In Detroit, the Engine Sputters

The Motor City's revival may be stalling in tough times

No doubt about it: Detroit these days is a city transformed. It has attracted $18 billion in new investment since 1994, creating thousands of jobs. The crime rate has fallen to a 30-year low, banishing the Murder City tag that dates from the 1970s. Office vacancy rates are low, and real estate values have soared. Three glitzy new casinos ring the central business district, and a domed football stadium is going up alongside Comerica Park, the sparkling new home of the Detroit Tigers. Downtown, where an abandoned department store sat empty for 18 years, cranes lift steel beams into place for the new $1.2 billion headquarters of Compuware Corp., which is moving its 6,500 office workers in from the suburbs.

But Motown's retooled engine is starting to sputter. Already, the jobless rate, which fell from 20% in 1992 to 5.4% in 1999, has shot back up to nearly 9%. As the slowing national economy threatens to stall Detroit's progress, it's becoming clear just how many obstacles remain to self-sustained growth. Public schools are still mostly failures, police and fire services remain a mess, street lights often don't work, and taxes--roughly six times as high as in neighboring communities--still deter most businesses from moving in. While other cities grew in the 1990s, Detroit's population fell by 76,000, the 2000 Census showed, slipping below 1 million for the first time since 1920. Another blow came in April, when Mayor Dennis W. Archer, who has won credit for helping to spark the city's renaissance, said he would not seek a third term.

Detroit's flashing yellow light stands as a warning to the rest of urban America. The recent economic boom turned around many decaying cities that had been all but written off. From New York's ghettos to the gritty streets of central St. Louis, investment flooded into inner cities, jobs proliferated, and seemingly intractable poverty rates plunged. But as in Detroit, all this progress remains surprisingly fragile. Many stubborn problems remain, from lousy schools to inadequate infrastructure. Well-heeled families--including more minority ones--continue to flee to the suburbs, leaving cities with ever-smaller tax bases and swelling social burdens they can't afford to carry. If the slowdown turns into a full-blown slump, America's urban revival could grind to a halt.

FRIEND OF BILL. Detroit's tentative renewal, then, epitomizes the great strides many struggling cities have made--but huge challenges remain. In the Motor City, a chunk of the credit goes to Archer, an energetic former Michigan Supreme Court justice who took office in 1994. By reaching out to business leaders and the surrounding communities, he ended years of hostility between Detroit and its mostly white suburbs. Archer's friendship with former President Bill Clinton also helped Detroit to be selected in 1994 as one of a few cities to get federal tax breaks for empowerment zones. They spurred some $6 billion in new investment in the city's most blighted areas.

Yet Archer concedes that Detroit's growth spurt has been helped by "an enormously good economy" across the U.S. Flush with profits from record sales, Detroit carmakers and other companies have poured billions of dollars into the city. DaimlerChrysler alone spent $2.2 billion on two new factories.

Archer has tried to ensure a permanent flow of investment and jobs by passing tax relief. Personal income taxes for city residents and nonresident workers will be rolled back by one-third, and corporate income taxes, currently at 1.9%, are being eliminated. But the cut won't be totally phased in until 2009.

In the interim, Detroit has wagered on two big projects to kick-start growth from a source other than autos. But the payoff may not be as large as Archer had hoped. One was a bet on casinos: In the past two years, three Las Vegas-style casinos opened downtown, creating 6,000 jobs and generating some $85 million in badly needed tax revenue. Long term, the city envisioned a riverfront casino district with three larger, permanent casinos surrounded by hotels, stores, and restaurants generating $248 million a year for the city.

But land speculators drove up riverfront property prices, Archer says, making it too expensive for the city and casino owners to assemble the necessary acreage. Now, his back-up plan is for only one riverfront casino; the others would expand their current locations. The result will be less city tax revenue and stiffer costs for police and fire protection.

The other strategy--the two new stadiums--hasn't panned out yet, either. A handful of new restaurants and bars has popped up near Comerica Park, but the stadium has already lost its buzz. The Tigers' record is mediocre, and tickets and parking are too expensive. "The value just isn't there," gripes Jeffrey Morcom, 33, who used to attend 30 games a year and now goes to half that. Attendance is down 30% this year, to 329,489, among the lowest in baseball. Meanwhile, retailers nearby say the two stadiums are driving up rents and not bringing them enough business. "I don't know that you can link too much economic activity to what we've done," concedes Detroit Tigers CEO John McHale.

'BURBS BALK. Part of the problem is that Detroit has been unable to lure back suburbanites. It still lacks the downtown residents and workers needed to spark more development around the stadiums. "If there's going to be an economic recovery in Detroit, it will be because large firms commit to move downtown and hire people," says Mark S. Rosentraub, urban affairs dean at Cleveland State University.

Detroit has staged a remarkable recovery, given the depths to which it had fallen. But now, as the carmakers slow down, so, too, does the city. Archer's glitzy showpieces aren't enough to support the city's long-term health on their own. If his successor can't come up with an encore, Detroit may find its progress stalled.

By Joann Muller, Jeff Green, and David Welch in Detroit

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