Detroit’s dire fiscal condition is sending ripples of concern through the normally placid capital markets that all state and local government rely on to raise cash for everything from road improvements and school roofs to libraries and parks. Holders of Detroit’s municipal bonds — always touted as among the safest investment vehicles — are being asked to take on staggering losses.
It also has worried the city’s 9,500 employees and nearly 20,000 retirees, who have much to lose. Under the plan put forward by emergency manager Kevyn D. Orr, a former D.C. bankruptcy lawyer, retirees will have to absorb significant reductions in pension and health benefits.
The choice before bondholders and retirees is stark, given that both groups would inevitably face steep cuts in a bankruptcy.
The city’s massive debt is matched only by a devastating loss of revenue and residents — a long-term condition that has escalated in recent years.
The city’s population has plummeted by 26 percent since 2000, while the unemployment rate has jumped from 7.3 percent to 18.6 percent. Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state. Even casino taxes, a bright spot in recent years, are projected to decrease because of increased competition from nearby Toledo.
All of that has led to an alarming erosion of municipal services. The city is home to nearly 80,000 abandoned and blighted structures. It recently announced plans to close 50 of its remaining 107 parks. Police response times are up to nearly an hour, and 40 percent of the city’s street lights do not work. Meanwhile, Detroit has the highest violent crime rate among the nation’s big cities.
“The best analogy I have heard for what is happening in Detroit is that this is a five-decade Katrina,” said Peter Hammer, a law professor and director of the Damon J. Keith Center for Civil Rights at Wayne State University in the city.
“Now, you either get a voluntary agreement from people holding long-term debt, or you get bankruptcy,” he added.
Orr has been searching everywhere for new revenue to help fix the problems. He has talked about spinning off the city’s water and sewer department into a separate authority. He has resurrected a proposal to lease the city’s beloved but deteriorating Belle Isle Park to the state. He also has reportedly explored selling some of the prized works owned by the Detroit Institute of Arts, as well as auctioning off a collection of vintage cars.
Meanwhile, the city is working to fan an encouraging trend for young people to move downtown. Several businesses, including Quicken Loans, have also moved their operations into the city’s mostly hollow core. But for the city’s fortunes to truly be reversed, analysts say that Detroit must first get out from under a mountain of debt — even if that means bankruptcy for the city and pain for creditors.