Time for Detroiters to put pride aside

  @FortuneMagazine November 8, 2013: 6:40 AM ET
detroit abandoned building
(Fortune)

Detroit elected a new mayor, Mike Duggan, this week.

Big deal. The Motor City is bankrupt, thanks to the folly of previous administrations, and the new mayor won't be behind the wheel as it tries to work itself out.

To extend the automotive metaphor, the new mayor is going to find himself riding shotgun.

Detroit's operations and finances are firmly in the hands of Emergency Manager Kevyn Orr, the workout specialist appointed by governor Rick Synder in March to get the city's finances in order.

Representatives of Orr and Duggan were making nice after the election, saying how much they looked forward to working with each other. But we've heard similar reassuring noises from the last three Detroit mayors, and their collective efforts were unable to halt the city's slide into insolvency.

"Dysfunctional" is the adjective most often applied to Detroit's city government, but others are just as appropriate: "incompetent," "delusional," and "corrupt." With the city literally crumbling around them, large chunks of the population are still behaving like victims, interested in milking a golden cow that dried up years ago.

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To hear them talk, Detroit is still the auto capital of the world, and city workers are entitled to fantasize about United Auto Worker-level benefits like first-dollar health care insurance, paid layoffs, and lavish retirement benefits. So they take actions that are self-defeating, like ignoring state aid to rejuvenate the city's largest park, because it makes them look dependent and needy. Others are simply futile, such as dragging Orr into court to fight for 100% payout of their comfortable pensions, even though the money isn't available to do so.

According to a poll by the Detroit Free Press, more than three quarters of Detroiters oppose cutting the pensions of city workers. Those are noble sentiments but not particularly realistic.

Detroiters should all take a deep breath and recall the bailout and bankruptcies of General Motors (GM, Fortune 500) and Chrysler that began to unfold five years ago. Pride took no part in the decision-making. The automakers went hat in hand to Congress for loans to keep them going. Their only goal was survival. When the bailout couldn't hold back the tsunami of losses, they declared bankruptcy.

The process wasn't painless and lots of people got hurt. Wages were slashed, dealerships were closed, bills went unpaid, and shareholders and bondholders took a haircut. It was expensive for taxpayers, too.

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Car czar Steve Rattner didn't hesitate to use his White House backing -- and the federal Treasury -- to restructure the companies. GM chairman and CEO Rick Wagoner lost his job and Cerberus Capital lost its investment in Chrysler, and today both automakers are viable and competitive. The medicine was harsh, but the patients recovered.

The city of Detroit needs to face up to reality. You've read countless stories about Detroit's declining population, abandoned houses and vacant land, a police force that is spread too thinly, and street lights that don't work. Even the hometown newspaper calls it "one of the most dangerous cities in America." But the rot goes deeper than that.

A glance at the stories in the Detroit News on just one day, Election Day, tell a deeply dispiriting story:

  • Wayne County Sheriff and unsuccessful mayoral candidate Benny Napoleon revealed that one of his friends had been murdered the day before, and he had just buried the brother of another friend who was also the victim of a homicide.
  • The security director of the Detroit/Wayne County Port Authority, which operates the city's only cargo terminal and oversees international trade, turns out to be a felon who extorted money from an illegal immigrant.
  • Crime and mayhem have become so prevalent on city buses that drivers staged a sickout; police have begun to step up patrols and install security cameras.
  • Neighbors have taken up a collection for the baby girl delivered by Caesarean after her mother was fatally shot when she was nine months pregnant.

Nearby was a reference to an earlier article that revealed that half of the owners of Detroit's 305,000 properties failed to pay their taxes, resulting in nearly $250 million in uncollected funds. "Why pay taxes when they aren't providing any services," one homeowner was quoted as saying.

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Opponents of Governor-appointed emergency manager Orr haven't been shy about exploiting class differences to advance their cause. They irrelevantly contrast his lawyer's salary of $275,000 a year with the average pension of a city worker, which is $20,000.

Mayor-elect Duggan played the populist during the campaign. He said that if he is elected, his first task would be to convince Gov. Snyder to move Orr out so that Duggan and his "turnaround team" can do their work unhindered. Now Duggan has to find a way to get along with Orr.

The whole scene has a Wizard of Oz feeling about it: For all the melodrama being played out in public, there is only a rickety scaffolding behind the curtain.

The pension dispute is emblematic. The city's pension fund is $3.5 billion in the red, and Orr wants to cut benefits to close the gap. City employees and retirees have gone to court to block any reduction.

On the surface, it seems like the same kind of dispute that will be played out in many cities in coming years. But pull back the curtain and you see that the pension fund was treated like a piggyback until it went broke. According to the New York Times, the fund made payments to active workers and others, as well as retirees, well beyond normal benefits. The excess payments were often made around Christmastime, to cover holiday expenses or heating bills. A spokesman for the trustees explained this largesse as follows: "People were having a hard time, living hand-to-mouth, and we thought we would give them some extra."

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The city's General Retirement System board acknowledged in an affidavit that it gave out $756.2 million in excess earnings to active employees from 1985 through 2007. To fill the hole, it actually borrowed money, raising $1.44 billion in a bond offering. Not surprisingly, it has been unable to make interest payments on the debt. Meanwhile, Orr was forced to fire the chairman of the Detroit General Retirement System who took an all-expenses-paid trip to a pension conference in Hawaii earlier this year.

Unlike the auto companies, the city of Detroit isn't going to get a government bailout. It has to come to the realization that there isn't any money and then figure out what to do next. That's a challenge it has yet to live up to. As Orr said in an interview with the Wall Street Journal, referring to the pension debt: "We cannot pay it. Everyone has known that for the last 20 years, and no one has wanted to deal with it.

An enormous amount of energy has been debating whether the Detroit Institute of Arts should sell some of its masterpieces to help out. The time would be better spent educating the new mayor, the city council, and its 700,000 remaining residents on the hard realities of their situation. Just ask General Motors. Pontiac and Saturn may be gone, but it is getting along just fine. To top of page



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