On Friday, a judge confirmed the plan for Detroit to execute it's bankruptcy plan. For the last year and a half, Detroit has been planning on how to finalize the details, and now that the plan is confirmed, they can begin working through the final details, and should emerge from bankruptcy protection within several months.
The plan is historic. It basically wipes out $7 billion dollars in debt and allows the city to charter a fresh course.
How They Got There: A Very Basic Answer
Seven billion dollars in debt is huge. The figure is astronomical. But it didn't happen overnight. There are many stories and articles that can tell you the full details, but what it boils down to is that the city lost over half of its population since the 1950's, yet continued to operate as if they hadn't. They certainly cut back services, but it was never in the amount to cover the lost revenue from the population losses.
So, they borrowed to make up the shortfall. And kept borrowing. Eventually, revenues kept falling and the balance kept growing, to where interest payments alone were projected to leave nothing to operate the city within years.
In other words, short of a miracle influx of a million residents overnight, bankruptcy was the only option.
The Grand Bargain: Who Loses What
Wiping out seven billion dollars was no easy task, although the time it took (about a year and a half) was pretty impressive, given that it's SEVEN BILLION DOLLARS that got wiped out. So, who paid and how did they agree? Again, the details can be found elsewhere but on a summary level:
- Banks – Many banks that bought bonds ended up accepting pennies on the dollar for their investments. In return, some banks got land and property that they can re-invest.
- Pension holders – Those collecting pensions agreed to slight reduction in current and future benefits. In return, they get to keep collecting a pension. When the process first started, there was fear that they would get nothing, and although the reductions are painful, they had to take place.
- Employees – Some current employees agreed to pay freezes and opened contracts for additional benefit contributions that aligned with the private sector.
What Happens After Bankruptcy
In addition to clearing debt, the city will receive money that is to be earmarked as a way to improve services and reduce blight. Private companies and foundations supported this as it is seen as an investment for the future growth opportunities that exist in the city. This is huge and I don't think has gotten enough attention. Basically, there are hundreds of millions of dollars being given to the city to allow it to start growing again. Never in my lifetime has there been any sign that the ‘outside world' is willing to back the turnaround in the city.
It's an opportunity and they must not screw it up!
Here are the things they have to do next:
- Tear down, tear down, and tear down – The city is full of abandoned houses and buildings. They tear down a lot of buildings, but they never come close to fully clearing the blight. The plan now calls to aggressively remove more buildings, with the idea that blight spreads, but if you clear the existing blight, you will reduce future blight. This has worked in other cities and it must happen in Detroit!
- Attract businesses – Some of the money will be earmarked for business growth. Getting land available for use. Providing utility or infrastructure improvements required for new growth. The opportunities are limitless!
- Turn on the lights – Street lights in neighborhoods are notorious for not working. This creates safety issues and attracts crime. Most lights or wiring haven't been touched in 30 years because there just wasn't enough money. Money has been pledged and a pilot successfully implemented to get every street light repaired and working. This must get completed!
- Technology – Detroit has computer systems that are as effective and up-to-date as those that existed in many cities in the 1980's. Things run slow. They're not connected. Information is kept locally. It's as if the idea of a network passed the city by. As a result, business owners could not get answers as information wasn't there. Inspections took forever. Records got lost. Confusion was everywhere. Hundreds of millions of dollars will now be spent to bring Detroit's technology into the current century, and the benefits that can be realized are tremendous!
Here's are a few more things that must be kept in the forefront of every Detroit leader now and in the future:
- Get it right – This isn't the first time that any of these things have been tried. I've been hearing about tearing stuff down since I was a kid. I've heard of the old computer systems for years. None of these problems are new and fixes have been tried. The difference is that you have people in place who are committed to doing this, and they have the funds right there without the looming debt behind it. Decisions are getting made quickly, and they need to keep doing that and make the right decisions.
- Stay focused – The current plan calls for annual budgets that would prevent getting back into the cycle of debt. Now that debt services is not as daunting, the revenues collected can be used to run the city. Trash can be picked up, parks can be kept running, police can drive cars that work, and people can get picked up in an ambulance and know that they'll make it to the hospital instead of it breaking down. The important things must be remembered.
- Remember this is a one time thing – Detroit cannot get themselves in the same position again. There won't be a second chance that will have as many people in support. As hurtful as this process was, if they mess it up, it will be catastrophic. They have to sustain this.
- Focus on neighborhoods – Downtown and some of the surrounding areas have actually been doing very well over the past five years. The problem is that the city is much bigger and most of the problems lie outside of these areas. The city now needs to concentrate on revitalizing the neighborhood. For every new high loft apartment reborn somewhere downtown, a house or neighborhood needs to be filled with a person or family who will represent the city well.
- Educate – Detroit Schools are a mess. Now that the city is getting a foothold on some other issues, there must be focus on improving one of the worst rated school systems in the country. This will remove a barrier for families to move to the city, and will provide education and knowledge for citizens that can translate to further growth and opportunity. Different people and groups will be involved, but the same determination needs to be put in place.
Detroit has a golden opportunity on its hands. As painful as it was to see the city have to declare bankruptcy, the fact is that it had to happen. Now that we've wiped out the financial mess that the mismanagement, corruption, and poor decision making of the last six decades have brought, the leaders of today and tomorrow need to focus on making the next six decades (and beyond) full of growth, opportunity, and prosperity.
Cheers to the new City of Detroit!