Bankrupting America: The Municipal Bankruptcy Mess is Heading to a Local Government Near You

ds-2With its abandoned libraries, boarded-up neighborhoods, and broken-down factories overrun by weeds, Detroit has long been seen as an extreme (and extremely photogenic) outlier in American urban decline. Surely no other city could match its combination of industrial over concentration and municipal ineptitude. No other once-proud metropolis could so closely resemble the site of a zombie apocalypse.

But when the Motor City filed for Chapter 9 this July, it was actually behind the curve of civic bankruptcy. Stockton, San Bernardino, and Mammoth Lakes in California all declared bankruptcy in 2012. Central Falls, Rhode Island, did so the year before that. Around the country, from Maine to California, Alabama to Illinois, local governments are seeing their tax revenues decline or simply fail to keep pace with politicians’ ever-expanding promises of how to spend them.

In far too many cities, including major centers such as Chicago and Los Angeles, everybody seems to acknowledge the basic fiscal unsustainability but few have the courage to start the hard work of fixing it. Instead, public sector unions fight to maintain their untenable health and pension benefits, local officials and development agencies keep pinning their hopes on shiny government-managed economic projects that ultimately benefit private-sector cronies, and city leaders continue to make the same poor choices that got them into trouble in the first place, thinking they’ll dig their way out eventually-or just fob the problem off on their successors.

The National League of Cities, a lobbying and training organization representing thousands of American municipalities, took a poll of its members in 2012 to determine the most popular methods for coping with personnel costs at a time of economic stagnation and declining tax revenue. At the top of the list? Hiring freezes, pay cuts, and layoffs. At the bottom? Changing union contracts, cutting back health care benefits, and reforming pension funds. This despite the fact that seven out of 10 city finance directors said public-employee benefits were having significant negative impacts on their budgets, more so than actual wages. Officials are unable or unwilling to confront the root causes of municipal decrepitude.

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America’s most dysfunctional cities often operate just fine for those who claim power over these ruined kingdoms. There are riches to be gained from feeding on the dying spasms of urban carcasses. In the National League of Cities poll, 44 percent of respondents reported increasing their spending on public safety, even after 20 years of broadly plummeting crime rates. Since public safety often makes up the largest portion of municipal employees, and since 48 percent of cities report reducing the size of their overall workforces, that means city dwellers are paying more money for less service. This is a recipe for urban flight, not renewal.

What follows is an examination of five broken cities -Detroit, Michigan; Harrisburg, Pennsylvania; San Bernardino, California; Trenton, New Jersey; and Chicago, Illinois-and the poor civic decision-making that got them to this point. This lineup shares fundamental commonalities, like huge debts and pension obligations, lackluster economic foundations, high crime and unemployment, and plain old corruption. But each city has its own unique policy-making disasters as well.

Detroit wasn’t the first municipal bankruptcy, and it won’t be the last. Just because your city didn’t throw its entire lot in with the auto industry doesn’t mean collapse can’t happen near you. To reverse the civic decline in America will require a sea change in governing philosophy. Here are some harsh lessons from recent history. -Scott Shackford

Detroit, Michigan

Population (2011): 706,585

Shikha Dalmia

In July, Detroit became the largest city to file for bankruptcy in America’s 237-year history. Over the next 18 months or so the city’s 40 municipal unions, representing the pension interests of retirees, will fight in federal court with 50 bondholders over what’s left. Even the municipality’s prized possessions-the Van Goghs, Monets, and Diego Riveras ensconced in the marbled Detroit Institute of Arts-are being eyed by creditors.

This is a tragic fall for a metropolis that in living memory was regarded as the Paris of the West. Fifty years ago, Detroit was the fifth largest city in the United States, with close to 2 million inhabitants. It had the nation’s highest per capita income. Its famous auto industry was a magnet for migrants. Detroit had the highest rate of home ownership of any black urban population and an unemployment rate of 3.4 percent, well below the national average.

Now, the auto capital of the world has become the murder capital of America, earning top honors in Forbes‘ list of most dangerous cities for four years running. Almost two-thirds of its population has fled, leaving behind tens of thousands of abandoned homes and businesses. The Economist has described this urban flight as a “demographic catastrophe” unparalleled in the developed world.

Detroit’s unemployment rate hovers around 18.5 percent. Median household income is barely half of the U.S. average. Almost 60 percent of the city’s (predominantly black) children live below the poverty level.

Who is to blame for this calamity? The progressive left and conservative right have competing theories.

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