Published: April 1, 2014
Detroit Emergency Manager Kevyn Orr stood behind a lectern in a ballroom on the University of Michigan’s campus, telling an attentive crowd how the civic-minded values absorbed here at his alma mater helped lead to a job that, when first offered, he wanted no part of. His initial response wasn’t just no, but an emphatic “Hell no.”
What “poor schmuck,” he thought, would want to take on a problem as big as Detroit, with its massive debt and crumbling infrastructure, its relentless exodus of residents and the epic blight they leave behind?
But then people close to him — in particular the managing partner at the Jones Day law firm where he worked, and his wife, a surgeon at Johns Hopkins Hospital in Baltimore — prevailed on his sense of civic duty, leaning on the do-gooder in him to forgo the pleasures of sunny Florida, where he was slated to head a new office for his high-powered firm. Instead, he took on the Herculean task of turning around a city that has been caught in downward spiral for the past 60 years.
In a 2011 piece titled “Pensions and Chapter 9: Can Municipalities Use Bankruptcy to Solve Their Pension Woes?” that appeared in the Emory Law School’s Bankruptcy Developments Journal, attorneys Jeffrey B. Ellman and Daniel J. Merrett — both of whom work in the business restructuring and reorganization division of Jones Day — succinctly describe the problem they were attempting to address:
“As world markets and private industries struggle to recover from the financial collapse of the late 2000s, speculation has grown about the next wave of financial troubles. One area that has come under increasing scrutiny from experts and the media is the crippling debt loads of government entities. From local municipalities to sovereign nations, the risk of governments and governmental units defaulting on their debts is real … Rumors abound in the media that numerous United States cities and other municipalities are on the brink of defaulting on their obligations.”
Then they outline some of the forces creating the calamity.
“The crisis among the nation’s municipalities has many fathers, and every troubled municipality faces its own unique challenges,” they wrote. “Yet some common drives can be identified. Not unlike private entities, municipalities across the nation have found themselves trapped in an extended cycle of declining revenues. Plummeting real estate values and high rates of foreclosure have eroded the property tax base … Widespread unemployment and, in some cases, decreasing population have depleted revenue from sales taxes and other forms of taxation.”
They could have pasted a photo of the Spirit of Detroit alongside that summary.
The decline of the Motor City has been well-chronicled; from an industrial powerhouse with a thriving and integrated middle class, the city’s population fell from a peak of nearly 2 million in the 1950s to fewer than 700,000 residents today. Compounding the problem is Detroit’s poverty rate, which is three times the national average.
The staggering population loss, as well as the decline of the auto industry and all the businesses that depended on it, produced a decades-long disaster the city has yet to recover from. It’s easy enough to explain: As people leave and jobs disappear, the tax base begins to erode. Loss in revenue means cuts in services, which causes more people to leave, forcing more businesses to close. Meanwhile, the infrastructure of a city spanning 139-square miles remains constant: the same number of streets to pave, the same amount of water mains and sewer lines to maintain, the same vast area for police to patrol and firefighters to service. And so, in an attempt to maintain some equilibrium, debt is incurred. But it’s not enough, and so people continue their exodus, leading to …
You get the picture.
Using Emergency Manager Orr’s numbers, the city has unfunded liabilities (read: debt) of $18.5 billion. Even if you accept the claims of Orr’s critics, who contend that the number has been deliberately distorted in order to justify the bankruptcy, Detroit’s debt load is still massive.
Read this article in full regarding Curt Guyette’s analysis of the Detroit Bankruptcy in Metro Times