No Longer Motor City

Detroit Sinks as Auto Industry Soars

By | Updated May 2, 2014

Don’t call it Motor City anymore; the link between the auto industry and its birthplace has shattered. The world dominance of General Motors, Ford and Chrysler built Detroit into a prosperous city of 1.85 million residents in 1950. Later, the decline of the Big Three brought Detroit low as they moved factories out of the city and foreign competitors won the hearts of drivers. General Motors and Chrysler declared bankruptcy in 2009 and Detroit followed in 2013, after the state turned over control of the city’s finances to an emergency manager. At the time, packs of dogs, limited police and fire response and broken streetlights plague a population shrunken to 700,000, with about 42 percent of them living in poverty. Last year was the car companies’ best since 2007.

The Situation

GM’s debt reached investment grade in 2013 for the first time in eight years. By year’s end, Chrysler had reported 10 straight quarters of profit. Ford returned to investment grade in 2012 and was able to take its blue oval logo out of hock.  Detroit owes $18 billion, mostly for health insurance and pensions it promised retired municipal workers; its rating has been cut to junk. Car companies have hired or recalled thousands of workers; unemployment in Detroit is 16 percent. GM, Ford and Chrysler are investing millions to add extra shifts at their factories, few of which remain in the city, to meet demand for their suddenly popular sedans. Detroit is being pressured to sell or rent Rembrandts, Titians and Rodins from among the 60,000 works at Detroit Institute of the Arts to raise money for the bankruptcy. Current autoworkers got to keep their pensions during the bankruptcies, and have received thousands of dollars in bonuses. A bankruptcy judge has ruled that Detroit isn’t legally barred from asking the court to cut municipal retirees’ pensions, and the emergency manager reached a tentative deal with pension holders in April to accept a modest cut.

 

The Background

 

Detroit’s ties to the fortunes of the auto industry have been fraying for six decades, as manufacturing jobs in the city fell from about 348,000 in 1950 to 27,000 in 2012, with fewer than 10,000 working in the auto business. Even while the U.S. automakers ruled the roads in the ’50s and ’60s they moved much of their manufacturing out of Detroit to new factories elsewhere in the U.S. and around the world. That evacuation accelerated Detroit’s decline.  Later, when both the city and the carmakers had shrunk, they found themselves in the same situation — with staff and services sized for an entity twice as large. To cover its costs, the City Council took on debt, running up a deficit that may reach $427.5 million by mid-2014. City employees, who had patterned their generous benefits on the auto industry’s glory days, are owed about $9.2 billion in pensions and other compensation — money the city doesn’t have and can no longer borrow.

The Argument

Struggling to cut costs deeply enough to allow the city to pay the bills, Detroit is just starting to map a road to recovery. The $320 million from various federal programs the Obama administration has pledged to Detroit pales when compared with the $80 billion the government spent to save the auto industry. Local business leaders are hoping to emulate troubled cities that rebounded, from Pittsburg to Leipzig, through a combination of outsourcing, rezoning and public-private partnerships. The emergency manager wants to revamp corrupt, inefficient or obsolete work practices and is pushing for givebacks from bondholders and considering reneging on obligations to retirees to create fiscal breathing room for bigger plans. But short-term savings like that could backfire later, says Michael D. LaFaive of the conservative Mackinaw Center: real reforms will require the cooperation of city workers, and new growth will require access to the bond market. He thinks the city should concentrate on creating a dramatically smaller, more efficient city structure. The wishes of city residents were more down to earth: In an October 2013 poll their priorities were for the city to hire more police, tear down abandoned buildings and fix the streetlights.

The Reference Shelf

  • A special report by Bloomberg News, “Reckoning to Revival: How U.S. Workers Rebuilt an Industry.”
  • Detroit Works Project: Blueprint for a stable city by 2030.
  • Emergency Manager Kevyn Orr’s June 14, 2013 proposal to creditors.
  • Bankruptcy Judge Steven W. Rhodes’s opinion supporting Detroit’s Chapter 9 bankruptcy.
  • Report from the Center for Automotive Research on the effect on the U.S. economy of bailing out the auto industry.

(First published on Dec. 12, 2013)

To contact the writer of this QuickTake;

Jeff Green in Detroit at jgreen16@bloomberg.net

 

To contact the editor responsible for this QuickTake;

John O'Neil at joneil18@bloomberg.net