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Wake up, America, Detroit bankruptcy mess could happen in your city, too

 

After seeing Detroit declare bankruptcy, people living in New York, Chicago and our other large cities should ask, could it happen here? The answer is yes, and it’s up to them to make sure it doesn’t.  Are they up to the task?  

A recent poll showed that New Yorkers want their new mayor to have empathy

Seriously: 61% of those asked said they want a mayor who “understands the needs and problems of people like you.” 

Cities, like companies, have to deal with setbacks. Unhappily for Detroit, past mayors ignored warning signs.

Only 15% said they would pull the lever for someone who “knows how to attract and keep business” while a mere 11% thought they might vote for someone who has managed a large organization. 

Are these people out of their minds?  

There is no mystery about why Detroit went belly-up. It’s not about a shrinking auto industry – it’s about management. Or, actually, mismanagement. 

Detroit isn’t the only city that has suffered a population decline or lost an industry. Cleveland lost 17% of its inhabitants in the past decade; the 2010 population of 397,000 was the lowest since 1900 and less than half the 1950 total of 915,000. But – Cleveland isn’t bankrupt; it boasts a balanced budget

Think about New York – once the garment center of the universe. See many button makers or zipper shops in New York recently? No – garment makers left for Asia decades ago. And yet, New York has prospered

Cities, like companies, have to deal with setbacks. Unhappily for Detroit, past mayors ignored warning signs – of a shrinking population, declining tax base, ballooning pension and benefit obligations – and did nothing. They allowed whole neighborhoods to slide into decay and crime, further chasing off any prospect of renewal.

By contrast, when the worst financial crisis of modern times threatened New York’s future, Mayor Michael Bloomberg cut costs and also aggressively wooed job-creators.   

New York lost more than 20,000 financial jobs between 2007 and 2012. These are not ordinary jobs; with average salaries of $363,000 these pay more than 5 times the average private sector job. For New York, one quarter of all private sector wages related to the securities industry in 2007. Losing them was a huge hit to the tax base.   

Still, the city has prospered, recovering all the jobs lost in the recession by mid-2012 – way ahead of the rest of the country. 

Why? 

In part because City Hall pumped up efforts to recruit new industries like fashion, tourism and – perhaps most important – technology. 

In 2012, a report published by the Center for an Urban Future declared that New York City had emerged as the country’s number two tech center, after not even being on the map five years earlier. 

The authors note that New York had experienced “stunning growth” in the sector, welcoming an estimated 1,000 new tech start-ups since 2007 – a figure they describe as probably a “gross undercount.” New York  region’s share of venture capital deals in the past decade has more than doubled from 5% to 11%.

 The growth has provided tens of thousands of new jobs – when employment elsewhere was dropping. It isn’t all start-ups, either. Google, Facebook and Twitter and others have expanded their footprint in NY.

This is no accident. The city offered incubators, marketing help and other assists to tech outfits. In remarks announcing that a joint venture between Cornell University and Israel’s Technion had won the rights to build the city-sponsored new NYCTech Campus, Mayor Bloomberg estimated that the new high-powered complex could generate 600 spinoff companies and $23 billion in economic activity over the next thirty years.

Like Detroit, New York has had its ups and downs. As for the auto hub, New York’s “downs” were the result of catastrophically bad management at the hands of John Lindsay (known mainly for his “charisma”) and others while the “ups” were driven by tough coots like Ed Koch who took a transit strike early in his first term to rein in out-of-control municipal worker pay. That took guts, but that’s what a big city mayor needs.

Managing New York, or Detroit or Chicago isn’t easy. Michael Bloomberg, famously not burdened with empathy, brought to the task proven management skills, as well as the ability to attract and keep smart people. 

City Hall bustles with brainiacs, not political hacks. 

He’s also wealthy, and therefore not corrupt. That helps. 

Detroit’s former mayor Kwame Kilpatrick is in jail, having recently been convicted of 24 felony counts related to corruption, racketeering and corruption. Twenty-four!

For years, Detroit’s mayors have used fiscal sleight-of hand to make the numbers work. Emergency Manager Kevyn Orr summarized in his first report on the state of the city, “Excluding proceeds from debt issuances, the city's expenditures have exceeded revenues from fiscal year 2008 to fiscal year 2012 by an average of $100 million annually. These financial shortfalls have been addressed with long term debt issuances…and by deferring payments of certain city obligations, such as contributions to the city’s two pension funds.” In other words, previous administrations simply failed to address the city’s financial problems, and hoped no one – and especially not voters—would notice.

At a news conference after filing for bankruptcy, Orr said about Detroit’s financial mismanagement, “What shocked me was the tolerance for this behavior for decades.” He added, “Frankly, I’m surprised … I know a lot of people were outraged by my appointment … I wish there had been a lot more outrage over the past 10, 20 years.”  

There wasn’t much outrage, but then maybe voters were looking for empathy in Detroit, too.

Liz Peek is a writer who contributes frequently to FoxNews.com. She is a financial columnist who also writes for The Fiscal Times. For more visit LizPeek.com. Follow her on Twitter@LizPeek.