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Posted on Sustainabilitank.info on July 26th, 2013
by Pincas Jawetz (pj@sustainabilitank.info)

First posted on July 24, 2013. We have now an add-on from the New York Times of today – July 26, 2013.

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Failure of an American City: Investing Lessons From Detroit’s Bankruptcy:
Last week, Detroit filed for bankruptcy and the largest driver of Detroit’s demise is one simple, startling fact

by Morgan Housel
Contributor, The Motley Fool, July 24, 2013.

The now bankrupt city of Detriot, Michigan.

In 1948, Secretary of Commerce Charles Sawyer called Detroit’s automobile industry, “a symbol of the way in which the American economy could best provide the average American with a steadily increasing abundance of the things he wants and needs.”

Last week, Detroit filed for bankruptcy.

Pundits this week pointed fingers at a city that promised too much, spent with abandon, and relied heavily on a single industry. They cite a poorly run government, myopic city planners, and even fraud. In most cases, they are right.

But the largest driver of Detroit’s demise is a simple, startling fact: the city’s population declined 65% in the last six decades.
No city can survive such an exodus; it’s actually amazing Detroit’s finances lasted this long.

The Motor City was home to 1.9 million people in 1950, at the time nearly identical in size to Los Angeles. Today, 700,000 inhabit Detroit, or less than a fifth the size of L.A. That works out to 2.2 people leaving Detroit every hour, 24 hours a day, for the last 63 years.

If the number of people who left Detroit in the last sixty years formed their own city, it would be the nation’s ninth largest, ahead of Dallas, Texas.
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The financial woes linked to Detroit’s shrinking population have been known for decades. A 1991 article in the Times-News was prescient: “Detroit’s population loss could be financial disaster,” it wrote.

And Detroit tried to avoid its fate. Total city spending was cut by more than $1 billion, or 33%, between 2006 and 2010, including a 77% reduction in “recreation & culture” spending, a 72% cut in capital outlays, a 41% reduction in spending on roads, and a 44% cut in “health & welfare” spending.

But the city made pension promises during a period when its taxpayer base was more than twice the size it is today. With an unemployment rate of 16% — more than double the nationwide average — there is a shrinking base of workers left to tax. And with a median income of $27,000, or about half the nationwide average, those who are employed have little income to tax. According to Detroit News, nearly half the city’s 305,000 properties didn’t pay their tax bill last year.

Seventy-seven of Detroit’s city blocks had only one owner who paid property taxes in 2012. You cannot run a city like this.


What Detroit’s fall means for investors may be more symbolic than direct.

Investors hold some $1 billion in Detroit general obligation bonds, and $5.3 billion of bonds backed by the city’s water and sewer revenue. That’s barely a rounding error in the $3.7 trillion municipal bond market. And not all of Detroit’s bonds’ value will be lost; part will be recovered post-bankruptcy, and parts are backed by bond insurance companies. The direct investing fallout from the city’s bankruptcy is nil.

Symbolically, Detroit teaches us three things about investing.

First, Detroit shows how organizations that can’t adapt eventually crumble.

Before it was a technology hub, San Francisco relied on shipping, and before that, gold mining. Before New York was the financial capital of the world, it was the garment capital of the world.

Detroit enjoyed the auto boom, but never found its second act.


Adaptation is a key trait to any organization’s survival, including companies. We’re always looking for companies that adapt to changing circumstances. Amazon (Nasdaq: AMZN) started as an online bookstore and adapted into the world’s largest store, period. Netflix (Nasdaq: NFLX) started as a DVD-by-mail company and adapted into a streaming video service. History provides two constants: change, and punishment for organizations that don’t adapt to change.

Second, Detroit provides a sad lesson in the need to save for one’s self. Tens of thousands of retired Detroit public workers wait anxiously for word on if, and how much, their pension benefits may be cut. Their story may not be unique. According to Credit Suisse, 97% of S&P 500 companies with pension plans are underfunded. The Congressional Budget Office wrote in 2011 that, “By any measure, nearly all state and local pension plans are underfunded.”
The hard lesson is that you can only truly rely on one person — yourself — to save for retirement and look after your investments.

Last, Detroit was overwhelmingly reliant on the auto industry. When the fate of three companies — General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler — turned, so went the entire city’s fate. Evan Soltas of Bloomberg wrote, “Detroit’s dependence on cars wasn’t exactly the problem. It was dependence itself. Cities should never go all in on any industry, cars or otherwise. It didn’t realize that until it was too late.”

The same mistake often trips up investors. We preach diversification at The Motley Fool because a lack of it can be one of the surest routes to disappointment.

William Goetzmann of Yale and Alok Kumar of the University of Texas once showed that the least diversified investors underperform the most diverse investors by an average of 2.4% annually.

Things change unexpectedly, and often for the worse. Diversification is the best way to mitigate that risk.

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Op-Ed Contributor, The New York Times
Come See Detroit, America’s Future.
By CHARLIE LeDUFF
Published: July 25, 2013 2 Comments

DETROIT — I KNOW an old woman who hasn’t opened her windows in a decade, afraid that what’s outside will climb inside. Inside, there is the stale odor of dead air.

I know another woman who called me about a corpse lying outside her window for six and a half hours. This was because of cutbacks at the morgue. No dignity in death here. They do it better in Baghdad.

The latest trend? When a person is murdered, he is thrown into an abandoned house, and it is set on fire. There are tens of thousands to choose from.

I know of an 11-year-old boy who was shot, the bullet going clean through his arm. The cops stuffed him in the back of a squad car and rushed him to the hospital. That’s how we do it. There was no ambulance available. About two-thirds of the city’s fleet is broken on an average day.

I know a cop who drives around in a squad car with holes in the floorboards. There is no computer, no air-conditioning, the odometer reading 147,000 miles. His bulletproof vest has expired. His pay has been cut 10 percent.

I knew a firefighter who died in a fire, but not from the fire. He died when the roof of an abandoned house collapsed on him and his brethren could not find him because his homing alarm was broken and did not sound. He suffocated.

In our town, the 911 dispatch system recently went down for 15 hours, and no one seemed to give a damn. When the system is running, the average wait is 58 minutes. Firefighters can’t use hydraulic ladders on fire trucks to do their jobs unless there is an “immediate threat to life.” In a fire — imagine that. The ladders haven’t been inspected in years.

If this were New York, these stories would have ricocheted around the world. But this is Detroit and, of course, nobody gives a damn. Even here people have been conditioned to accept these things as normal, a nuisance, the buzz of a fly.

This numbness, in a peculiar way, is a sign of strength. People here manage to get along somehow.

So we went broke, bust, bankrupt. We’ve known that in Detroit for years. Only now it is official with a Chapter 9 filing last week. The biggest municipal default in United States history — at least $18 billion. Suddenly, America gives a rip.

How did it get this way, I’m asked? After all, it was just 99 years ago that Henry Ford offered the workingman $5 a day and profit-sharing. How, in less than a century, did it come to this?

The short answers: municipal mismanagement, race riots, white flight, black flight, dead flight (people routinely disinter their deceased and relocate them to the suburbs). There were the overreaching unions and management that couldn’t balance a ball. Proof? The multibillion-dollar bailout of the auto industry. Thank you, American taxpayers!

Then there is our spectacular civic corruption: A former mayor, Kwame M. Kilpatrick, waits for a bed in federal prison, convicted of extortion, racketeering and bribery. He looted the city of millions of dollars and stole the future of thousands of children. They can send him to hell for all I care. I don’t want to pay for his upkeep. But thank you, taxpayers! You will pay for it. And the ex-mayor’s team of super lawyers will also be paid with the public dime.

So Detroit files for bankruptcy. What does this mean? Pay close attention because it may be coming to you soon, Los Angeles, Baltimore, Chicago, Philadelphia. In 2011, Moody’s calculated the unfunded liabilities for Illinois’s three largest state-run pension plans to be $133 billion. (It is expected to be even larger this year.) That’s the size of six Detroit bankruptcies — give or take a few hundred million.

Of Detroit’s debt of at least $18 billion, about $7 billion is secured by collateral like casino revenues and utility taxes. That means creditors — read: big banks — will get paid. Of the remaining $11 billion dollars or so in unsecured debt, about $9 billion is owed to retirees and current municipal workers, people like firefighters and police officers. These debts come in the form of promised pension checks and health care benefits, all backed by a false, unsecured promise. These are the people who are likely to lose out.

In simple math, do we sacrifice 30,000 former and current workers to save a city of 700,000 people and their progeny? Most Detroiters will tell you yes. Don’t judge. We feel bad about it. But we’re simply Americans. We are a gaunt dog. We are desperate. And you are watching and studying us.

Pension checks will be much smaller than planned and health care benefits will get foisted off on Medicaid and Obamacare. Thanks again, taxpayers!

There is hope up here on the Great Lakes. We have fresh water, profitable auto companies, more than $130 billion a year in trade with Canada crossing through our city, a world-class research university and, eventually, a clean balance sheet. Hey, it helps to be first. What do you have, Atlanta?

So come visit Detroit, my fellow Americans. Come take a look at your future. Come give the tires a kick. And if you want your money back, come strip copper pipes and wiring from the abandoned buildings — if you can find any copper. Chances are, someone beat you to it.

Charlie LeDuff, a reporter at the TV station WJBK and a former New York Times correspondent, is the author of “Detroit: An American Autopsy.”

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