Economics 101: Detroit is failing because it had to fail

From The Wall Street Journal:

Detroit Launches New Program to Repair Streetlights
Nearly Half City’s 88,000 Lights Are Broken; New Authority Plans to Borrow Funds to Revamp System
By Matthew Dolan | Dec. 8, 2013 6:50 p.m. ET

DETROIT—On Harper Avenue, along a busy but dimly lighted commercial strip of shops and corner bars, James Jennings checked one street lamp after another, searching for one he could fix.

“If I can get it burning, I’ll get it burning,” Mr. Jennings said. But the night-shift worker for the Detroit Public Lighting Department wasn’t having much luck. Most of the poles here are stripped of copper or the underground wiring is fried—trouble that no new bulb will correct.

Problems in this bankrupt city run deep. Police on average take nearly an hour to respond to some of the most serious calls. Firefighters must contend with blazes that erupt among the roughly 78,000 abandoned and vacant structures. The population has shrunk to 700,000 from a high of 1.8 million decades ago.

But when federal bankruptcy Judge Steven Rhodes last week affirmed the city’s eligibility for Chapter 9 bankruptcy, he cited streetlights as a prime example of Detroit’s decline. Nearly half of the city’s 88,000 street lamps are dark, according to city estimates.

“The city does not have enough money to take care of its residents, let alone pay its debts,” the judge said in the Dec. 3 ruling that cleared the way for Detroit to cut future payments to unsecured creditors, including pension funds.

More at the link.

Most of the stories that we see concerning the bankruptcy of Detroit concern the pension worries of retired and soon-to-retire Detroit municipal workers.  How bad is the problem? From The Detroit News:

Firefighters, along with police officers, don’t qualify for Social Security while other city workers do. The city has about 23,000 former employees collecting pensions. On average, general workers collect about $18,700 a year and police and firefighters average around $30,700.

The Detroit News article referenced Bonnie Walls, the 87-year-old widow of a former Detroit treasury worker, who now lives in Leesburg, Florida, — about a thousand of the city’s pensioners have moved to the Sunshine State, and are thus paying their taxes to Florida cities, and not to Detroit — who receives $688 per month from her late husband’s pension, along with $1,432 in Social Security. Mrs Walls never worked for the city, but the city is paying her anyway. And if she is 87 years old, it has to be asked: has the city been paying a pension to a (now deceased) worker and his wife for longer than he worked for the city?

From the Detroit News. Click image to enlarge.

Part of the problem is obvious: Detroit has 23,000 city pensioners, and only 12,900 city workers, and even those 12,900 municipal employees constitute a city workforce out of proportion to the city’s size:

Detroit overstaffed compared to other cities
APRIL 25, 2011 AT 3:12 PM

Detroit —Detroit’s work force hasn’t shrunk with its population, leaving the cash-strapped city with far more employees than most comparably sized cities.

The 12,900 workers in the Bing budget proposed this month is much more than similar size Midwestern cities including Indianapolis and Columbus, Ohio, and double much more populous cities including San Jose, Calif.

Bing has resisted calls for mass layoffs, saying Detroit’s population exodus in the past 10 years was fueled in part by shrinking services.

The mayor said he owes it to residents to focus on the city’s long-term viability and fix structural changes like pension and medical costs that threaten to consume half the budget by 2015.

More at the link. But the situation is obvious: you have a city which is too large for its current population — 78,000 abandoned buildings tells that story! — and a municipal workforce which is too large for its existing residents to support, on top of which is a pensioner population which was based on providing municipal services for a population more than twice its current size. It isn’t surprising that Detroit has had to declare bankruptcy; the only surprise is that it took so long. That the retirees want to be exempt from action to get the city back on its financial problem is only natural, but it doesn’t matter: pension costs are so much of the problem that they cannot not be part of the solution.1

But, there are some people who seem to think that Detroit is a good investment, though they aren’t investing all that much:

China’s Newest City: We Call It ‘Detroit’

Gordon G. Chang, Contributor. “I write primarily on China, Asia, and nuclear proliferation.”

Detroit, broke with almost no prospects for recovery, is the .  In fact, it was bad news—the city’s July 18 bankruptcy filing—that triggered renewed interest.  “While the bankruptcy is viewed as a bad thing elsewhere, it raised the exposure level of Detroit’s real estate market in China,” says Evonne Xu, a Michigan attorney catering to Chinese purchasers.  Middle Kingdom, meet Motown.

Chinese shoppers can’t resist a bargain.  Where else can you ?  China Central Television, the state broadcaster, in March reported that two houses in Detroit cost the same as a pair of leather shoes.  No wonder a poster on Sina Weibo, the Twitter-like service, asked, “Seven-hundred thousand people, quiet, clean air, no pollution, democracy—what are you waiting for?”

Who says the Chinese are waiting?  Dongdu International Group of Shanghai bought, sight unseen, two downtown icons, the David Stott building for $4.2 million and the Detroit Free Press building for $9.4 million, both at auction this September.

Moreover, Chinese purchasers are making bulk purchases of “inexpensive properties”—those selling for $25,000 or less—in the rings surrounding the city center.  “They’re banking on the downtown resurgence spiraling out into those rings,” explains Kelly Sweeney of Coldwell Banker Weir Manuel.  Mainland parties often buy at tax and foreclosure sales, hold their property, and patiently wait for appreciation.

The Chinese certainly have made an impact on the locals in Detroit.  “I have people calling and saying, ‘I’m serious—I wanna buy 100, 200 properties,’ ” said Caroline Chen, a real estate broker in nearby Troy, Michigan, to  “They say ‘We don’t need to see them.  Just pick the good ones.’ ”  Chen reports that one of her colleagues sold 30 properties to a Chinese investor.

More at the link. Nicole Curtis, the Rehab Addict, restored a condemned house she bought for $1.00 in Minneapolis, but she’s originally from the suburbs of Detroit, frequently wears t-shirts proclaiming her Motor City origins, and her new episode tonight is the first in a series on a home she restored in Detroit. It sounds like she could pick up ; the Chinese sure are. .

Of course, the obvious problem is: if the Motor City can’t even keep the street lights on, you may not be able to rehabilitate that inexpensive a house and have it worth as much as you need to put into it.

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