A Decade After Bankruptcy, Is Detroit Better?

The 2013 bankruptcy filing didn't make the city more prosperous, more functional, or less corrupt.

If there is a lesson from Detroit's 2013 bankruptcy, it's that going broke can only take a city so far. Municipal bankruptcy is a process that gets a city out of debts that it can't pay. But city residents don't get better services when those debts are canceled.

There are some things that ought to surprise people about city finances. When Detroit filed for bankruptcy in July 2013, residents found out that the group the city owed the most money to was not banks or bondholders or city contractors—it was the city's pensioners. Former city employees accidentally became Detroit's largest creditors because the city didn't have enough money to pay them what they were owed.

This should not be. When governments promise to pay their employees pensions, they should set aside enough money to pay for them. This keeps the cost of pensions on current taxpayers and doesn't push the costs into the future.

Michigan has a constitutional requirement that public officials properly pre-fund pensions, but that did not happen in Detroit. This wasn't a simple mistake. Multiple Detroit pension officers and advisers were sent to prison for bribery.

So Detroit retirees got their pensions cut in bankruptcy. The city no longer pays for retiree health insurance. Retirees instead rely on coverage from the Obamacare exchanges and any subsidies they may be eligible for there, plus Medicare when eligible. Pensioners would have gotten a better deal had the people managing their investments not been corrupt and exploited their positions to benefit themselves.

During the bankruptcy, Detroit had a weird situation with its art collection. The works hanging in the Detroit Institute of Arts (DIA) were not owned by the museum; they were owned by the city government. A bankruptcy court isn't going to let a normal person keep a $100 million Bruegel the Elder masterwork when it's asking creditors to take a haircut. But things worked out differently in Detroit.

A mediator put together a deal to give the DIA the city's collection, and in return the city got some extra payments from state taxpayers and from local foundations to be put in the pension fund. The city hasn't been putting revenue in its pension fund since bankruptcy; the state and foundations have. Whether the city can afford this obligation when those payments end this summer is a big question.

An important step in emerging from bankruptcy was for the court to certify that the city's bankruptcy plan was "feasible"—that the city would not fall back into insolvency shortly after going through bankruptcy court. City officials hired a high-priced consultant who wrote a 226-page report on the subject, concluding that it was difficult to say.

Sure, the projections looked fine. But Detroit was lacking some of the basics that it needs to operate like a normal institution. "The lack of accounting and financial information systems confounds virtually every city operation and makes it difficult to perform even basic analysis or performance monitoring," the consultant noted. "The city has accumulated dozens of non-integrated systems which make it impossible to obtain the timely and reliable systemic information necessary for efficient operations and informed decision-making."

It's still unclear that the city has fixed this basic problem. If there's progress on this, it is hard to see.

Perhaps this is why city officials still get charged with corruption. That includes one police officer who had commanded the city's Public Integrity Unit. You can't steal thousands unless you mismanage millions.

People don't want to live next to vacant, decaying buildings, and the city has torn down a lot of them, not without controversy. Some contractors used dirt containing arsenic to fill in the void that was left by home demolition.

Investors build buildings in downtown and midtown, but often with money and tax preferences from state and local governments. Healthy real estate markets ought to require no special subsidies for development.

The public school district is terrible—fourth grade reading proficiency is the nation's absolute lowest among city school districts—but parents don't have to send their kids there and most of them don't. The majority of students in Detroit now go to charter schools.

The city's economic trends remain miserable. It's still losing people. The city population dropped from 700,000 people to 620,000 people since bankruptcy.

Detroit remains the poorest city in America, and that competition is not especially close. The Motor City's poverty rate is 31.8 percent. The next closest city is Memphis, at 24.2 percent. The national average is just 12.6 percent. Median household income is just $34,800, which is half of the national average.

Only 39.6 percent of Detroit residents were working in 2022, compared to the 62.2 percent national average.

The people living in the city are subject to an inordinate amount of crime. More than a quarter of Detroit residents said that they have been victims of vehicle theft, home or auto break-in, property vandalism, or physical violence in the past year, according to a survey by the University of Michigan. That's in a single year, not over a person's lifetime in the city. While such surveys are not performed in every city, a Bureau of Justice Statistics report on crime victimization in 2020 found that 0.93 percent of Americans had suffered a violent crime and 6.19 percent of households experienced a property crime. What is unfathomable in much of America remains a part of everyday life in Detroit.

A functioning city government can respond to crime and reduce it. Competent city management can improve the quality of life for Detroiters. But there's no policy that Washington or Lansing lawmakers can put in place to force city officials to manage their services better. It's something that has to come from city voters holding their own city government officials accountable.

Better city services may not even be necessary to help Detroiters do better. Other cities have corrupt officials without falling to Detroit's level of poverty and decay. If the city government doesn't get better, maybe other institutions can overcome its defects.

Detroit has many problems, and bankruptcy solved only one: the city's inability to pay its pensioners and other creditors. It didn't make the city more prosperous, more functional, or less corrupt. Detroit continues to earn its reputation as a poor, dysfunctional city.