Transforming Detroit

July 26, 2012

It was just six weeks ago that I wrote: “Detroit is standing on the precipice of fiscal collapse.” Now, however, I may nominate Detroit as the turnaround story of the year. Make no mistake, hard times lie ahead for the Motor City, but it has since stepped back from its own fiscal cliff.

Mayor Dave Bing, the new city program manager and the city’s chief financial officer are using the powers granted to them under the consent agreement with the state to make big changes. Under the direction of the financial advisory board, which was also put in place under the consent agreement, the mayor used his new authority to cut the pay of city workers in 40 unions by 10 percent and make other changes to labor agreements:

[Mayor] Bing has said the changes are needed in order to make the city fiscally solvent. Among the changes: a 10-percent wage reduction, the elimination of longevity pay for longtime employees and increased co-pays on health care, to 20 percent from 10 percent on some plans. Other so-called work rule changes include using civilians in positions currently held by police officers.

Detroit has been shrinking for several decades, but the economic recession combined with the collapse of the auto industry have hit the city hard. Detroit has lost more population in the last 10 years than any other major U.S. city, and according to data from Thomson Reuters MMD, its vital signs are as bad or worse than cities like Stockton or San Bernardino that have recently entered or moved toward bankruptcy:

Change in
Change in
City Gov.
Rate 2011
City Pop.
‐6.30% ‐9.80% 19.90% $25,787 713,777 ‐25.00%

Like most cities, Detroit’s debt is divided into general obligations of the city and revenue bonds that are separate legal entities and support the water system and airport. The general obligation debt of the city has junk ratings (B3/B/CCC), but the revenue bonds of the city are rated at investment grade. The pension funds of the city are also in relatively good shape by muniland standards.

& Sewer
Debt $M Ratings Debt $M Ratings Pop Served Debt $M Ratings
$2,433 B3/B/CCC $5,442 Baa2/A+/A‐ 4M $2,145 A2/A/A‐

Unlike the woe-is-me political prattle that you hear from most city leaders facing tough times, Bing said the following in his annual address to the city in March:

My primary obligation is to bring financial stability to our city. I came into office confronted by a deficit of over $330 million created over decades … You have seen the tentative union agreements that my administration has made, which include structural changes for work requirements, benefit concessions and paycuts.

Every mayor and city manager from Stockton, California to Scranton, Pennsylvania needs to study the actions of Detroit’s mayor. The path to fiscal solvency is tough and requires leadership from public officials. Right-sizing a city can happen and must happen all across America. All eyes on Detroit.

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