Is it time to rightsize Detroit?

November 30, 2012

There are two sides to the story of Detroit.

One is the political and civic story of how the mayor and city council will manage the multi-year process of shrinking the city government to fit a population of 700,000. At its peak in 1950, Detroit had about 1.8 million citizens. The Motor City has undergone a 60 year contraction in population, and now the city’s geographic and infrastructure footprints need to shrink to survive.

The Detroit News transcribed Mayor Dave Bing’s interview with CNN (embedded above):

Bing said he took the job to “make the hard decisions so this city would have a future.” But the toughest part of the job is “managing expectations,” the mayor said.

“We are in an environment I think, of entitlement,” Bing said. “We’ve got a lot of people who are city workers who for years and years, 20, 30 years, think they are entitled to a job and all that comes with it.

“Nobody wants to go backwards, but in order for us to move the city forward, we are going to have to take a step or two backwards and then, I think, all of us have to participate in the pain that’s upon us right now.”

What Bing essentially says is that everyone in Detroit must participate in rightsizing their community. That is the truthful way for a politician to tell the story, and it should be repeated across many cities in the U.S. It’s a pity that so few are able to talk about unpopular truths.

The other side of the Detroit story is its weak fiscal condition, and the 50-plus municipal bond issues that the city has outstanding. You can see the bonds here on the MSRB’s EMMA reporting system.

Fitch Ratings gives a precise analysis of the strained revenues that support city spending and these bond issues (requires free Fitch registration):

Adequate cash flow has been a recurring concern for the city. City officials planned to receive a $10 million disbursement of state escrowed bond proceeds on November 20th and a $20 million disbursement on December 20th to forestall illiquidity in mid- to late-December.

The city desperately needs this cash, and the state had promised to provide the “escrowed bond proceeds” if the city meets its commitments. But it has not:

The failure of the city to meet the agreed-upon milestones raises the risk that the escrowed funds will not be released in time to avoid a cash crisis. City officials plan to make offsetting cuts, including unpaid furlough days, to conserve cash and avoid illiquidity. The receipt of property taxes in January should restore minimum levels of liquidity until the next low cash-flow point in April. Since the near-depletion of liquidity has been a recurring problem Fitch believes this may continue.

To complicate matters, the city council and attorney refused to approve a law firm that the state required for the process, and the money spigot was turned off. What happens when there is no more money? It’s the same as a business when it has no more money. City workers will be furloughed. Fitch is worried about the political situation that led to the impasse:

The recent inability of the various branches of government to work together to reach the agreed upon milestones in a timely fashion highlights how quickly this environment can change, and how severely such changes can threaten the city’s tenuous operating environment. Given this volatility Fitch is concerned that additional actions by these or other stakeholders, including unions or taxpayers, could deepen the city’s fiscal crisis.

And what about the overall financial condition of the city? Basically, it’s collapsing:

The city projects fiscal 2012 ended with an operating deficit of $100-110 million (9 -10% of spending), as compared to a $30 million surplus projected at the beginning of the year… It also leaves the general fund unrestricted deficit at about 20% of spending.

Translation: Detroit is bleeding cash.

And what about the economic condition of the region? It’s brutal:

The Detroit area economy remains pressured after severe weakening during the recent recession. Despite the loss of thousands of automotive jobs, the economy remains heavily dependent on the auto industry. The city’s resource base remains under considerable stress, as evidenced by the very high unemployment rate, poor wealth indices and declining tax base.

How brutal?

The seasonally unadjusted August 2012 unemployment rate of 19.6% showed little improvement over the 20.8% recorded a year prior, despite contraction of the labor force. It remains more than double the state and national rates of 9.2% and 8.2%, respectively.

Given these painful realities facing Detroit and its mayor, who can help? Detroit News columnist Daniel Howes summed it up like this:

Among the myriad problems complicating the looming financial collapse of Detroit, few are more politically fraught for Gov. Rick Snyder, state Treasurer Andy Dillon and the Republican-controlled Legislature than identifying the source of funding likely to be needed to finance a lengthy restructuring — including a Chapter 9 bankruptcy — of the cash-strapped city.

Detroit consistently overestimates tax revenue and underestimates its spending. Its revenue sources are “tapped out,” as one ranking source familiar with the situation described it; a hit looms of more than $400 million in swaps owed to counter-parties; and many reforms promised nearly a year ago under the consent agreement remain undone.

Detroit – shrinking in size and hemorrhaging cash – is a Gordian knot of politics, special interests and shrinking resources. Tough choices lay ahead. At least Mayor Bing has laid out the ugly truth: there is massive pain ahead for the Motor City.


Design Observer Group: The Unreal Estate Guide to Detroit

Bloomberg: “Detroit Bonds Cut Deeper Into Junk as Cash Crunch Nears”

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