What’s after Bankruptcy? Lessons in Governance Reform and Financial Planning from Other Cities

By Martin Lavelle

On November 7–8, 2013, the Federal Reserve Bank of Chicago, Detroit Branch and the Citizens Research Council of Michigan hosted a two-day symposium on municipal bankruptcy, with the aim of uncovering what could be learned from cities that have experienced and are currently experiencing fiscal struggles. Local experts were given the chance to comment on presentations by national experts regarding Detroit’s July bankruptcy filing. This blog summarizes key information from the conference.

Day One

The first day’s discussion centered on the current state of local governments that have already gone through financial difficulties and lessons that could be learned from past crises.

Michael Pagano, College of Urban Planning & Public Administration, University of Illinois–Chicago, argued that Detroit’s case is unique and isn’t necessarily the beginning of a wave of municipal bankruptcies. Cities are still required to balance their budgets annually. Part of the budget pressure Detroit currently faces stems from cuts in state revenue sharing, which began in 2000. Further pressure on Detroit’s finances came from drops in property values which, combined with drops in sales and income tax revenues, put major constraints on Detroit’s budget.

According to CLOSUP’s September survey of municipal governments, fewer jurisdictions are reporting declines in state aid, though almost half still report decreases in state revenue sharing, according to Debra Horner, CLOSUP, University of Michigan. With property tax revenue growth flat, local governments are reducing their spending through shifting more health care costs to employees and increasing intergovernmental cooperation. Between 25% and 50% of Southeast Michigan’s local jurisdictions are less able to meet their fiscal needs, fewer than Saginaw (more than 50%), but more than Western Michigan (fewer than 25%). Fewer than half of Michigan’s local jurisdictions feel they can’t meet future needs within their current spending structure, with fewer reporting they can improve their service delivery and that significant structural reform to public finance is needed.

Robert Inman, Wharton School, University of Pennsylvania, argued that Detroit has to set up the right set of institutions and incentives that will create the appropriate fiscal culture. Inman said fiscal crises result from weak demographics, a weak economy, and weak public policies. Wage and benefit increases without compensating marginal productivity increases is a “recipe for disaster,” said Inman, something Detroit pensioners face under Chapter 9 bankruptcy. Detroit’s decaying infrastructure (physical and human) equates to borrowing money indirectly while contributing to losses in property values. Detroit and other fiscally troubled cities should have the option to privatize when necessary, Inman said, and to create neighborhood and business improvement districts but not tax businesses to cross-subsidize residential services.

Municipalities should devote more time to place-making, according to Anthony Minghine, Michigan Municipal League. When municipalities diminish their service level in order to pay workers’ pensions, it leads to lower property tax revenues, which further erode service delivery. Minghine said the municipal government financial model is broken, except in high-income areas. He added that Michigan’s emergency manager law is a law of destruction, not construction. Once a municipal government starts to experience financial difficulties, it becomes hard to end that cycle of financial dysfunction.

Frank Shafroth, George Mason University, said state governments can and should play an important role in preventing municipal bankruptcies. Prevention should come through preemptive responses to deteriorating financial conditions, not through reactions to already dire financial situations. In the case of Central Falls, Rhode Island, it has been more expensive for the state after the bankruptcy filing because state law did not require Central Falls to accept state assistance. Even though Rhode Island volunteered help by offering the expertise of former city managers for no charge, it wasn’t enough to prevent Central Falls’ bankruptcy. Shafroth expressed concern that Michigan’s current intervention system with local governments will not begin soon enough.

Joyce Parker, The Municipal Group, brought Ecorse, MI, successfully out of her emergency management through place-setting and engaging the community in the place-setting process. Parker was able to get city residents to overcome the anger and distrust that sometimes accompanies the appointment of an emergency manager and contribute to the process of setting Ecorse on a sustainable financial course. While serving as Ecorse’s emergency manager, Parker did have to decrease staffing levels, but was able to accomplish some cost-cutting by sharing resources with other local governments.

Day Two

The second day’s discussion turned to the impact a municipal financial crisis can have on investors and how state governments might intervene in local governmental finances.

Lisa Washburn, Municipal Market Advisors, reported that Detroit’s financial troubles did not surprise investors because the city had been plagued by out-migration, high poverty, significant tax burdens, structural budget deficits, and political corruption, thereby prompting state assistance. However, Michigan’s unwillingness to provide direct monetary assistance surprised the investor community, because the state had a long history of credit oversight and of prioritizing debt repayment. Investors questioned how the state could execute such a poor communication strategy and get involved too late in Detroit, seemingly encouraging Detroit to go bankrupt and default. After Detroit’s bankruptcy filing, some Michigan municipalities’ debt issuances were forced to accept higher yields and even higher risk spreads, yet Washburn argued that Detroit’s bankruptcy does not pose systemic risk to the municipal bond market. She noted it may be harder for Detroit to reenter the municipal bond market because of its debtor-in-possession financing and the time it may take the city to emerge from bankruptcy.

From a neighborhood investor’s perspective, Bill Pulte, Pulte Homes, who has done extensive work in removing blight from Detroit’s Brightmoor neighborhood, said Detroit must be cleaned up before any turnaround plan can work. Pulte reported that no one can make a profit currently in Detroit’s real estate market, in part because of Detroit’s 100,000 vacant structures and its 100,000 vacant parcels. In the past, federal funds for demolition went to many contractors, working in different parts of Detroit. Now, Detroit will receive $52 million from the state and $150 million to accelerate blight demolition in an effort that will be more coordinated.

When it comes to state intervention in municipal finances, Stephen Fehr, Pew Center for the States, indicated that 19 states can intervene in distressed localities, but only a handful of these states are really active. States should oversee local governments in order to ensure public safety, avoid negative stigma, and block the distress from spreading to neighboring towns, Fehr said. He noted that Detroit is similar to Camden, NJ, in that both cities have been the focus of various state and federal efforts, as well as service sharing. New Jersey’s state government, under Governor Chris Christie, approves local budgets and debt payments.

North Carolina arguably has the most effective intervention program, which resulted from bankruptcy filings by multiple local governments in the early 1940s. An outside board reviews data sent in periodically by local governments. A state commission then reports on the status of local governments. The board recommends that local governments maintain an 8% fund balance. If the fund balance falls short of that target, warning letters go out to those governments.

Eric Lupher, Citizens Research Council of Michigan, pointed out that since the 1960s, Michigan has had legislation that allows for state intervention into local government finances, but not state monitoring. Public Act 436, passed into law by Michigan’s State Legislature late in 2012, allows the state to take some initiative when intervening into local government financial dealings. Lupher asked whether the scoring of local governments’ fiscal conditions should be taken over by an outside firm, like Munetrix. He said state governments should want to prevent local government finances from worsening because of the economic impacts financial struggles have on cities and the state. One way to protect against financial emergencies could be for the state to teach local governments best budgetary practices. In the case of Detroit, Lupher argued that the state should uphold its constitutional pledge and protect pensions through the creation of a Michigan Benefit Guaranty Corporation. [1]

Arguably, the biggest takeaway from the conference was that states should be more involved with local government finances so financial emergencies can be avoided. Intervening too late in a municipal government’s financial emergency may be more costly for state government post-crisis. Also, state governments should want to be informed about the condition of municipal governments’ finances, particularly in the larger population areas that help drive economic growth. It is very difficult for Michigan to achieve strong state-wide economic growth if its largest city, Detroit, is experiencing significant financial distress.

[1] A Michigan Benefit Guaranty Corporation would be similar to the Pension Benefit Guaranty Corporation (PBGC), which protects more than 40 million American workers in more than 26,000 private-sector defined benefit pension plans. The PBGC is headed by a director who is appointed by the President and confirmed by the Senate (pbgc.gov).

November Light Vehicle Sales Reach Seven Year High

U.S. light vehicle sales for November jumped to 16.3 million units on a seasonally adjusted annual rate (SAAR) basis. This makes November the largest sales month on a SAAR basis since February, 2007. Some analysts attribute November’s strong performance to a month-end surge in sales and to the fact that Black Friday landed on the final weekend of the month. Among the automakers, GM remained in the lead with an 18.0% market share year-to-date. The remaining leaders were Ford (15.7%), Toyota (14.4%), Chrysler (11.5%) and Honda (9.8%). Chrysler Y/Y sales increase of 15.8% was the largest of top five manufactures. Fuel prices fell again in November; down 6.1% for regular fuel all grades on a year over year basis, helping to keep pickup truck and SUV sales strong. Lower fuel prices also helped push the YTD combined Detroit Three market share up to 45.2%, its highest level since calendar year 2007. In addition, the YTD share of domestically produced light vehicles (those produced in North America) increased to 78.0%, its highest level since calendar year 2005.

Comparing Detroit’s Commuting Patterns with Other Cities’

By: Martin Lavelle and Emmanuel Ogbonna

According to the U.S. Census Bureau, the average one-way commute time for U.S. workers increased by almost three minutes between 1990 and 2000. However, since 2000, this commute time has fluctuated between 25 and 26 minutes, even with the numbers of drivers continuing to increase. Why hasn’t the average commute time increased further? For one, U.S. roadways have also expanded since 2000—which likely helped ease some traffic congestion. Moreover, changes in the mode of transportation—such as the greater use of public transportation and carpooling—may also have helped to relieve congestion. Other possible explanations are that workers relocated closer to jobs or that jobs relocated closer to workers. In this blog entry, I examine the commuting patterns of city of Detroit and compare them with those of other cities in Michigan and across the Midwest; I also look at Detroit’s commuting patterns in comparison with those of other Rust Belt cities and similar industrial cities in different parts of the country. I present these comparisons in the hope that they will lend some insight into the ongoing and forthcoming challenges Detroit faces, including those related to improving its transportation infrastructure and broadening its economic base. Such efforts are important to Detroit as it attempts to rival cities that have turned themselves around at least to some degree (e.g., Pittsburgh and Baltimore).

The city of Detroit typifies U.S. suburban and exurban sprawl, with some job holders in the area commuting as long as 75 minutes one way from Jackson and Lansing, Michigan, regularly.[1] By way of explanation, some analysts have attributed Detroit’s current commuting situation to the presence of the domestic auto industry headquarters and the absence of a suitable regional public transportation network. Indeed, the lack of a coordinated regional transit network—with the exception of a (somewhat unreliable) bus system—makes it difficult for Detroit’s job holders and residents to move inside and outside the city to their places of employment. The commuting conditions for Detroit workers and residents look even more challenging when compared with those of other major cities. The U.S. Census Bureau’s On The Map tool helps researchers analyze the commuting patterns of states, metropolitan areas, cities, and other places. I use this tool to generate the tables that follow. Table 1 presents where the jobs of Detroit residents employed in 2011 were located.

Table 1

Focusing first on the central city of Detroit, we can see that 37.7% of the job holders who lived in the city of Detroit also worked there in 2011 according to the work destination report, meaning that the remaining 62.3% of Detroiters who were employed that year commuted into Detroit’s suburbs (or farther afield) for work. The main pattern that can be discerned from the table is that if one draws arcs connecting the suburbs around the city of Detroit according to the degree to which Detroiters were employed there in 2011, the primary “ring” formed would contain Southfield, Livonia, and Dearborn and the secondary ring formed (a bit farther out from Detroit) would include Farmington Hills, Royal Oak, and Warren (see the map below).

Map

Table 2

Taking a different approach, we can examine where workers reside in the Detroit metro region. Table 2 presents information on where people who worked in the city of Detroit in 2011 lived. In 2011, 28.3% of the jobs in Detroit were occupied by workers who also lived there, meaning that 71.7% of workers employed in Detroit lived outside of the city. This 71.7% figure has most likely increased since 2011 because of the ongoing movements of people and businesses into Detroit’s Downtown and Midtown neighborhoods from outside the city.

How do these findings for the city of Detroit compare with those of other Michigan cities? Table 3 shows (employed) city residents by the share of them who work outside of their city of residence. As a rule of thumb, we might expect that larger cities to have lower shares of their residents working outside the city boundaries. But that does not necessarily hold true in Michigan. For instance, the largest city, Detroit, had 40% of its (employed) residents working within its own boundaries in 2011, leaving 60% of them working outside the city. In contrast, the much smaller Michigan city of Ann Arbor had almost 60% of its (employed) residents with jobs based within its city limits as of 2011.

Table 3

This finding is not all that surprising if we look more closely at Ann Arbor’s economic makeup. Many people are drawn to both live and work in Ann Arbor (rather than just live there) because it hosts the University of Michigan, Google, and Ann Arbor SPARK (an organization that assists local businesses and entrepreneurs) and features several attractive amenities (such a bustling downtown).

The shares of residents who were not employed where they lived largely held steady for the major cities of Michigan between 2002 and 2011. Detroit, Ann Arbor, Flint, and Grand Rapids only saw small changes in their shares, while Michigan’s capital city, Lansing, experienced a larger decline in its share, possibly because of the shrinking of state government, which forced labor force participants to look for job opportunities outside the city limits.

Table 4 presents the percentage of Michigan cities’ work forces commuting into these cities from outside their boundaries. The table shows that larger shares of workers with jobs in major Michigan cities commuted from outside the city limits in 2011 than in 2002. Urban business districts often offer more opportunities for high-skilled workers, and the Michigan cities compared below are no exception. In recent years, Detroit’s Downtown area has seen an influx of large businesses, including Quicken Loans, Blue Cross & Blue Shield, and Chrysler’s executive office, coming from the surrounding suburban areas; and several small businesses have established themselves in Detroit’s Midtown area. In addition, Ann Arbor has seen several venture capitalists and entrepreneurs, along with Google, locate their operations there, providing economic growth on top of that delivered by its mainstay, the flagship campus of the University of Michigan. Grand Rapids’ growing reputation as a conference destination has brought more economic activity to its downtown. Flint’s University of Michigan campus has expanded its downtown presence. And as the state capital, Lansing will always be a commuting destination.

Table 4

In the Michigan cities compared in Tables 3 and 4, the majority of each city’s own working residents were commuting outside of the city for work in 2011 (with the exception of Ann Arbor), while the majority of city-based employers had employees who lived outside of the city that year. These trends are in stark contrast with those of the mid-twentieth century—when city residents could find work easily inside their respective cities, often at one of the many manufacturing facilities. Nowadays, given the loss of manufacturing jobs and the deterioration of city residents’ job skills, residents must often look outside the city limits to find job opportunities and employers must be able to draw workers from outside the city in which they’re based.

For Detroit, Lansing, and Flint, Table 4’s results for both 2002 and 2011 most likely reflect people wanting to live outside the city because of a combination of negative housing conditions, poor public service delivery, low school quality, and overall low quality of life. But in Ann Arbor and Grand Rapids—two cities with more positive reputations—the results from Table 4 may reflect people having gained employment in these two cities but deciding to commute there from their residences outside the respective city limits.

Table 5

So, how does Michigan’s story compare with those of other major cities in the Seventh District? Of the major Seventh District cities featured in Table 5, only Chicago and Milwaukee have extensive mass transit systems (something in addition to buses). Seeing that more Indianapolis residents worked within the city in both 2002 and 2011 may be surprising, but the city encompasses most of Marion County, which has a large surface area. Over the past few years, Des Moines has seen an increase in commuter traffic from the city to its suburbs, particularly West Des Moines, as they become more popular for businesses and residents. The 10 percentage point increase in (employed) city residents not working where they live for Des Moines between 2002 and 2011 is likely reflected in this increase in commuter traffic. This percentage did not change as dramatically for the other Seventh District cities studied.

According to Table 6, 46% of people who worked in the city of Chicago in 2011 did not live there. Indianapolis’s suburbs such as Brownsburg, Zionsville, and Fishers have seen population increases over the past few years, which may explain why a higher share of its city work force lived outside of the city limits in 2011 than in 2002. All of the Seventh District’s major cities have the infrastructure to handle more inbound traffic from their suburbs—namely, extensive freeways systems—so the commuting patterns shown in Table 6 should not be all that surprising.

Table 6

Tables 7 and 8 compare Detroit with other cities that are looking to redefine (or have already redefined) themselves as places where high-skilled workers will want to not only work but live. Before going over the results of the tables, let me provide a little background for each city. Pittsburgh is arguably the U.S. city most discussed as a model of economic transformation—it went from being a city reliant on steel manufacturing to one that is strongly associated with the higher education and health care industries. Through this transformation, Pittsburgh has also achieved a high quality of life for its residents. Cleveland has begun its efforts to mirror Pittsburgh’s downtown revival by implementing a rapid bus transit system; the hope is that this system will connect its University Circle neighborhood—a center of innovation and a place with young demographics—with other parts of the city. Birmingham has been referred to as the “Pittsburgh of the South” on account of the steel industry’s presence there. Despite the presence of some regional banks and universities, Alabama’s Jefferson County, whose county seat is Birmingham, is currently involved in bankruptcy proceedings. Baltimore famously made over its downtown with a new baseball stadium and a new football stadium, attracting people, especially young professionals, back to its Inner Harbor area. Buffalo is attracting young people back by developing residential and commercial areas around its downtown medical campuses.

Table 7 shows that shares of (employed) residents who were not working where they lived held fairly steady for the cities sampled between 2002 and 2011. In 2011, Pittsburgh remained the only city in the sample that saw a majority of its residents with jobs not commuting outside of the city. The other cities listed in Table 7 saw more of their respective employed residents leave the city limits to go to work in 2011. As these cities became more decentralized in the last quarter of the twentieth century, suburban job clusters were created that remain popular places in which to work and live.[2] Detroit’s and Cleveland’s freeways are now lined with business centers, industrial parks, and suburban skyscrapers; such developments led to the creation of school districts that remain among the best in Michigan and Ohio, respectively.

Table 7

While each of these cities is seeing more of its work force commute from the suburbs (or farther afield), the recent pace of out-migration from Detroit to its suburbs becomes more evident in Table 8. Of the cities in Table 8, only Detroit and Birmingham have mass transit systems limited to traditional buses. Pittsburgh and Cleveland have recently expanded their mass transit systems, allowing more workers to commute into the city using light rail and rapid buses. The numbers in Table 8 may reflect the effect of years of population migration from the central cities to their respective suburbs.

Table 8

Conclusion
Detroit exhibits commuting inflow/outflow ratios that somewhat resemble those of other Seventh District and Rust Belt cities. Detroit’s ratios differ from other cities’ ratios mostly likely because of the following factors. The jobs found in the city of Detroit are more suitable for members of a high-skilled work force, who mostly live outside the city’s boundaries. Meanwhile, the population residing in the city of Detroit is mainly made up of low-skilled workers who must look outside the city limits for gainful employment. In all likelihood, Detroit residents will have a more difficult time finding gainful employment than residents of other decentralized manufacturing cities because of Detroit’s large geographical size and unreliable public transportation system.

If the city of Detroit were to see an increase in the percentage of its population both living and working within its boundaries, this would most likely come about because the city had diversified its economy and because it had become a more attractive place for young people to begin their careers—key achievements made by many other Rust Belt cities that have transformed themselves in recent years.

[1] This estimate is based on my personal experience and my talks with other Michigan residents who commute to Detroit. Also, according to the U.S. Census Bureau’s OnTheMap tool, almost 700 people travel from Grand Rapids, Michigan, to Detroit for work—a one-way commute of two-and-a-half to three hours.
[2] Decentralized manufacturing cities indicate cities where an urban population and the manufacturing industry have been largely redistributed to suburban areas.