Landmark – Detroit Bankruptcy
We knew Detroit was imploding. We might be surprised how complicated its bankruptcy will become. Beyond unions, retirees, bond holders and tax payers, other collapsing cities will also have a stake in the results. They’ll almost certainly model their actions off Detroit’s decisions. Meanwhile, the state of Michigan may be heading in a different direction altogether, acting more like Indiana and Wisconsin. This is going to be interesting.
Detroit “Emergency Manager” Kevyn Orr filed a Chapter 9 Municipal Bankruptcy in Federal Court, Thursday, July 18, 2013, effectively surrendering to a massive $18 billion debt and a shrinking tax base.
Expect this case to be noisy and messy, but here’s what we know today…
The Detroit bankruptcy draws attention because of its incredible size, and because legal decisions handed down in Detroit will influence actions in many other troubled municipalities.
The city of Detroit was once the most productive 140 square miles on the planet.
Much of the history of the automotive industry was grim, even decades ago; but Michiganders knew for certain that anything “automotive” would enable most employees to buy a house – and a car – and support a family. “Support,” by the way, allowed for a Stay-At-Home Mom, at a time when parents believed that it takes a family to raise a child.
So, how did we get from that picture of bounty and opportunity, all the way to 2013 when it takes two incomes to support most families?
Forget that. Unemployment in Detroit crested at 28 percent in 2009. It’s still a crippling 16.3 percent today. And Detroit has the highest violent crime rate of any major city in the country.
As a recruiter, I can tell you that many, many manufacturing companies made their exits a long time ago.
Even as Detroit-based GM releases a statement that it is “proud to call Detroit home,” Government Motors is pouring ever greater investment into its production facilities in… China.
The Toyota non-union phenomenon clinched it all, decades back. As it turned out, the Japanese were capable of making a quality product. The hysterically funny “Made in Japan” punch line went quiet generations ago.
And, they made it clear that a quality product could also be manufactured without the help of high-priced union labor.
That put some punch in the line.
Toyota’s competitive advantage crushed many companies that simply could not compete.
Those that wished to survive began to create a shadow industry.
Although Michigan based companies continued to operate in a slightly non-committal way, investors concentrated on opening new companies in the South, using completely different corporate identities. The new companies had lower labor rates, and they were generally non-union.
It was a simple thing for owners to let the Michigan companies fade away, forwarding incoming orders to the more profitable locations.
Really, if you could send your work to Mexico, why couldn’t you send it to Alabama just as easily?
Many of the breaking bankruptcy stories mention Detroit’s stunning population decline. It peaked at 1.85 million in 1950 and is now down to some 700,000 today.
I would highlight, instead, the horrific vaporization of manufacturing employment. It sits like a lump at 27,000, down over 90% from a once magnificent 296,000.
Think about that.
Even today, nobody could see that coming?
Changes At The State Level
Michigan voters are beginning to weary of unions and taxes.
Last year, Proposition 2 was soundly defeated, disposing of a union attempt to write collective bargaining into the state constitution. 81 counties voted against. Only the counties containing Detroit and Flint voted in favor.
In response, the state of Michigan passed a right-to-work law. It barred unions from forcing people to join them. And it put a stop to the automatic deductions of union dues from the paychecks of public employees.
I followed similar legislation in Wisconsin and Indiana. Wisconsin was particularly rowdy, including the recall vote against Wisconsin Governor Scott Walker. In that vote, Walker won by a larger margin than when he was originally voted into office.
Oh, and Wisconsin and Indiana now have enough money to pay their obligations.
Oh, again… Both states were instantly rewarded with more jobs.
Layers of Litigation
In the meantime, lawyers will get very rich, arguing about how to carve up the corpse that was Detroit.
And this is where things will blossom into the raucous and expensive.
The Detroit bankruptcy is not entirely a municipal issue.
Detroit is located in one of the seven states where retiree pensions and benefits cannot be cut. It’s illegal.
Out from among the various murky legal problems, the effects of the decision on pensions will roll across the country.
You can bet, if Detroit doesn’t have to pay its retirees, then California and Illinois won’t want to, either.
As I see it, this leads us to two much larger considerations…
First, we have been discussing the Detroit bankruptcy – up to this point – as a one-off Landmark issue.
U.S. municipalities have been going broke faster and faster, bigger and bigger, more and more often.
Detroit is not a Landmark. It’s just another railcar on the Freight Train To Disaster.
In 2010, the highly regarded analyst Meredith Whitney warned against buying municipal bonds, forecasting that 100 cities could tip over, vaporizing $100 billion in the process.
She may have guessed low.
We can’t leave this subject without noting the obvious.
Cities are blowing out now. Detroit at $18 billion won’t be the biggest.
And it won’t be the last.
So, what do we see at the federal level?
The Congressional Budget Office offers their calculation of the “fiscal gap” for the good ole US of A.
It’s $220 trillion.
That’s a really impressive number, don’t you agree?
Be very careful about jobs or industries that depend on government spending.
S&P 500 type internationals are not likely to bring foreign earnings back into the U.S.
Unions have lost visibility with their man in the White House.
Job prospects are best in right-to-work states, especially where taxes are low.