Sunday, December 4, 2011

Detroit–Immediate Pain but Potential Bright Future

Detroit is in a world of hurt financially.

“Its financial picture is bleak, the City of Detroit may not have the means to fix itself without landing in bankruptcy court, restructuring experts say.

Mayor Dave Bing and city officials insist they can find solutions to fend off a financial meltdown, even as the state begins its review of Detroit's finances Tuesday.

But experts who reviewed the city's finances for the Free Press said that even an emergency manager -- despite sweeping powers to slash costs, abolish union contracts and sell off assets -- will likely find the challenges too great to solve without the help of a bankruptcy judge.

One reason?

The city's long-term debts and obligations to retirees.” Bankruptcy might be Detroit's only option, experts say, Detroit Free Press, accessed 12/4/2011.

The Citizens Research Council of Michigan just released a report on Detroit’s legacy costs and indebtedness.

“At June 30, 2010, all funds of the City of Detroit had $6.4 billion of outstanding bonded debt, including $5.2 billion attributable to the Water and Sewerage system, and over $600 million of other future obligations. Included in the $6.4 billion of outstanding bonded debt was $1.0 billion of general obligation debt, which equates to debt of about $1,400 per resident of the city. There will be $467.7 million of interest due on this $1.0 billion of principal; including principal and interest on general obligation debt equates to more than $2,000 per resident.

The city had $1.5 billion of outstanding pension obligation certificates and other unfunded costs associated with personnel totaling $5.6 billion: $481.5 million of unfunded actuarial accrued liability (UAAL) in the General Retirement System, $134.2 of UAAL in the Police and Fire Retirement System. . . .

Detroit also had $5.0 billion of UAAL for other post employment benefits, but the city continues to pay these liabilities on a pay-as-you-go basis. If the city had made the annual required contribution to fund OPEBs on an actuarial basis in fiscal 2009-10, it would have allocated $313.9 million, rather than the $149.7 million actual payment; an additional $164.2 million would have been paid from city accounts to fund future liabilities, reducing the amount available for current operations. Nonetheless, the city government's future liability for non-pension benefits promised to city retirees is about $7,000 per resident.”

Legacy Costs and Indebtedness of the City of Detroit”, Citizens Research Council of Michigan, December 2011, Report 373.

Fundamental conditions are the causes of the problem:

  1. Declining population – from near 2 million down to 713,777 residents reported in the 2010 census
  2. Plummeting property values depressing property tax collections
  3. High unemployment depressing city income tax collections
  4. Decades of city employee wages and benefits at levels that no longer can be supported by the remaining residents

The shrinking tax base, in terms of number of residents, property values and income might well be called “the perfect storm”. The obligations incurred in the past might have been manageable if the city had not shrunk as it has, but now those liabilities are comparable to the “stranded costs” that electric utility companies bear when the demand for electricity that had been expected when the power plants were built is not realized due to loss of customers. The number of retirees from a city of nearly 2 million far outnumber the number of active employees needed to service the city today. “In FY 2010, there were 8,356 retired members of the Detroit Police and Fire Retirement System (DPFRS) and they received an average annual allowance of $29,163. There were 3,992 active members of the system (2,927 Police and 1,065 Fire); the number of active members has been declining (there were 5,585 active members in 2001).” CRCM, p. 9.

Revision of the pension and other post employment benefits (OPEB) must be a part of the solution. Mayor Bing, the City Council and the unions have not been able to reach agreement. The unions, in particular, appear in denial of the problems. Governor Snyder is loath to utilize Public Act 4 of 2011 (the Emergency Manager act) and appoint an Emergency Manager due to the likely push-back from the Detroit residents. The Mayor and other parties, in a show of solidarity, have declared that it is a Detroit problem to be solved by Detroiters. Member of the City Council has used the “race card” to rile up the troops against the potential appointment of an Emergency Manager.

While we can understand why Mayor Bing (who has announced he will run for re-election), the City Council members and perhaps local legislators as well may make defensive statements for political purposes, it is sad to see politics get in the way of good policy. They make reaching agreement and finding a solution more difficult in the event an Emergency Manager is ultimately necessary. To give Mayor Bing the benefit of the doubt, we might wonder if he was simply seeking to make dealing with him more palatable for the unions than the alternative – under the theory that “it is better to deal with the devil you know than one you don’t know”.

It is clear that the fate of Detroit will have massive impacts on the state as a whole. I look forward to resolution of the problem as quickly as possible – preferably by Detroiters themselves, but if not, via the appointment of an Emergency Manager, and if even he/she cannot solve the problem, with the aid of a bankruptcy judge.

We need to shift our focus as quickly as possible from the immediate cash flow problem to long term solutions to the fundamental conditions. Redevelopment of Detroit is possible by a combination of:

  • creation of a expanded logistic center via construction of a freeway to freeway connection to a bridge from Windsor for trucks, a second railroad tunnel between Windsor and Detroit that can accommodate double stacked container cars (to seize the opportunity of the trade corridor from Halifax, Nova Scotia with its deep water port, through Montreal, Toronto, Windsor, Detroit and Chicago) and the expansion/creation of the Detroit Freight Hub. This can also tie into the Aerotropolis consisting of Detroit Metro Airport, the Willow Run Airport and surrounding area, creating multiple options for movement of people and goods, and driving down transportation costs of local businesses to make them more competitive. Tens of thousands of jobs are waiting to be created – if only we see the vision and act on it.
  • elimination of blighted structures in strategic areas, such as surrounding the Midtown area along Woodward Avenue, where great potential exists for businesses and people to come back in to take advantage of the locations.
  • creating a regional transit authority to bring modern rapid transit to the area along the four major corridors identified by the Regional Transit Authority Task Force, which, in conjunction of the empty spaces created by the demolition of the over 80,000 vacant and decrepit homes, will encourage redevelopment of residential areas and discourage continued sprawl north and west of Detroit. Of course, a working Metro public transportation system supporting the major lines will also need to be reformed. Secondary benefits of lower cost provision of basic utilities will be realized, as compared with continuing to extend them outward from the city.

Michigan will grow again. A dynamic, redeveloped Detroit must be a major part of that future. We can do it – if we have the foresight, energy and will to work together for the solutions working for the general public good, and not for the shortsighted benefit of the special interest groups.

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