Detroit's Bankruptcy: Tip of the Iceberg?

Last week, the City of Detroit became the largest city to file for bankruptcy in the history of the United States. The once vibrant city, whose roots came from automobiles and music, fell-victim to its financial situation, which includes between $18 to $20 billion in debt. Along with a large amount of debt, Detroit has encountered problems with underfunded pensions, diminishing population, and poor public services. As a result of the bankruptcy, Detroit could experience large legal fees and cuts in its public services and bondholders will be left with pennies on the dollar. Is Detroit just the tip of the iceberg for cities that may file for bankruptcy?

Just last week, Moody’s Investor Services downgraded Chicago’s credit rating as a result of underfunded pension liabilities. Moody’s called the liabilities, “very large and growing.” As seen with Detroit, cities can face difficulties in meeting future funding requirements that public service demands. As Detroit’s financial situation deteriorated so did its public services. Other cities that currently have financial struggles are Cincinnati, Minneapolis, Portland, and Baltimore.

Cincinnati was downgraded by Moody’s from an Aa2 to an Aa3 rating on July 15. Both Minneapolis and Portland have their ratings under review by Moody’s. Cincinnati currently has a $60 million budget deficit and Baltimore has a $745 million deficit. Baltimore has the highest property taxes in Maryland, but the citizen’s revenues do not match with the growing budget deficit.

What can these cities do to avoid bankruptcy? Outside of bankruptcy, many cities have renegotiated contracts, take advantage of rainy day funds, form public-private partnerships, and, reduce public health care and pension benefits. One option cities can take is selling city assets. Harrisburg, the capital of Pennsylvania filed for bankruptcy in October but the state law denied it. Recently the city has sold assets, raising more than $2 million. Detroit will have to sell some of its assets, maybe including the controversial idea of selling the Detroit Institute of Art’s assets.

It is important that cities and countries look at the city of Detroit as an example of what can come from poor financial decisions. The amount of government borrowing should be reviewed on a municipal, state and national level. The United States could see similar problems with increasing Social Security and Medicare expenses and increasing retirees. More cities could follow in Detroit’s footsteps of filing for bankruptcy if debt and underfunded pension liabilities are not controlled.