General Motors Came Back After Bankruptcy. Can Detroit Do the Same?
It's by no means the only factor, but it's a sizable part of the story: The parallels between the meltdown of the entire U.S. auto industry in 2009 and this week's historic Chapter 9 bankruptcy filing on behalf of the city of Detroit are impossible to ignore. That the city's tax base has shrunk so dramatically over the last decade — a loss of more than 200,000 residents in the past 10 years alone, or nearly 28 percent of its population — is inextricably linked with the long, steady decline of auto manufacturing jobs in Detroit. Mix in a healthy dose of financial mismanagement and some very real corruption, and you're left with a bunch of abandoned neighborhoods and a decimated municipal financial framework that can no longer afford basic services for the population it has left, let alone the pensioners to whom it made promises decades ago.
At the same time, this year has seen a series of relatively sunny earnings reports for General Motors, the only major automaker with its headquarters still in Detroit. GM's 2009 government-funded bankruptcy seems to have worked out about as well it possibly could have for the company, which posted better-than-expected profits of $1.18 billion in the first quarter of 2013.
Right. So can bankruptcy do for Detroit what it appears to have done for General Motors?
Mmm, kinda. Keep in mind that GM's Chapter 11 reorganization allowed the automaker to split into two companies, one with its strong brands (Chevrolet, Cadillac) that was designed to survive, and the other with weaker brands (remember Saturn?) that was then sold off piece by piece. While cities like Cleveland have had some success in preserving property values by demolishing worthless vacant structures, you can't exactly cut an entire city in half and dump the parts that aren't working on the open market.
That said, there are many aspects of bankruptcy protection that the city should be able to avail itself of the same way GM did. Assuming a judge authorizes the city to move forward with its Chapter 9 case, a restructuring of city operations and budgets would follow. That process (which could take anywhere from months to years) would likely include everything from layoffs, budget cuts, the sale of assets, getting big concessions from unions, and reducing debt by forcing the city's thousands of creditors to agree to accept a lot less than what they're owed.
Can't the federal government just bail out the city the same way it bailed out GM?
It sounds easy, doesn't it? But don't forget that the $49.5 billion GM bailout resulted in the U.S. government owning a ton of shares in the company, which it's lately been selling off for a tidy sum. Whatever you want to say about GM, it was always a business with products to sell. City governments, of course, aren't in the business of profits. Not to mention, can you imagine this particular Congress approving any such deal?
Are retired city workers going to lose their pensions?
Unclear. Michigan's constitution technically prohibits the accrued pension benefits of public employees from being reduced retroactively. But Detroit Emergency Manager Kevyn Orr has previously indicated that bankruptcy would mean pension cuts for both current and former city workers would be on the table. The city's pension funds currently face an estimated shortfall of about $3.5 billion. For (hopefully obvious) political reasons, it's unlikely that current retirees would see their checks disappear entirely, but smaller checks are a (frightening) possibility. Future retiree benefits would be the big area for cuts, though. Plenty of states and local governments have already slashed pensions even without going bankrupt.
How come I keep hearing about how Detroit is making a comeback?
There is indeed a part of downtown Detroit and another section in Midtown that are experiencing a renaissance, with new residents and jobs and real estate development all moving in over the last several years. Businessman and investor Dan Gilbert has been the prime mover of this trend. But the up and coming parts are still only a sliver of the overall city, which is geographically huge: 140 square miles.
Isn't the main thing Detroit needs to do is to get more people living in the city again, paying taxes? How does bankruptcy help there?
It certainly doesn't help the city's reputation with potential new residents, does it — who wants to bet their personal future on a bankrupt place? But the basic theory is that bankruptcy can help Detroit shake off its crippling financial burdens, which would then allow it to spend what money it does have on improving city services. Things like reliable police and fire departments are a pretty crucial first step before any mass number of families and businesses will feel confident moving back in.