Detroit's Bankruptcy Is A Prelude To San Diego & Beyond

So this is what it’s come to, huh Detroit?  How truly sad.  Bankrupty.  In this case, the “BK” abbreviation doesn’t connate to “have it your way”, but rather “you’re gonna have it the court’s way.”  Decades of visual warning lights and alarms in the form of residential and business urban flight, over-generous employee pension and healthcare benefits, and erosion of the domestic automobile manufacturing industry, to say nothing of political corruption, were all ignored by city leadership.  “Let the next mayor and city council fix the problems” ultimately resulted with the current Mayor, Dave Bing, the best that Detroit has had in 40 years, and this city council fiscally unable to do anything but seek outside assistance.  Enter Michigan Governor Rick Snyder and his hand-picked Emergency Manager, Kevyn Orr, who were handed the $18 billion dollar slop of debt in March.  Despite his best efforts to reason and strike a deal with city employee unions, pension fund managers, and both secured and unsecured bond lenders, Orr was rebuffed and had, in the words of Snyder, “no viable alternative” but to file for bankruptcy.

As someone who was born in Detroit in the early 60’s and resided on it’s east side for the first 11 years of my life and then, like many families did after the 1967 race riots, moved to the suburbs, I still consider myself a “Detroiter.”  My childhood memories are as vivid as ever.  Ours was a neighborhood of mixed ethnicities, primarily of Belgian, German, and Polish heritage.  A week-end didn’t go by where, if my father and a neighbor were outside shoveling snow in winter or mowing the lawn in summer, a party was certain to follow at someone’s home.  The wives would soon be called over, as well as the kids, and the fun would begin!  Children walked the multiple blocks to school unescorted by parents, and being driven to school was a rare treat.  We played whiffle ball in the street during the summer and went feather bowling at The Cadieux Café.  Backyards were flooded with water and resulting ice rinks brought into play for pick-up hockey throughout the winter.  Sledding was right up the street on the hills of Balduck Park.  Our neighborhood was one big playground!

All that changed after 1967.  I remember very well seeing smoke rising from the fires downtown.  The Michigan National Guard and their armored personnel carriers and Jeeps rolling south down Warren Avenue toward the riots.  My dad remained home from his job for days.  Watching the fighting and arrests on our lone black-and-white television was frightening.  That was the beginning of the end for Detroit.  My parents hung on in our beautiful little home for another four years, then had enough and we followed the parade out of the city.  As kids, we hated to leave, but understood the reasons………sort of.

Fast-forward 40 years.  Detroit’s population is down to 700,000 from a high of 1.8 million in the 1950’s.  There are 40,000, yes, 40,000 abandoned buildings throughout the city.  Half of the city’s parks are closed, and 40% of the street lights are inoperable.  Too say nothing of the on-going high crime rate.  Of Detroit’s approximate $18 billion debt, half is attributed to unfunded city employee pension and healthcare benefits.  According to Mr. Orr and his team, there is no method to cure this debt and he illustrates the reason:  there are 21,000 city employee retirees, and only 9,000 active city employees.   The number of city employees will likely be further reduced post-bankruptcy.  In short, too many people collecting a check, and not enough of them funding the pension program.  It’s a problem at every level of government throughout the country, and it’s not going away without serious reform. 

This municipal bankruptcy is being closely monitored throughout the country by politicians, public employee unions, and the financial community.  Michigan’s Constitution protects public employee pensions, but Orr and Snyder will argue that they must be adjusted against limited funds; the unions will argue the Constitution is resolute.  General obligation bondholders, typically classified as “secured” and first in line for full repayment of their loans, are being classified by Orr with their unsecured creditor brethren.  Thus they too, are targeted for severe financial haircuts.  Such an act would be unprecedented, so Wall Street shivers at the thought of such a conclusion.  And what of the public employee unions and their allies in city halls, county boards, and state capitols throughout “the land of the (not debt) free?”  All that easy borrowing from the bond market to paper-over operating budget deficits and unfunded pension and healthcare benefits will be a practice of the past.  The “kicking the can” down the road for future generations will come to end.  Union leadership and their dues paying rank-and-file will face a huge private sector reality check:  lay-offs, pay and benefit reductions, and, God forbid, employee-paid 401K plans in place of tax-payer funded pensions! 

I sincerely hope Detroit’s saga is not repeated in a city or state near you, but that’s highly unlikely.  Los Angeles and San Diego immediately come to mind as the next sequels of this municipal horror flick; even more so does the state of California.  The names of the innocent and places may be changed, but the script and villains are all too familiar.