I don’t know very much about municipal bankruptcy, because nobody does – it hasn’t happened that often. In general, municipal bankruptcies are caused by a particular chunk of debt that goes bad due to disastrous financial or infrastructural investments. In those situations, the question is one of equity: how to restructure the debt so that the various stakeholders take the appropriate amount of pain. Once the debt is restructured, the municipality can return to normal operations.
That’s not the situation with Detroit. Detroit isn’t bankrupt because the city wasted a bunch of money on a particularly ill-conceived project or investment. Detroit is bankrupt, most fundamentally, because its population has shrunk to less than 2/5 of its peak, and its tax base has shrunk more than accordingly. There’s obviously a lot more to the story than that – the decline of manufacturing in general and the auto industry in particular; the the long-term consequences of the riots of the late ’60s and the rise in the crime rate through the 1970s and 1980s; epochal malfeasance in city government that caused both businesses and much of the middle class to lose confidence in the governability of the city. But for a good long time now Detroit has been in a hole so deep that there is no plausible way to get out even if they stop digging. So the question isn’t just one of how to equitably share the pain. The question is how to restructure the municipality so it can return to the municipal equivalent of operating profitability.
The most straightforward way to achieve that would be to change the legal boundaries of the city by annexing the surrounding suburbs. While the city of Detroit’s population shrank from about 1.85 million to 713,000 from 1950 to 2010, the metro area’s population grew from 3.2 million to 4.3 million, and the per-capita Gross Metropolitan Product of the MSA was about $46,000 in 2010, which is just a bit below the per-capita GMP for the Atlanta or Pittsburgh MSAs, and comparable to the St. Louis MSA. The Detroit MSA is a perfectly viable economic unit; the city of Detroit is not.
Of course, by “most straightforward” I mean in comparison to more fanciful schemes, but also in comparison to a truly organized “liquidation” which would involve deliberately shrinking the physical boundaries of the city and relocating people as necessary. Annexation is currently illegal under Michigan law, but the state can change the law, as it has before; the great American cities all grew by annexation until they were compelled by law to stop. The obstacle is politics, not principle.
Politics, of course, aren’t to be sneezed at. And here’s where the questions of equity interact with questions of legal restructuring. The big equity question is whether the city can restructure its pension obligations, which it may be forbidden by the Michigan constitution from doing. If they don’t, then the pain of bankruptcy will be borne overwhelmingly by bondholders. That’s a risky proposition in terms of not only Detroit’s future borrowing, but the health of the municipal bond market as a whole. On the other hand, if bankruptcy allows Detroit to set aside its state constitutional obligations to its municipal workers, we may see more municipal bankruptcies. At a minimum, the incentives to play “chicken” in high-stakes labor negotiations go up. And, for that reason, the incentives for the municipal unions to fight such an outcome to the death are very high. That kind of battle will generate a lot of heat, but will do nothing to save Detroit.
It seems to me, then, that the political horse-trade that needs to happen is a restructuring of pension obligations in exchange for a reorganization of the Detroit metro area into a more functional economic unit that would be viable for the long term. The missing piece of such a trade is: what’s in it for the suburbs, apart from the “enlightened self-interest” of the long-term benefits of a revival of the urban core?
Perhaps this would be easier, politically, if the Detroit suburbs had invaded Poland a couple of generations ago, and so could only exercise political influence by subsuming themselves in a larger political entity. Then again, maybe not.