Detroit’s bankruptcy is reverberating through municipalities and financial firms beyond Michigan.
My Politics colleague Bill Johnson and I were on a panel in Chicago Wednesday hosted by the Illinois Policy Institute to discuss the Detroit example for other municipalities. The Chicago-based think tank has done superb work in plotting Chicago’s own descent into debt – with accumulated liabilities now totaling $83,000 per citizen. Chicago is the New York of the Midwest – big buildings, thriving business district, a youth magnet – but like New York of the 1970s and ’80s it is showing cracks.
The city’s debt is unsustainable. It has lost 200,000 people in the last decade. And its pensions are only funded 36 cents to the dollar. Its murder rate is 19 per 100,000. New York City walked up to the edge of the bankruptcy abyss in 1978 (it’s then-state emergency board is the model for Governor Snyder’s emergency board in Detroit) with debt, a 1 million person population loss since 1950, and 24-per-100,000 murder rate.
New York turned itself around, shored up its debts, reduced its murder rate and maintained its middle class tax base. Detroit did not – reaching a tipping point where its tax base could no longer support its liabilities AND provide services. It’s a warning to every city, even Chicago.
But perhaps most interesting was that, while Detroit obsesses over jewels like the DIA, the outside world is obsessing over Kevyn Orr’s placement of Detroit’s general obligation (secured) bonds on the Chapter 9 table.
Bondholders shudder over the implications for other municipalities. After all, G.O. bonds are secure by a vote of the people – a promise that taxpayers back those debt obligations 100 percent. If Detroit defaults on those bonds, a red line will have been crossed in American finance. A safe investment tool will be in jeopardy and the ability of cities to raise money will erode.
Detroit’s cracks are widening.