The Slow-Motion Financial Implosion of Detroit

I wrote about Detroit’s financial problems three years ago when the city’s leadership had a viable plan to fix the city by downsizing its infrastructure. The Detroit Works Project had a blueprint for renewal in 2010. The city has since squandered the time and money it could have committed to that plan and is now facing imminent bankruptcy. This disaster was a long time in the making.

Read Detroit’s financial statements. The CAFR for FY 2012 has the bottom line up front on page 2, with an accumulated deficit of $326.6M from several years of operating deficits. The CAFR itself is ironically interspersed with happy photos of fun things going on in Detroit. Maybe next year’s CAFR can show the Mayor and his state-appointed emergency financial managers turning shovels on bare dirt where their offices used to sit. The Single Audit Report is even worse, with up-front warnings of material weaknesses in Detroit’s internal controls over financial reporting. The federal government has every right to cease funding programs in Detroit given these weaknesses, but politics means more than financial sense.

Detroit’s credit rating at Moody’s has seen almost nothing but downgrades and downgrade reviews since 2010, with the exception of February to December of that year when credit facilities backed by the State of Michigan stabilized Detroit’s outlook. The city had that window of opportunity (during which I wrote my blog article on Detroit’s potential for unbuilding) to quickly begin its downsizing. The city instead has been paralyzed by public employee unions whose members have enjoyed generous pay and benefits for years and are still resisting fiscally responsible cuts to benefits.

I think Detroit had the right intention to downsize itself but picked the wrong means to execute. Reviewing the Detroit Works Project’s strategic framework reveals color-coded maps of the city’s center. The city designated much of its inner core as blighted where no redevelopment would be allowed and tried to pigeonhole specific industries into specific neighborhoods. That’s micromanagement, and it’s dumb. Detroit is in no position to pick and choose which companies it will allow to move in. Contrast this approach with San Francisco, which has given tax breaks to several digital media companies that came to The City regardless of the neighborhood where they chose to settle.

Detroit’s detailed plan for renewal is probably going to come undone out of necessity if receivership forces it to move faster. Farms and ranches will sprout again within city limits and former unionized workers had better learn how to plant rows of corn. City managers should radically and immediately liberalize their approach to zoning.

The lessons of Detroit for the state of California are obvious. Sacramento policymakers are committed to more of what hasn’t worked: more spending on underperforming public schools, more taxes on high income earners, more regulations on business, and more protection for public employee benefits. None of that is going to work in Detroit now that Motor City is crossing an event horizon on its way to collapsing into a singularity.

About Anthony Alfidi 128 Articles

Affiliation: Alfidi Capital LLC

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

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