By now, you’ve probably heard that Detroit filed bankruptcy and as of November 7th received court approval for its bankruptcy exit plan. You may have also heard about Detroit trying to shut off water to nearly 10% of its population or municipal pensioners fighting to save their pensions or various foundations saving Detroit’s art collection from creditors. You are even excused for asking “What does it mean when a city files bankruptcy anyway?” Don’t worry. You are in good company. No one truly knows what happens when a city as large as Detroit files bankruptcy.
A bankruptcy filing by a municipality is somewhat similar to a bankruptcy filing by a corporation or even a household. In essence, Detroit does not have enough revenue to support paying its long term obligations and paying its short term needs. Imagine a family with two parents, a few kids, a house mortgage and car note. If the parents lose their jobs, they are unable to pay the mortgage, pay the car note, and support their children. In order to support their children, which is the parent’s top priority, the parents may need to file bankruptcy to conserve their cash for their children’s needs instead of the holders of the house and car note.
The good news for Detroit is the bankruptcy filing and bankruptcy exit plan were approved by the court. Although basic municipal services in Detroit such as police services, hospitals, and education are far from adequate, the disapproval of the bankruptcy exit plan would have meant immediate and drastic cuts to an already depleted municipal work force.
The approval of the bankruptcy exit plan for Detroit, which has $18,000,000,000 in debt or nearly $250,000 of debt for every resident will be allowed to devote its scarce tax revenue on providing essential services instead of paying debt service to creditors. The court allowed Detroit to eliminate more than 30% of its long term debt. The experts (politicians, urban planners, and economists) are still unsure if the bankruptcy will put the city on stable footing. Current tax revenue has been unable to sustain the current expenditures exclusive of debt service, such as public safety, education, or health care. There is no reason to believe the near future will be different. In other words, imagine a family who has successfully filed bankruptcy but the parents are still unemployed. Even with a bankruptcy filing, the family still does not have a paycheck to pay the necessary bills.
How did this happen? Don’t we live in one of the wealthiest countries in the world?
There exist a direct correlation between cities with failing municipal finances and cities that have lost substantial population in the past few decades. Again, Detroit is a prime example but not the only one. Large cities primarily in the Northeast and Midwest such as Newark, New Jersey, Cleveland, and Baltimore suffer from the same fate. In 1950, Detroit had nearly 2,000,000 residents. Today, Detroit has less than 800,000 residents and the number continues to decline. Residents pay taxes. Fewer residents means less tax revenue generated for Detroit to pay for essential services such as police, education, health care, or even water. If you could talk to our imaginary family who just filed bankruptcy but was still unemployed, you would tell them to move into a smaller house and cut non-essential expenses in order to save money.
So how does Detroit move into a smaller house? And how does this occur in a responsible way that doesn’t impact essential service to poor residents. One way to achieve this is through planned shrinkage. Planned shrinkage is a policy which involves lessening the municipal footprint of a city through relocating tenants away from more blighted neighborhoods and concentrating municipal services into more dense yet fewer neighborhoods. The basic infrastructure of a city (e.g hospitals, streets, schools, street lights), whether used or unused, still carries a cost to maintain. Fewer neighborhoods and a smaller footprint for the city results in savings on sewer systems, public safety, education, and health care. The implementation of planned shrinkage can and should be used for any city that faces lower tax revenue due to diminishing population. In essence, residents would be encouraged to leave certain blighted communities to live in other more thriving communities.
Now you may be thinking that encouraging residents to leave their neighborhood is neither very humane nor compassionate. Really? Is shutting off water to 46,000 households and arguably some of the poorest residents in Detroit humane? The United Nations Office of Human Rights recently commented that Detroit was violating international standards by shutting water off. You read this correctly. The UN was not criticizing some distant country in Africa, or Southeast Asia but criticizing the United States for its inaction in response to Detroit.
Detroit has been in decline for decades. Although the court approval of the bankruptcy filing and exit plan will bring some relief to the city, it will not change the standard of living for the majority of its residents. The police force will continue to be inadequate; schools will continue to be underfunded; and public hospitals will be understaffed. Detroit simply does not have the tax revenue to support these basic services for its residents. Albert Einstein is quoted as saying “Doing the same thing over and over again is the definition of insanity." In order to avoid the insanity of inadequate municipal services which the average Detroit resident faces, significant structural change is needed to put Detroit on proper footing.
Edward Poteat is an adjunct professor at Columbia University and author of The Fiscal Cliff which chronicles the plight facing many older American Cities. Edward has also developed affordable housing in the Metropolitan New York City market for nearly two decades. Please follow him on Twitter: @poteated