It’s no secret that Detroit has taken a major hit in the recession. The former car manufacturing mecca of the western world, Detroit has now crumbled after the fall of the automotive industry. Unemployment rates are at an all-time high while the housing market remains sluggish. So what options are left for this capital city?
Detroit may need to start thinking about bankruptcy as a final solution to resolve its long-term debt. While analysts see hope in bankruptcy for the city, both Mayor Dave Bing and Governor Rick Snyder have said that Chapter 9 shouldn’t be necessary in their solution.
Bankruptcy is only to be considered as a final solution under Michigan law. It should only be pursued after an “emergency manager” cannot reconcile the budget through any means necessary. This can involve breaking labor contracts, cutting pensions and even selling the city’s assets.
While this may be good news for state employees and citizens barely surviving on pension and healthcare plans, it could be more hard times for the entire city. While Snyder says “I don’t want to end up with an emergency manager,” it’s obvious that Detroit is running out of time. Snyder is urging elected officials to sign a consent agreement, which will help them slash the city’s budget and eliminate thousands of city jobs. Mayor Bing seems to be behind the plan, hoping to avoid any outside intervention.
One city Detroit could learn from is Vallejo, California, the first city to file for bankruptcy since the recession began. Vallejo was hit hard by the housing slump and was overwhelmed with debt. The city filed for bankruptcy in 2008, forcing them to lay off workers, close fire stations and throw out union contracts.
Now, just three years after Vallejo’s Chapter 9 filing, it’s clear that the city is finally getting back on track. The city’s credit rating is still badly bruised and could take two to seven more years to fully recover. Employee morale is at an all-time low, with employees constantly worried about job security and retirement options. While citizens are still recovering, it seems bankruptcy was the only option left for Vallejo, with residents refusing to pay more in taxes.
Unfortunately Vallejo isn’t the only example for Detroit, as Central Falls, Rhode Island has more recently filed. Central Falls is a much smaller city who could no longer afford to pay for its high pensions it had promised to its state employees.