuring plan to the bankruptcy court. On the inevitable other hand, estimates made on the rather far-fetched assumption of an 8% return to pension fund investments have been seen as unrealistic. Detroit, while facing the same overly optimistic expected returns that allowed smaller contributions to retirement funds in many places, was not out of line in terms of the cost of its pension obligations in relation to its revenues. The judgment of experts at Boston College’s Center on Retirement, a generally well-respected source, provides comparisons showing Detroit’s pension costs comprising 7.7% of its revenues, considerably less than those of New York or Philadelphia, for example. It is ranked number 65 out of 173 cities surveyed with a funding level of 77% compared to the average of 73% (Munnell et al., 2013).

Not only is the situation of Detroit not as bleak as is popularly asserted, but issues of fairness also arise. As “Buttonwood,” The Economist columnist writes,

Once a worker has retired, it is very hard to replace lost income. Pensioners may have started working in Detroit in the 1970s; they cannot reasonably have anticipated the city’s current problems.

In contrast, most municipal bonds are held as part of diversified portfolios; any loss resulting from a writedown will cause only a small dent in the investor’s wealth. Most bonds will have been bought in recent years when the city’s problems had become well-known and were reflected in its credit rating; the city’s bonds were first classed as junk in 1992. Thus investors were making a conscious decision to grab a higher yield in the face of higher risks.

It was widely argued that pension obligations should be prioritized over the claims of unsecured bondholders of general obligation debt (Johnson, 2014).

A year after he had been appointed, Orr filed a 120-page plan of adjustment, the legal name for the document stating what the city says it can pay. To cut the $18 billion debt, it called for giving the unsecured holders of general obligation debt 20 cents on the dollar and general pensioners 74% of their existing monthly pensions that average a modest $19,000 a year, but only 66% if pensioners through their union resisted and dragged the matter out in court hoping for a better deal. Police and fire workers were offered 90%, with an offer of 96% if they quickly accepted avoiding court costs for the city. At the end of March 2014, Orr, on behalf of the city, offered a revised version of the city’s plan that would pay some of its bondholders and pensioners less than originally offered (Dolan, 2014). There would then be further drawn-out legal challenges.

Under the core elements of the Orr plan, water and sewer bonds would be paid in full, but other bonds, including those funded with dedicated taxes, would receive 15 cents or less on the dollar that, like other elements of the amended plan (Attorneys for the Debtor, 2014), may or may not be found justified by the courts. By changing the status of the bonds—reneging as critics maintain—Orr is potentially damaging the promised commitment of “full faith and credit,” not only on Detroit, but other cities in Michigan and nationally. One way or another precedents will be set (Alexander, 2014).

The plan rested on the most interesting accommodation in the proposal, an extra $820 million that would go to the pension fund and not to other creditors. This elite intervention—made in consultation among the governor’s representatives, nine local and national foundations, and the Detroit Institute of Arts (DIA)—would protect the DIA and its art collection that would be insulated by independent non-profit status from efforts of the creditors to force sale of its world class holdings.

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The financial press reported anger at a possible “cramdown” that would pay unsecured bond holders so little. The Economist’s March 1, 2014 bold-faced headline declared, “Bondholders choke at the city’s restructuring proposals.” But buying high-risk bonds often brings such an outcome. Public sector debtors had been more generous in the past out of fear that future borrowing costs would increase as a result of a strategy that challenged these claims. In private bankruptcy cases this was not an issue. How the bankruptcy plays out will set a precedent for other deeply indebted cities. By imposing such a settlement on bondholders, future borrowing costs for other cities would rise to reflect the new perception of greater risk for lenders. The terms of the bankruptcy will undoubtedly change and perhaps, as one pundit has written, “Orr’s legacy will be a plan that, instead of solving Detroit’s financial problems, will land the city in court fighting lawsuits for years to come” (Alexander, 2014).

Some of the city’s other creditors, like the Detroit Police Lieutenants and Sergeants Associa- tion, agreed to concessions fearing they would experience a worse outcome in a cramdown by the bankruptcy judge that would be imposed if they did not agree. Editorial writers, and not only in Detroit, contrasted what was happening in Detroit to what happened in the housing market collapse in which creditors, in that case powerful banks, did not have to cut a deal with bankrupt homeowners. While pensioners have to negotiate new terms, big banks did not have to negotiate, “leaving home- owners in the dust” (New York Times, 2014). This comparison may be considered in terms of the differences between Chapter 9 and Chapter 13 of the bankruptcy code and how Michigan law is being interpreted (Stoll et al., 2013). In any case, politics and courtroom debate will go on for some time and bargaining will evoke these and other arguments.

How bondholders and pensioners are treated in relation to promises made to each requires consider- ation of what justice demands, but also pragmatic considerations. Many of the holders had purchased high-yield bonds relatively recently at deep discount, given what was understood as risk of loss. They now demanded payment from which their speculative investment would greatly profit. Yet any time the expectation of the owners of financial obligations are disappointed, powerful financial interests protest what is declared an illegitimate redistribution of income and wealth. In considering the issues of bankruptcy and rights conflicts, it is important to reconsider distribution of blame for public debt. Understandings of the laws involved and justice claims for priority, the (ir)responsibility of financial institutions and their past, often illegal behavior, and the extent of subsidies to private investors that have proven costly to Detroit and other jurisdictions are important considerations. To declare the city of Detroit dead without closer attention to the next chapters in the city’s story is insufficient. When this is undertaken it is necessary to look back at the allocation of responsibility for the city’s continuing pain.

From the start, in his rejecting of Orr’s first proposal (there have been five at this writing) Judge Rhodes said the court “will not participate or perpetuate hasty and imprudent financial decision- making” and the judge indicated he would not approve settlements, even those recommended by his court’s own mediator, that do not resolve the city’s systemic problems (Review and Outlook, 2014).

On September 2, 2014, the bankruptcy trial, formally a plan confirmation hearing, began. The City of Detroit would have to prove to Judge Rhodes’ satisfaction that it had crafted a viable and fair plan that corrects the financial mistakes of the past and revitalizes services. Judge Rhodes has the power to accept, offer modifications, or reject the plan. It is up to him to determine whether the plan is fair, follows the law, and has the prospect of success. If it does, he would allow the city to emerge from bankruptcy. At this writing, all that can be said is that there will be perhaps as many as 80 people testifying, that between the city and its creditors there will be several hundred exhibits, and after more weeks or months Judge Rhodes will issue a decision (Bomey, 2014).

CONCLUDING THOUGHTS

This essay queries the story of the demise of Detroit. Whether or not one finds potential in revitalization efforts, the factors stressed in this paper should encourage the re-examination of the current situation of the city, particularly the framing of the city’s bankruptcy. It has argued that looking at the abundance of depressing statistics concerning Detroit, it is easy to understand the

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popularity of the “Detroit is dead” story. But because cities are not like humans, they rarely die permanently. They may fall on hard times; their governments can cease to function in meeting their most basic obligations. By interrogating the details and reflecting on different accounts of the causes of the crisis, and how these are implicit in the bankruptcy discussion, some insight into the ongoing distributional struggle that takes place in urban space can be gained.

ENDNOTES

1 Romney was surely wrong in his interpretation of what Obama had done. Not only was it President George W. Bush who, before he left office, authorized loans to Chrysler and GM, under Obama union workers were forced to accept major concessions that continued after the companies returned to profitability and, by 2013 enjoyed record sales. Many American plants were closed as the Obama team carried out a painful restructuring. Strategies to make U.S.-based transnationals more competitive internationally included greater foreign sourcing, with no particular concern for displaced American workers.

What is impressive about the intervention by the Obama administration, which effectively took control of what had been America’s largest corporation, was its uncompromising demand that GM overhaul its insulated corporate culture. This included requiring GM’s chief executive, Rick Wagoner to resign. The hands-on task force appointed by Obama also required the company to replace several members of its board with new outside directors. GM and Chrysler were required to cut jobs, close factories. They emerged as leaner manufacturers, along the lines their foreign competitors had pioneered—thanks to the government.

In the closing days of 2013, when the government sold the last of what was once a 60% stake in GM, taxpayers lost $10 billion of their $49.5 billion investment in the Detroit automaker. The Center for Automotive Research in Ann Arbor estimated that the government’s auto bailout helped save 1.2 million jobs in the United States (Vlasic & Lowrey, 2013). The decisiveness of the Obama administration in carrying out a state-led industrial policy to restructure the industry was impressive, in contrast to the unwillingness of Congress to allocate new funds to help the city of Detroit. President Obama did, however, instruct administration officials to find as much money as possible from funds already allocated to government agencies that could be channeled to the city.

2 When word of Orr’s comments spread, retired city workers demonstrated in front of his office demanding an apology. The Detroit Free Press quoted Charles Jenkins, who worked in the city’s recreation department for 30 years as saying, “You can go out there and talk nasty things about our city, but we’re some good people,” adding that his annual pension was less than $20,000 a year. “All around the world, they’re talking about us like dogs, saying what type of people we are. We’re a loving people, we’re a happy people. Then they want to take something from us. It don’t make sense. I worked hard. Everybody else here worked hard.” The group of retirees organized with the help of the American Federation of State, City and Municipal Employees, the city’s largest employee union, rallied outside City Hall before going upstairs to Orr’s office. They held signs that said, “I am not lazy!” and “I earned my pension” (Guillen & Gardner, 2013).

To paint Orr as sinister and unfeeling seems a mistake, at least if one also pays attention to other incidents such as his response in a New York restaurant to a disgruntled banker who told him, “We’re going to punish you.” Orr told the banker standing over his table about a little girl he saw on Seven Mile Road waiting for a bus ride home from school “that would likely take her to a blighted neighborhood with broken streetlights. ‘None of us would let our children live that way—and that is the life of the children in this city,’ Orr, a father of two, recalled telling the speechless banker, whom he declined to identify” (Livengood, 2014).

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ABOUT THE AUTHOR

William K. Tabb is Professor Emeritus of Economics at Queens College and of Economics, Political Science and Sociology at the Graduate Center, City University of New York. He has been visiting professor of economics at the University of California, Berkeley and scholar in residence at Kansai University, Japan. Tabb was Principal Consultant, Evaluation Office, United Nations Development Program study of South-South Cooperation. His books include The Long Default: New York and the Urban Fiscal Crisis, The Political Economy of the Black Ghetto, The Restructuring of Capitalism in Our Time, Economic Governance in the Age of Globalization, Unequal Partners: A Primer on Globalization, Reconstructing Political Economy: The Great Divide in Economic Thought, and The Postwar Japanese System: Cultural Economy and Economic Transformation.

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