The Examiners: Anders J. Maxwell on Municipal Distress

As Detroit nears a crucial point in its restructuring, what lessons does the city’s historic bankruptcy offer troubled municipalities?

One Nobel laureate traces Detroit’s collapse to failed social policies from the 1960s. The Chicago Fed comments on the city’s lack of financial oversight. A major business journal’s primary lesson: Detroit should have filed for bankruptcy 30 years earlier, before the U.S. auto industry’s prolonged decline. The city’s debt load suggests a more concise conclusion.

At the time of its July 18, 2013, Chapter 9 filing, Detroit reported obligations exceeding $18 billion. This compares to a declining revenue base now estimated below $1.5 billion per year. Of the $18 billion, over half is due to unfunded pension and retiree health liabilities. These liabilities, moreover, continue to compound as employment declines, reducing plan contributions, and depressed rates lower investment returns.

Unfunded employee liabilities are hardly unusual among American cities. Measured by unfunded pension liabilities per residence, Chicago, New York, Boston and Philadelphia—as well as a plethora of smaller municipalities—have claims well in excess of Detroit’s. The difference in how these cities manage these growing obligations will, in due course, determine solvency.

Detroit’s experience in the past decade is informative. The city’s rapid deterioration resulted from the failure of elected officials to confront issues and highlights the significance of effective partnerships between City Hall, labor and business with the courage and integrity to address debilitating issues created by years of denial. Former New York mayor Ed Koch’s administration stands as a great example. Inclusive leadership makes a difference.

Anders J. Maxwell is a managing director in the restructuring & recapitalization group at New York-based investment banking advisory firm Peter J. Solomon Co.