After Detroit Who’s Next?

by Veronique de Rugy

After quite a bit of drama, a federal judge ruled yesterday that Detroit can go ahead and declare bankruptcy. What it means is that the city is now allowed to shed some of its unsustainable pension obligations. Megan McArdle over at Bloomberg View explained yesterday what it means for pensioners:

This is terrible for the pensioners, who are likely to see their checks cut back quite a lot. But it’s hard to see what else could have happened. Detroit can’t pay its debts and keep the city running. There is no more tax revenue for the city to take; the citizens are poor, and the commercial base is the sort of low-margin retail and dining that cater to a very poor population, plus a few corporate headquarters bobbing in a sea of beautiful, empty Art Deco office buildings.

Blessedly, the pensioners will not lose everything; the funds still have some money. And the bankruptcy court does have discretion in how the losses are allocated between unsecured creditors (which is what Detroit’s pension fund now is for the estimated $3.5 billion by which it is underfunded). The court is unlikely to just stiff the other creditors in order to pay the pension, but you can expect it to make sure some assets are left in there. It may also look to claw back some of the extra payments that were made to current retirees in prior years.

Now, the question is the following: is this an isolated case or should we be expecting more of this in the future? The answer is that Detroit may be the first big city to go under but it won’t be the last. Steve Malanga, for instance, reports yesterday that Boston and Chicago could be next based on their balance sheets:

Last month the Civic Federation of Chicago attempted to answer that question by comparing 12 American cities to Detroit on key issues of solvency. Boston and Chicago scored closest to the Motor City.

The federation’s study used a sophisticated method of calculating financial health which included measuring changes over five years in a series of metrics like cash solvency (a ratio of working capital to expenses), long-term solvency (the availability of future resources to pay for long-term obligations), service-level solvency (government’s ability to maintain basic services desired by citizens) and operating solvency (the ability to fund current expenditures with recurrent revenues).

Detroit, not surprisingly, scored lowest (the more points a city accumulated, the worse its performance). Boston was closest to the Motor City. Boston scored poorly on its ratio of debt service to expenditures, on working capital to expenditures, and on its ability to continue funding basic services with available resources.

Chicago ranked low in expenses per capita, liabilities per capita and taxes per capita.

Columbus, Ohio, led the pack in financial performance (it is both a state capital and the home of a major public university) followed by Pittsburgh.

It is also worth reading this WSJ article from this summer about who could be next. It looks like Philadelphia and Chicago are on most people’s list

The Corner

The one and only.