How to Break an American City
The municipal bankruptcy mess is heading to a local government near you.
With its abandoned libraries, boarded-up neighborhoods, and broken-down factories overrun by weeds, Detroit has long been seen as an extreme (and extremely photogenic) outlier in American urban decline. Surely no other city could match its combination of industrial overconcentration and municipal ineptitude. No other once-proud metropolis could so closely resemble the site of a zombie apocalypse.
But when the Motor City filed for Chapter 9 this July, it was actually behind the curve of civic bankruptcy. Stockton, San Bernardino, and Mammoth Lakes in California all declared bankruptcy in 2012. Central Falls, Rhode Island, did so the year before that. Around the country, from Maine to California, Alabama to Illinois, local governments are seeing their tax revenues decline or simply fail to keep pace with politicians' ever-expanding promises of how to spend them.
In far too many cities, including major centers such as Chicago and Los Angeles, everybody seems to acknowledge the basic fiscal unsustainability but few have the courage to start the hard work of fixing it. Instead, public sector unions fight to maintain their untenable health and pension benefits, local officials and development agencies keep pinning their hopes on shiny government-managed economic projects that ultimately benefit private-sector cronies, and city leaders continue to make the same poor choices that got them into trouble in the first place, thinking they'll dig their way out eventually-or just fob the problem off on their successors.
The National League of Cities, a lobbying and training organization representing thousands of American municipalities, took a poll of its members in 2012 to determine the most popular methods for coping with personnel costs at a time of economic stagnation and declining tax revenue. At the top of the list? Hiring freezes, pay cuts, and layoffs. At the bottom? Changing union contracts, cutting back health care benefits, and reforming pension funds. This despite the fact that seven out of 10 city finance directors said public-employee benefits were having significant negative impacts on their budgets, more so than actual wages. Officials are unable or unwilling to confront the root causes of municipal decrepitude.
America's most dysfunctional cities often operate just fine for those who claim power over these ruined kingdoms. There are riches to be gained from feeding on the dying spasms of urban carcasses. In the National League of Cities poll, 44 percent of respondents reported increasing their spending on public safety, even after 20 years of broadly plummeting crime rates. Since public safety often makes up the largest portion of municipal employees, and since 48 percent of cities report reducing the size of their overall workforces, that means city dwellers are paying more money for less service. This is a recipe for urban flight, not renewal.
What follows is an examination of five broken cities -Detroit, Michigan; Harrisburg, Pennsylvania; San Bernardino, California; Trenton, New Jersey; and Chicago, Illinois-and the poor civic decision-making that got them to this point. This lineup shares fundamental commonalities, like huge debts and pension obligations, lackluster economic foundations, high crime and unemployment, and plain old corruption. But each city has its own unique policy-making disasters as well.
Detroit wasn't the first municipal bankruptcy, and it won't be the last. Just because your city didn't throw its entire lot in with the auto industry doesn't mean collapse can't happen near you. To reverse the civic decline in America will require a sea change in governing philosophy. Here are some harsh lessons from recent history. -Scott Shackford
Population (2011): 706,585
In July, Detroit became the largest city to file for bankruptcy in America's 237-year history. Over the next 18 months or so the city's 40 municipal unions, representing the pension interests of retirees, will fight in federal court with 50 bondholders over what's left. Even the municipality's prized possessions-the Van Goghs, Monets, and Diego Riveras ensconced in the marbled Detroit Institute of Arts-are being eyed by creditors.
This is a tragic fall for a metropolis that in living memory was regarded as the Paris of the West. Fifty years ago, Detroit was the fifth largest city in the United States, with close to 2 million inhabitants. It had the nation's highest per capita income. Its famous auto industry was a magnet for migrants. Detroit had the highest rate of home ownership of any black urban population and an unemployment rate of 3.4 percent, well below the national average.
Now, the auto capital of the world has become the murder capital of America, earning top honors in Forbes' list of most dangerous cities for four years running. Almost two-thirds of its population has fled, leaving behind tens of thousands of abandoned homes and businesses. The Economist has described this urban flight as a "demographic catastrophe" unparalleled in the developed world.
Detroit's unemployment rate hovers around 18.5 percent. Median household income is barely half of the U.S. average. Almost 60 percent of the city's (predominantly black) children live below the poverty level.
Who is to blame for this calamity? The progressive left and conservative right have competing theories.
On the left, Thomas Sugreu's 1996 classic, The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit, popularized the notion that highways and rising wages in union-dominated inner cities caused capital to flee to the Rust Belt's suburbs after World War II, much before the race riots of the 1960s. But blacks couldn't follow because discrimination prevented them from buying homes in the new neighborhoods, trapping them in dying urban areas without jobs.
Racism has indeed played a historical role in slowing the progress of African Americans. But if discrimination didn't debilitate them before the mid-1950s, when they migrated to Detroit from the South, it is unclear why it would do so after that, when the civil rights movement was actually making headway. Indeed, in a thriving city, one group's exodus simply leaves opportunities for other groups, especially immigrants. Not in Detroit. The white flight triggered by racial conflict in the 1960s was followed not by the influx of Arabs, Jews, Hispanics, or other groups-many of whom have since settled outside the city limit, creating thriving neighborhoods. It was followed by the outflow of ever more groups, including middle-class blacks.
On the right, the prevailing theory developed by Charles Murray, Thomas Sowell, and Lawrence Mead, among others, is that the progressive welfare state subsidized the breakdown of inner city families by handing black women an incentive to bear children out of wedlock while able-bodied black men loitered about, chugging beer. This has deepened the dysfunction in the black community, preventing cities like Detroit from staging a comeback.
But why would black families in Detroit be uniquely susceptible to the pathologies of the welfare state? It is far more plausible that the causality runs the other way: instead of dysfunctional blacks being the cause of inner city malaise, the malaise itself might have hollowed out inner cities, leaving behind a dysfunctional class with diminishing prospects.
Both sides agree that some broader sociocultural force -external racism or internal familial breakdown-is primarily responsible for Detroit's rut. But Harvard University economist Ed Glaeser suggests that the real culprit is government policies that have thwarted the animal spirits of entrepreneurs.
Glaeser argues in a 2011 City Journal article that the distinguishing feature of resilient cities such as Seattle and New York that have managed to reinvent themselves is that they boast a creative cluster of small companies-not just a single controlling cartel.
The Big Three automakers-General Motors, Ford, and Chrysler-killed Detroit's culture of entrepreneurship with their decades-long supremacy, Glaeser says. Instead of innovators, these industrial giants bred and rewarded company men with no talent or stomach for startups, the modern economy's engine of jobs. "Detroit's history testifies to two important phenomena," notes Glaeser. "First, the link between American entrepreneurship and employment; and second, the ability of a successful, big-firm industry to destroy a local culture of small-firm start-ups."
The federal government has reinforced this destruction through repeated cash bailouts and corporatist interventions on behalf of the auto giants. Had central planners allowed natural market forces to prevail, writes Glaeser, Chrysler and General Motors might well have dissolved decades ago and been replaced with smaller, nimbler companies.
But Uncle Sam is not alone in undermining entrepreneurship in Motown. Detroit's local politicos have done their part too. Democrat Coleman Young, Detroit's first black mayor, got the ball rolling with racially charged rhetoric that chased white residents and businessmen out of the city. He divided the police department along racial lines, creating separate layoff lists for black and white officers. He gave black crime a pass and withheld law enforcement resources from white establishments.
White flight allowed Coleman to consolidate his political base of black voters and Big Labor, which bought him five consecutive terms and helped permanently transform Detroit into a one-party town. This removed the checks and balances necessary to curb corruption and profligacy. Since Coleman, every mayor of Detroit has used money in city coffers to buy off municipal unions with lavish benefits. Now the coffers are empty.
The biggest barrier to local entrepreneurship nowadays is the political class's fascination with glamorous, Aswan Dam-style projects. Although the fondness for white-elephant investments predates Young, he took it to new heights when he deployed the city's eminent domain powers to destroy Detroit's flourishing Poletown neighborhood for a General Motors plant. Subsequent mayors have cavalierly killed small establishments to make room for taxpayer-financed stadia, casinos, arenas, and convention centers, whose promises of jobs and tax revenues, like the Poletown plant, rarely materialized.
Even as Detroit has handed special tax breaks and incentives to mega businesses, it has erected insurmountable regulatory hurdles for small entrepreneurs. For example, hair braiders are required to spend thousands of hours in mandatory training before they can open a salon.
Where is Detroit heading after bankruptcy? The city's emergency manager, Kevyn Orr, plans to channel the savings generated by restructuring the city's debt into basic services. That's a sensible goal. But Detroit's fiscal difficulties have deeper causes that require a new generation of political leaders capable of a broader policy transformation to resurrect the lost culture of entrepreneurship. Until then, Orr's fixes will be tantamount to pumping gas in a car with a broken engine.
Shikha Dalmia (email@example.com) is a senior analyst for the Reason Foundation.
Population (2011): 49,673
The city of Harrisburg, Pennsylvania, just held one of the most expensive garage sales in history.
Wagon wheels, Native American tools and headdresses, antique weapons, paintings, and even a stuffed buffalo were on offer at a seven-day auction held by the city in mid-July. It was the end of a decade-long saga that began when former mayor Stephen Reed began collecting-with about $8 million in city tax dollars-historical artifacts in the hopes of building a tourism-generating museum to the American West.
That's right: a museum about cowboys, Indians, and life on the frontier-in central Pennsylvania.
"We're not in the west," points out Michael Power, a local resident and auction attendee. "We don't have the Lone Ranger out here. We didn't have Custer's Last Stand here."
It gets worse. Most of the $8 million used to buy those artifacts came from the city's water and sewer infrastructure fund. Now, Harrisburg is dealing with the consequences, which include several massive sinkholes created by leaky pipes. One such sinkhole in midtown Harrisburg has consumed an entire block, forcing residents from their homes for months.
While the failed museum is a humorous example of how Harrisburg has gone astray, there is nothing funny about the city's $600 million debt.
"It was years of bad management," says Dan Miller, the city's controller. "It's the typical way in politics: if you can push it off and spend the money elsewhere, that's the name of the game."
Harrisburg is the epitome of policy making that puts the superficial ahead of the substantial. Instead of investing in repairs to the city's aging infrastructure, Reed during his 28-year reign redirected funds from those accounts to bankroll a stream of Hail Mary projects aimed at revitalizing a depressed city.
Besides the failed Wild West museum, the city also purchased a downtown hotel to keep it from going out of business and a minor league baseball team to keep it from moving out of town. The hotel ended up in foreclosure. The baseball team was resold a few years later, at a loss.
To Reed's credit, there are parts of Harrisburg that appear much nicer today than 20 or 30 years ago. Yet all those economic development projects came with expensive unseen costs, like those leaky pipes under the city streets.
The city still may have been able to survive that handful of poor economic development decisions. But it was the creative financing on a 30-year-old trash incinerator that drove Harrisburg over the cliff.
In 2004, the city borrowed $125 million to retrofit the incinerator, hired a contractor who promised to save money by using an unproven new technique for turning garbage into steam, then decided to move forward with the project even after that contractor was unable to secure insurance.
Two years later the incinerator retrofit was unfinished, the contractor was in bankruptcy and the city was on the hook for more than $300 million in debt payments.
Today, the incinerator accounts for half of Harrisburg's debt problem. The city has responded to the borrowing crisis by becoming a deadbeat: Harrisburg has not made any loan repayments since 2010. And yet still the local government is running annual budget deficits, in large part due to unsustainable contracts with police and firefighter unions.
"The union contracts are strangling the city," says Miller, who wants Harrisburg to file formal bankruptcy, a move opposed by state officials and Mayor Linda Thompson, who defeated Reed in 2009.
Most of the city's $10 million operating deficit this year is due to employee costs, Miller says, and bankruptcy could re-open those labor contracts for negotiation. The city entered Pennsylvania's program for distressed municipalities in 2010, but that hasn't stanched the bleeding.
David Unkovic, the first man appointed by the state to guide an economic recovery plan through the city government, resigned abruptly in April 2012. He left a handwritten note on his desk before walking out, claiming that "ethical and political crosswinds" prevented him from making progress.
The city now has a new state supervisor, former U.S. Army Gen. William Lynch, who oversaw part of the rebuilding of Baghdad following the U.S. invasion there. His appointment was met, only half-jokingly, with comments about which assignment was more difficult.
And now Harrisburg soon will have a new mayor. Thompson was defeated in a Democratic primary election this May by Eric Papenfuse, a successful businessman who runs a bookstore in midtown. He faces several independent candidates in November, but is a heavy favorite.
The city will still face the same problems. The debts still need to be paid off and the pipes are still leaky.
But at least the stuffed buffalo found a new home.
Eric Boehm (firstname.lastname@example.org) is a reporter at the Franklin Center for Government and Public Integrity.
San Bernardino, California
Population (2011): 213,012
For the Inland Empire of Southern California, the growth in the housing market in the early years of the 21st century wasn't just a bubble. It was more like a tide pushing in from the Pacific coast, bringing in wave after wave of new developments and freshly built homes. When the bubble burst, the tide quickly withdrew, leaving behind empty, foreclosed-upon homes like driftwood and seashells.
San Bernardino is the second-largest desert city in California. It was devastated by the housing collapse. In 2012, even as the country was recovering from the mess, the area's foreclosure rate was the highest in the country, according to Realty Trac: three times higher than the national rate and well above even California's average.
In a sense, city leaders took their post-crash policy cues from homeowners who threw up their hands and walked away from their mortgages. In July 2012, after a budget report declared that San Bernardino had a $45 million deficit, the city council quickly voted to file for Chapter 9 bankruptcy and stopped paying many of its bills.
Despite its location in bountiful Southern California, San Bernardino is not a wealthy city. It's not even middle class. More than a third of its residents live below the poverty line, according to the Census, ranking it second behind Detroit among the poorest metropolitan areas in the country.
Yet this March, even while officials were making their bankruptcy case to a judge, the city council voted to increase the wages of several San Bernardino police department employees, some by more than 10 percent. Turns out, the city had no choice.
A section of San Bernardino's charter has required since 1976 that the wages of public safety employees be tied to the average wages of 10 nearby cities with populations between 100,000 and 250,000. That San Bernardino is the poorest of these cities, and that nearby Irvine boasts a median income of $87,484, doesn't make a difference. Unless the charter is changed through a public vote, the city will continue to have to pay the same wages for its public safety employees as nearby communities that have better economies and more tax revenue.
Even as the increase passed, the San Bernardino Sun reported Mayor Pat Morris observing, "We are and have been for many years on autopilot on our most expensive single item. Particularly in the times that we have now-that is, times of bankruptcy and insolvency-to not have the power to control these items is a remarkably unwise autopilot condition on a very important labor contract."
What has San Bernardino gotten out of such a spending rule, beyond a deficit and a public safety budget that consumes nearly three-quarters of city expenditures? A crime rate around double the state and national average. Several times over the past decade San Bernardino has ranked among the most dangerous cities in the country, according to the research company Morgan Quitno, though it has dropped in the rankings in recent years.
The compensation formula may put the average police salary at nearly six figures, but it also necessarily limits the total number of police officers San Bernardino is able to afford, given the depressed state of city revenue. In order to try to balance these growing costs, the city has started requiring police to pay into their own pension funds. Previously the city had been paying the employees' contributions as well as the city's part. This latest move has been treated by police employees as if it were a pay cut.
The lurch toward bankruptcy came with very little preparation, and that decision is now coming back to haunt city officials. To the north, the city of Stockton, which filed around the same time, is moving forward with its Chapter 9 proceedings while San Bernardino is hung up in a battle against the California Public Employee Retirement System (CalPERS), which is demanding that the city continue paying into the state's massive pension fund.
Stockton, however, planned out its process, attempted negotiations with creditors and continued to pay into CalÂPERS, though it did default on some bond payments. Tim Reid of Reuters has noted that San Bernardino did essentially the opposite: "The city did not engage in substantial staff nor budget cuts in the years prior to the bankruptcy, nor did it seek to negotiate with any creditors. Instead, the city declared a fiscal emergency, a move aimed at avoiding negotiations, and simply stopped paying both bondholders and CalPERS." CalPERS has not agreed to release San Bernardino from such obligations and is challenging the city's bankruptcy claim, arguing the city lacked a plan to balance its budget. A judge ruled at the end of August that San Bernardino is eligible for bankruptcy protection.
In the meantime, San Bernardino's inability to get its finances in any sort of order has prompted a recall effort targeting the mayor, the entire city council, and the city attorney. The mayor and city attorney (who has previously run against the mayor) are frequently at odds, and the entire process is politicized, as various factions scramble for control of the city's future.
But it's possible the city may not even have a future. Observers have begun wondering out loud whether the next logical step will be disincorporation. That's one novel way to break an American city: by having it cease to exist.
Scott Shackford (email@example.com) is an associate editor at Reason 24/7.
Trenton, New Jersey
Population (2011): 84,899
"TRENTON MAKES-THE WORLD TAKES." First installed in the 1930s as a boast of the city's industrial prowess, this message displayed in glowing red letters on the outside of the Warren Street Bridge is now more of a sardonic joke at the expense of New Jersey's ailing capital city.
Trenton's industrial might-based on rubber, steel, pottery, and even barbed wire-had already started vanishing by the mid-20th century; as the 21st dawned most of it was gone. So, too, was the famous neon sign, finally replaced with a new LED version in 2005. At the time, the Delaware River Joint Toll Bridge Commission, a "quasi-public service-oriented agency" funded solely by tolls collected at various bridges and roads, imagined that the landmark might receive further technological upgrades, but only if it could attract corporate sponsorship. Local politicians resisted that idea. "If getting the flashing lights and all that is going to cost so much money that you need a corporate sponsor, then don't do it,'' then-mayor Douglas Palmer said. Trenton has come to learn that neither public nor private support is reliable enough to pull the city out of its nosedive.
As early as 1957, a report by a team of urban planning students from the University of Pennsylvania warned that industrial cities such as Trenton were headed for financial collapse. The report suggested that the government step in to prevent that fate. And so the state of New Jersey began a building boom, focusing on Trenton proper instead of its outlying suburbs. Government, the Trentonian later noted, would become Trenton's business "for generations to come."
Now thousands of state employees commute to Trenton from the suburbs every day. But all of this construction created a revenue problem for the city, because government buildings are exempt from local property taxes and don't tend to generate many sales taxes.
Instead, Trenton began receiving state aid as payments made in lieu of taxes. That transfer payment reached a high of $38 million in 2008, under the Capital City Aid program. Two years later, the cash-strapped state government led by Republican Gov. Chris Christie discontinued it in favor of a "transitional aid" package that included Trenton and other municipalities that Christie wanted to wean off of state assistance. The program has lived up partially to its name; the total transitional aid allocated by the state fell from $170 million in 2012 to $109 million this year, and the number of cities participating has gone down from 22 to 10. But Trenton remains one of the 10. The city received $22 million in 2012 and then $25.4 million this year; 10 years ago, by comparison, Trenton received $16.5 million in state aid.
In March 2012, Trenton's municipal government nearly ran out of toilet paper. Mired in a budget battle, the city council passed a $16,000 emergency appropriation that, along with a donation from People for the Ethical Treatment of Animals (PETA), covered the growing toilet paper shortage in municipal buildings. In exchange, the PETA-donated paper contained a message about slaughterhouses and fecal bacteria in meat. The mayor, Tony Mack, characterized the situation as a "fundamental issue in our community."
In September of that year, Mack was arrested by the FBI on corruption charges, accused of accepting bribes from developers. Members of the city council worried that his legal problems might affect how much the state government would keep supporting the locals. Nevertheless, this year transitional aid went up by 15 percent over fiscal year 2012.
The aid spike came as the city was jacking up its budget by 7 percent and its property tax rate to $3.75 per $100 in assessed value, an increase of 6 cents. The budget for fiscal year 2013 passed with less than three months remaining in it. City officials claimed they didn't want any tax hikes but said the property tax increase was required to secure the transitional aid. Mayor Mack called the aid increase a "major victory" that "shows our efforts to shore up Trenton's structural integrity is being noticed." This is hardly an indication that self-sufficiency is even a goal.
Some residents are resigned to a perpetual state of failure. "We're a city of people who feel entitled to be wrong year after year," business consultant Dan Dodson wrote on his blog Re-Inventing Trenton earlier this year. The title of the blog post? "Giving Up on Reinventing Trenton."
Wrote Dodson: "What really pushed me over the edge was the recent debate over Thomas Edison State College's proposal to develop a parcel of city owned land. The same empty suits that pushed the hotel, the ballpark and the arena on us as revitalization measures (that clearly didn't work) were at it again. In a city that says we have too many state buildings, we rushed to build another one."
None of the "revitalization" efforts Dodson mention worked. Some don't even make it off the ground: Trenton allocated $1.3 million for a settlement related to a municipal courthouse project that Mack canceled in 2010, calling the associated $7.9 million lease "horrible" and a waste of tax dollars. But the $1.3 million settlement in this year's budget isn't the end of that story. The settlement could end up costing Trenton $8 million in rents and fees through 2029. And the decades-long project to "shore up" Trenton continues.
Ed Krayewski (firstname.lastname@example.org) is an associate editor at Reason 24/7.
Population (2011): 2,707,120
The Windy City's inclusion in a "broken cities" list might raise eyebrows. Chicago is a beautiful place with one of the nation's most stunning skylines. Visitors could be lulled by its vibrancy and polish.
Detroit is going to seed, with urban farmers planting crops where neighborhoods once stood. Stockton, California, is in bankruptcy court. But Chicago, according to a Chicago Business article in March, is the nation's "hottest urban center."
Unfortunately, one need not venture too far from the center into its gritty neighborhoods, or pay much attention to the crime-ridden news, or read the Census Bureau reports showing that 200,000 people have fled the city, to understand why there's far more trouble than Chicago boosters would have us believe.
An August 4 column in the Chicago Tribune by Gail MarksJarvis points to foreboding financial news. "Chicago has become a national poster child for financial distress in the aftermath of the Detroit bankruptcy, as bond analysts have been warning investors about cities and states that could be financially risky in the future," she wrote.
MarksJarvis points to the warnings of Marilyn Cohen, chief executive of investment management company Envision Capital: "Between Chicago's appalling murder rate, blubbery unfunded pensions and ratings downgrades, don't touch this credit with a 10 foot pole." Cohen's rationale: "The Chicago murder rate is a symptom of the city unable to grapple with its problems or its pension debacle. The unions have a stranglehold on the city and state and no one has been willing to raise revenue or do what needs to be done."
Other failing cities can look to emergency managers or bankruptcy courts to provide some relief to the union-imposed stranglehold, but not Chicago. One key reason is the city's deeply embedded culture of cronyism and system of aldermanic privilege, which places inordinate power in the hands of local ward bosses.
As Aaron Renn wrote in City Journal, people depend on the whims of City Hall for nearly everything. Chicagoans are reluctant to stand up to bad ideas or to outright corruption, lest they suffer reprisal. Aldermanic privilege received national publicity last year when a Chicago alderman threatened to stop Chick-fil-A from opening a restaurant in his ward because of the owner's stance against gay marriage.
That brouhaha spotlighted the power local bosses have, usually exerted in ways far less apt to garner headlines, yet equally destructive of non-compliant businesses. The result is a municipal system unusually resistant to much-needed reforms.
Like other big cities run by liberal political machines, Chicago has high taxes and punitive regulations, large and bureaucratic government, and surly public-sector unions. But the depth of the city's problems is mind-boggling, and the results of a fiscal disaster there will be far more spectacular than bankruptcy in more obviously decrepit cities.
For instance, the school system is at a breaking point. The Chicago Sun-Times announced in July that 2,113 teachers and other employees would be laid off. That comes on the heels of the announced closing of 50 schools. Mayor Rahm Emanuel tried for a short time to stare down the muscular teachers union, but ended a strike by giving in to most of the teachers' demands. The school district faces a $1 billion deficit, in part due to raises, and in another part because of pension debt the city won't confront.
As the Illinois Policy Institute recently reported, "In what's become a torrent of bad news regarding Illinois' fiscal health, Moody's Investors Service has downgraded Chicago Public Schools' $6.3 billion general obligation debt one notch. The credit rating agency's outlook remains negative, and CPS debt is now just four levels above junk bond status."
No surprise that the pension fund isn't the only part of the school system that's failing. A few months ago school officials announced a dismal statistic-a graduation rate of 63 percent, which school officials actually greeted as good news. A 2010 Tribune report noted that by the district's own internal documents, more than 40 percent of its high schools are failing.
Who is going to attempt change in a city where patronage-i.e., getting yourself, your friends, and your lazy cousins more money and privilege based on their loyalty to the ward boss or mayor-still rules? And who is going to insist on change in a city where officials would rather protect their world-class-city image than take on vested interests?
Given these realities, Chicago will continue to rot behind its gleaming veneer.