Bankruptcy itself won't save Detroit

City can shed its debt, but it also needs to bring back residents, raise revenue
Associated Press
Jul 20, 2013

Four years ago, America's Big Three automakers mortgaged all they owned or went into bankruptcy court to keep from going broke.

Since then, General Motors, Chrysler and Ford have all returned to full financial health, unlike Detroit itself, which filed for bankruptcy Thursday after years of painful decline.

So why can't the Motor City use bankruptcy to transform itself in the same way? Unfortunately for Detroit, it's not that simple. Automakers were able to shed most of their problems in bankruptcy court and come out leaner and more competitive. The city can get rid of its gargantuan debt, but a bankruptcy judge can't bring back residents or raise its dwindling revenue.

"In General Motors, at least you could have this dream about there being increased revenues in the future," said Douglas Baird, a bankruptcy law professor at the University of Chicago. "It's much harder to do that in the case of a city like Detroit because it doesn't sell a product."

Detroit, which filed the largest municipal bankruptcy case in American history, owes as much as $20 billion to banks, bondholders and pension funds. It has revenue of about $1.1 billion per year, a number that drops by about $100 million annually. And it's burdened with a running deficit of $327 million.

The city had to borrow $80 million from Bank of America last year just to keep the lights on.

City taxes are already at limits set by the state, so the only way Detroit can raise revenue is to attract more workers and residents so they pay taxes. But with high crime, poor services and decrepit neighborhoods, people are moving out rather than in. The population has fallen to around 700,000, less than half as many people as during the heyday of the 1950s.

Much of the city's debt to banks and bondholders is secured by tax revenue, and just how much the creditors get will have to be hashed out in court. A big chunk is owed to employee pension plans and for the health care costs of more than 18,000 retirees. So the city is caught in a time warp of sorts. It has obligations leftover from the boom days, with today's much smaller revenue base.

"Even if they were completely successful in wiping out all of the debt, it doesn't solve all of the problems," said Steve Miller, board chairman at insurance giant AIG who has turned around a number of struggling companies. "The retirement obligation and health care obligation of a workforce that used to support a 2 million population cannot be supported with the diminished population of 700,000."

Detroit's problem, he said, is similar to what he faced at Bethlehem Steel, which had 12,000 active workers contributing to pension plans that served 130,000 retirees.

"There was no way to make that math work," Miller said. Retirees had to take reduced benefits after pensions were turned over to the federal government.

Like those at Bethlehem Steel, Detroit's pensioners are also likely to see benefit cuts. And because they're lower in the pecking order of creditors, they may bear the brunt of the city's ills, Baird said.

And many will have trouble taking the hit, especially those hurt in the line of duty.

"Some of them were shot. Some of them had buildings fall on them," said Don Taylor, president of the Retired Detroit Police & Fire Fighters Association. "And they've been injured for life. They can't get other jobs."

Michigan Gov. Rick Snyder is sympathetic but says the city is in dire straits.

"We really want to empathize with their situation," he said. "A lot of people worked hard for the city for a lot of years. They're on a fixed income. We all need to appreciate that can be a difficult situation. This is a very difficult situation overall, though."

Snyder wouldn't say if pension or health benefits would be cut, but he said the city has to deal with its unfunded pension liabilities. The pensions have "somewhere north of 50 percent" of the assets needed to pay all benefits, he said.

The state, Miller said, will likely have to come up with cash to help Detroit through the bankruptcy until its tax base grows, just like the federal government helped GM and Chrysler. But Snyder said that shouldn't be expected.

Any savings from cutting pensions could be used to provide better services, said John Pottow, a University of Michigan professor specializing in bankruptcy and corporate law. "It's also going to help people who want to have the police show up or their garbage collected."

And with a little luck, smaller debt after bankruptcy could lead to a renaissance for Detroit, just like it did for General Motors and Chrysler, which also went through bankruptcy protection.

Former GM Vice Chairman Bob Lutz said Detroit's bankruptcy shouldn't be much of an obstacle to the rebirth of GM and the rest of the U.S. auto industry. The resurgence of the Big Three may help lift Detroit out of trouble as auto sales continue to increase, he said.

"It can and must be a new beginning, with a clean slate," Lutz said. "Life will go on."




Come on donutshopguy, all we need is some federal stimulation! We can build new highways, and bridges. Everyone will be Happy, Happy, Happy!!


Luxembourg, Sweden, Norway, Germany. All those countries enjoy a better standard of living. Why? People are valued. In America it is only about those at the top. We as nation will continue to go downward until there are jobs that compensate fairly. Sandusky another example. Services will be challenged because of jobs losses.





The Hero Zone's picture
The Hero Zone

That is the difficult part, how do you force, compel, or even encourage that as a softer approach? The minimum wage is not the answer because it will never be enough and can always be avoided by under-the-table employment. You can set it at $20/hour as I remember Big Dog favoring but then what? Where does the money come from and when the prices of goods and services rise to meet that rate we find ourselves at that same crossroads.

I can't claim to know the answer to it, or at least a direct method to address it. There has to be a multi-tiered approach that focuses on education and encourages more people to participate in market forces to both increase and manage their income. In a way as you referenced to a perception of those countries' spirits, it has to be interwoven into the culture. Interwoven, not forced. Not mandated.

Humans and their equivalent in corporations have adapted to the laws as they have been written and around them, too, its own culture springs up. So, as it took generations to build up on old laws, it will take generations to tear them down and build something new. It is that realization that we as a country aren't manufacturers nor laborers as once was needed in a bygone golden age. Information and services are dominant forces now (not to say there aren't builders nor farmers for an agrarian lifestyle), so how can we adapt to that as our standard?

It's a head-scratcher but one that should focus on the efficiency and simplicity our society has endeavored to reach. Unfortunately for many on either side of the aisle, there will be adjustments made that will seem uncomfortable.

The Hero Zone's picture
The Hero Zone

In followup I did some research and bring back the scouting reports from what others think could help turn it around. Think of them as you will, I won't claim the merits or flaws. First, however, some brevity:

1. Cutting deals, pensions, benefits, wages, and other burdens won't fix the problem alone. Incentives to invest must be put in place.

2. The relationship between public sector unions and those they help elect was brought up into the mix. This leaves the questions of actual taxpayer representation when those elected are beholden to those who helped pay and put them in power.

A parallel was brought up that in the private sector unions bargain and contest against a private company which creates its own products and resources. In the public sector, the leadership bargains against...the public at large which is only capable of consuming through taxes. On a personal note I think even FDR warned against public unions for that very reason.

3. In order to lure investors into the city and help them comfortably part with their cash, as well as to compete with other cities, a suspension of such taxes as capital gains or taxes made for new hires (in other words all the stuff that comes after the money was put down, not before) could be enacted. Other free-enterprise and other such termed policies can be instituted.

4. Review public procedure for services to ensure things like bus routes aren't redundant, police patrol more efficiently, or the overall tax structure is competitive. I believe I heard that Detroit's tax on production machinery is the highest in the country. In my personal opinion it sounds like strangling the golden goose if that's the case.

5. While it will most likely forever be called "The Motor City" the city can't rely on one major industry fueling or defining it for if that industry fails so too will the city. To an extent Cleveland has this problem with biotech and to bring it home, as much as our area is seasonal in nature we feel that pinch every fall/winter.

6. Something that has already been done is dislodge the corruption clogging up the system. Even if those in elected office now are as clean as the wind-driven snow there is still a lot of gunk in the arteries that will require systematic change. Office and other local legacies, "traditions", and ideas will need to take a step back for the next generation.

7. The city of Detroit, as much as we may have smirked at The Onion's article, and its residents need support and leadership - not laughs and kicks as it is walked by. This is an incredible opportunity for it to be the first modernized city of its kind in the U.S., having the rare opportunity at being able (and forced) to redo everything from the ground up. That said, it will probably have to be the largest importer of humble pie in the nation. It won't be easy and many feelings and reputations will either feel hurt or actually be hurt.

8. This is a bit of a barometer for what is going to/has happened nationally and should be monitored as such. Increasing tax expenses mixed with a shrinking tax base will only continue to make things worse. As much as I hear a certain station use the clip, Cleveland Mayor Frank Jackson said:

"It's not that we don't know what the problems are. We've known them for years. It's not that we don't know what the solutions are. We've known those for years. The problem is we haven't done anything about it."

Time is running out to "do" things. It is a luxury that many cannot afford and will require local, state, and national conversations to fix. It will require pet projects and egos to be put aside and an openness to living a different lifestyle than we are used to.

So, there's what I've found. Some of these suggestions may even be brought to bear here in Sandusky proactively as, while not bankrupt, things are still really tight. I still personally contend that the age of the big city is reaching twilight as telecommunications, improved private/public transportation, and a societal shift away from the lifestyle of city living being necessary for protection and security comes to fruition.

It is a good reminder to us all, too, that nothing is permanent. No age, no law, nor economic trend. No procedure, no regulation, nor group (private or public). "Third rails" are, in my opinion and to quote a fellow commenter in these forums, "bullspit". Responsible transition policies to a new expectation must be enacted. Just as Detroit can't cut its way to prosperity, neither can the nation at large.


"All those countries enjoy a better standard of living. Why? People are valued. In America it is only about those at the top."

I agree. With very few exceptions, the super rich can't get enough money. It is these super rich people who have control of the government. Eisenhower warned the people about the Military Industrial Complex.
"Another concern, Bowman says, was the possibility that as the military and the arms industry gained power, they would be a threat to democracy, with civilians losing control of the military-industrial complex."

Wars are started by the US Government based on lies to profit the Military Industrial Complex. Vietnam and the Iraq wars are two examples. It doesn't matter if you vote Democrat or Republican. The corporate news media picks the candidates to run for President. Other better candidates are excluded.


"Wars are started by the US Government based on lies to profit the Military Industrial Complex. Vietnam and the Iraq wars are two examples. It doesn't matter if you vote Democrat or Republican. The corporate news media picks the candidates to run for President. Other better candidates are excluded."

Who thought Bush jr was the best, a philandering Governor from one of the worst ranked states of the Union, a 2nd year jr Senator former state senator and jr law professor, a man who married a series of millionaire wives, a peanut farmer and governor from another low ranked state, an overage Senator who flip flops?


Kurt ie is exacally right

The New World Czar

Let's flash back to 2012 (pre-election, of course)...

Does this now make Detroit "Obama's city"?


Obama promised the city... the city delivered 98% of the vote for him... Obama went back to White House... Detroit went bankrupt. Is anyone surprised? He is just another politician. He made a political promise and kept it the way many if not most political promises are kept... till the people vote... and not a second longer. Notice I didn't use a party? ALL politicians make promises that last till the next election.

The Big Dog's back

Yep, let's clean house next election and change the House of Representatives. Glad you agree they do nothing.

The Hero Zone's picture
The Hero Zone

Deal! Congress needs an enema. Can we get term limits, too, please?


Change out the entire house, senate and presidency, add term limits and the country might actually recover from the politicians we currently have. All new office holders, none of the old ones allowed. Sounds like a plan. Anyone want to bet if piddle puppy would agree? A completely new house, senate, and unknown president.

The Big Dog's back

We have a good President. Give him the Congress he needs to get things moving.


With his approval ratings dropping through the roof, I'm sure obozo woud move things to the opposite of the countries wishes.
thank God we have a republican House and after the midterms, a republican senate to enable Obozo to be a true lame duck.


He had his chance his first two years. He had a majority in the house and a supermajority in the senate. The people didn't like what he did, and decided to not have one party rule anymore. He screwed the pooch, AKA the BIG Dog, and didn't even give him a kiss.

The Big Dog's back

The koch brothers didn't like what he did.


Neither of whom hold an office and can only vote once each. Your boogie men are under your bed., along with your bff soros.


New idea.... declare Detroit as a new country independent of the USA with several conditions
NAACP takes ownership
Al Sharpton becomes the 1st citizen
We have a fundraiser to move big dog there free of charge

"Detroit Councilwoman To Obama: We Voted You, Now Bail Us Out"
"Obama Causes Welfare Chaos In Detroit"

Detroit needs some Obama money.




REAT = ???


Yes, Ford. I got rid of both my GM vehicles and bought 2 new Fords, a Focus and an F150. It does matter.


I also, will never buy another GM or Chrysler product after the bailout. Ford put all their money on the table to save their company. That's how you run a business.

The government should not be involved in private business.

Detroit is not alone, unfunded gov't pension liabilities will sink a few more cities!!!!!


The political parties have you all bamboozled. They are out of touch in that wasteland call Washington DC. They throw you scraps and you step and fetch it. They are part of that 1% that control the country.

Keep drinking the kool aid .

It's your responsibility to make your life better. Stop relying on someone else . Get a job. Go back to school. Work harder. It's your life.


Probably the best post on here in a long time.


No working person will return unless the corruption and moochers are gone. Can't they sell the whole thing for scrap?