When a City Goes Bankrupt: A Brief History of Detroit c. 2010

Miles strode through the streets of Detroit, long-legged and focused, carrying a cup of keys to all the houses he contracted and an envelope of charge cards to cover construction supplies. He had reached his mid-thirties with experience and skills and a reputation as a guy who handled stuff, on budget and on schedule. People called to ask for him by name, and he turned down small jobs.

He had “the contacts, the contracts,” he said, the words tripping off his tongue like a beat-box poet’s. “Detroit’s a good thing when it’s going good.” And back then, in the mid-2000s, it was: The city seemed on a tear, with new theaters and sports stadiums and a resurgence in manufacturing. His house, a two-family frame house on Belvidere Street he bought when he turned 19, sat on a block that had two-and three-story houses with homeowners inside and furnished front porches out front. The American Dream seemed firmly within his grasp, wealth one investment away. He planned to buy a second house and become a landlord.

Television ads and billboards and even casual conversations described the quick cash to be attained in the mortgage market. When a mortgage lender offered Miles a loan against his house, he took it. On a day so cold that it bit at his skin, he made a down payment on a second house a few blocks south on Belvidere, a small, single-family bungalow. When the temperature rose high enough, he worked hard installing toilets and sinks at the new house, replacing the kitchen cabinets and painting the exterior white with red trim. Then he woke up to a phone call from a neighbor: The house had burned down.

As the year 2008 bore down, he sensed his work slowing and more people competing for construction work. Instead of contracting whole houses, now he only got requests for repairs. His first house on Belvidere Street was developing leaks, damaging the roof and the foundation, while the interest rate on his reverse mortgage climbed. He had a tenant, but the tenant got shot trying to stop a carjacking. Then the tenant saw bills from the mortgage servicer for mounting delinquency fees and stopped paying rent.

In January 2012, the lender foreclosed on the house. Miles had to move out, under a winter sky the color of pearls, and a few days later scrappers arrived to steal any copper wiring or other metals. Within a week the house had crumbled. As winter progressed the street steadily accumulated vacant and deteriorated houses.

Miles said he had a devil on his shoulder, testing his faith. A friend’s aunt gave him her house on Rowe Street, a ten-minute drive north of Belvidere in the Osborn neighborhood of Detroit, a poorer area hit hard by mortgage foreclosure. On Rowe Street the houses packed together up to the frozen sidewalk, and illegal dumping littered the puddled edges of the street. This house had also burned, and the woman planned to use a payment from her insurance policy to leave Detroit. Though the house kept the snow and rain off Miles, the cost of making it livable seemed insurmountable, and in spite of his height and serious demeanor, he felt unsafe there. His daughter, a freshman in high school, could not stay with him. The man who lived across the street got shot one night and died.

Detroit entered bankruptcy in July 2013 after a state-appointed emergency manager displaced local elected officials from power.

Miles scoped newspaper ads and found a faux-Tudor house he liked further east, on Rosemary Street, offered by an investment company called Detroit Progress LLC. Detroit Progress had listings for hundreds of houses for sale, and Miles had seen the company’s signs around town. He liked the house on Rosemary because it was brick and bigger than it looked from outside, and the block seemed quiet. In 2007 the house had gone through mortgage foreclosure and then in 2012 entered tax foreclosure. In the county tax foreclosure auction that year, Detroit Progress had won 100 tax-foreclosed properties. Now the company sought to flip the Rosemary Street house for $4,000 plus any unpaid property taxes, more than five times as much as the company had bid to win it.

Miles viewed the house and saw its decrepitude, but by then lots of Detroit houses looked as bad, and he thought he had the skills to fix it. Thieves had stolen the furnace and all the piping, holes pocked the roof, and smoke damage on the walls gave the impression of mold spores. He asked an acquaintance whose voice he thought sounded white to negotiate for him by phone. The asking price for the house dropped by a third, and Miles drove downtown through heavy snow to check the property records. The records showed more than twice the price of the house in outstanding 2013 property taxes, but he decided to buy it anyway. He carried his belongings over at 6:00 in the morning and 12:00 at night in darkness so that no would see him and try to steal them. He did not have much to bring to Rosemary Street: his tools, a vinyl sofa, two lamps with no shades, a low glass table, one dining room–style chair, and a mattress. When he finished, he boarded up the front door of his old Rowe Street house and parked a neighbor’s spare truck in the iced-over driveway. A few days later the truck caught fire and burned the side of the house. Soon afterward the roof fell in.

Miles had not found much construction work since the financial crisis intensified, but he thought he could manage the costs of his new house. He had been fending for himself for years in a city now seven months into bankruptcy, but people were telling him, “Detroit’s coming up—Detroit’s moving,” and he believed his life might become easier. He did not know that he would soon find himself fighting for his fourth house, barred from driving, and dogged by criminal charges brought against him 14 years earlier.

Detroit entered bankruptcy in July 2013 after a state-appointed emergency manager displaced local elected officials from power and chose not to pay $300 million due on the city’s debt. Bankruptcy offered a process in which the emergency manager could negotiate modifications to the debt without having to pay creditors during the negotiations.

Historically, instead of declaring bankruptcy, cities received more support from higher levels of government.

In bankruptcy, when a majority of creditors support a re-structuring plan, the plan binds every creditor. Outside bankruptcy, even one creditor can undermine the restructuring plan by insisting on a better deal for itself. Such a plan generally includes lower debt payments, which free a city from spending as much money servicing the debt, and further savings from shrinking the size of the public workforce, cutting services, and selling city-owned assets.

Seventeen months and nearly $180 million dollars in fees and costs later, Detroit emerged from bankruptcy having cut some municipal workers’ pensions nearly 7 percent, paid a financial creditor 13 cents on every dollar it was due, and obtained $325 million in new loans. In lengthy and often fraught negotiations at the local bankruptcy court downtown, the city had balanced its budget and gained ideas for generating new money to fund essential services.

Yet Detroit still faced the squeeze of population decline and widespread poverty that eroded its tax base and overburdened its public welfare programs, limited help from the federal and state governments, and no clear path to population growth or new jobs. Bankruptcy could not provide new remedies against financial problems. It could not directly reverse the population loss, employment loss, or property value loss that contributed to the shrinking tax base, nor could bankruptcy bring back lost federal and state support to offset pressures on public welfare.

For months Detroit’s problems headlined national news. Following that, how could the city attract people and businesses? If any new investment occurred, how would it affect existing residents? No one knew the ability of a courtroom bankruptcy process in a large American city to spur solutions to deep-seated structural problems, many the result of poverty, race, and power inequities.

No one knew in part because for decades cities hardly ever went bankrupt. Until the Great Depression bankruptcy procedures did not even exist for cities, and between 1970 and 2007 only three cities entered bankruptcy. Those cities had smaller populations than Detroit and used the bankruptcy process to address isolated setbacks like the loss of a large lawsuit or a natural disaster.

Historically, instead of declaring bankruptcy, cities received more support from higher levels of government. In 1944 Franklin Delano Roosevelt touted in a fireside chat the interdependency of “all groups and sections of the population of America” and proposed a second bill of rights that committed the federal government to the provision of good jobs, housing, and education. In 1966, after the Great Society programs directed further federal aid to cities, Robert Kennedy testified before Congress, “To speak of the urban condition . . . is to speak of the condition of American life. To improve the cities means to improve the life of the American people.” In 1975 New York State advanced money to New York City and helped the city by backing local bonds with state tax revenues. In 1978 after Cleveland defaulted on some debts, Ohio lent it money.

But as potential voters moved to the South, the West, and city suburbs, politics changed. Assistance to cities peaked in 1978, the same year Jimmy Carter said in his State of the Union Address, “Government cannot eliminate poverty or provide a bountiful economy or reduce inflation or save our cities or cure illiteracy or provide energy.” Between 1980 and 1988, during Reagan’s presidency, total intergovernmental aid to cities fell by half.

Mandatory balanced budget rules forced states to reduce funding to cities. Lacking support from federal and state governments to meet urgent obligations, cities turned to the bond markets, subjecting themselves to market volatility. The recent financial crisis revealed the unsustainable position of cities that resulted from the risk and leverage they acquired. Since the crisis governmental support continued to fall, leaving cities without a buffer against the market downturn.

Meanwhile demands for social services in cities increased. In order to maintain solvency cities turned to the limited options available to them: reducing services, raising taxes and user fees, borrowing more money by issuing municipal bonds, and competing for private investment by offering tax deals and incentives to companies. Not all cities had the capacity to stabilize their budgets through these actions.

Bankruptcy offered federal and state governments a way to avoid bailing out the cities that lacked the capacity. Politicians branded municipal budget shortfalls as the fault of entitled municipal workers and retirees and reckless borrowing by municipal leaders. In 2012, Stockton, California, became the then-largest city to file for bankruptcy, and the bankruptcy process rewrote Stockton’s union contracts. By the end of 2012 three more California cities had filed for bankruptcy, and nine more had declared financial emergencies.

In 2013 Detroit broke Stockton’s record and assumed the mantle of the largest city ever to enter bankruptcy. Detroit became emblematic. The problems Detroit confronted paralleled problems in many other American cities. Though a few unique cities have attracted the optimal industries and population to win the spoils of the modern economy, many cities have failed to manage persistent unemployment, stagnant wages, and rising inequality. Without outside help from their state and local governments, more than 70 American municipalities since 2007 have entered bankruptcy and been forced to write down their debts on their own. Several hundred more cities now struggle on the brink of default and are shrinking public payrolls, cutting services, and selling public lands. Cities have suffered the brunt of mortgage foreclosures and declining property values and have generally been home to the largest numbers of poor, minority, and marginalized Americans, those most dependent on public services.

Detroit’s bankruptcy offered an opportunity to test whether bankruptcy could affect cuts to cities’ pension obligations. Many states’ constitutions, including Michigan’s, protected pension contracts against modifications, but federal bankruptcy law allowed any contract to be changed during bankruptcy. In one of the few rulings in the case, the Detroit bankruptcy judge found federal bankruptcy law could supersede state pension protections.

Through bankruptcy’s exclusive focus on cities’ culpability for fiscal crisis, its lack of attention to the people affected, and its implicit demand for cities to solve “their” problems on their own, we have overestimated the ability of cities and their residents to combat powerful forces like automation, suburbanization, the recent financial crisis, and deindustrialization. We have underestimated the resources and tools necessary to change the trajectory of cities and the importance of sustainable cities. We have neglected our fellow citizens, who have been forced to endure reduced services, high taxes, and insufficient human investment.

Broke follows seven Detroiters as they navigate life during and after their city goes bankrupt. Some of them are lifelong residents navigating the city’s real estate market, school system, and job market; some are outsiders attempting to capitalize on foreclosed properties or start small businesses. None has received the attention and aid that he or she needs in order to flourish.

A majority of Americans live in cities. Cities provide the economic engine of America and are a depository of its culture. The country cannot prosper if its cities are decaying. Stabilizing cities’ futures seems to depend not on bankruptcy but on expanding opportunity for individual urban residents.

Though Detroit is often described in terms of the population that it has lost, more than 700,000 people still live there, persevering in the face of high taxes, struggling schools, and scarce jobs. The people in Detroit, more than 40 percent of whom fall below the poverty line, are bravely making do. Their future holds a mirror to America’s.

————————————————

Broke