Detroit filed bankruptcy under Chapter 9 in July 2013, facing close to $20 billion in debt. A large part of that debt was due to the city’s underfunded pension plans. And then there was the fact that the Rust Belt had rusted through, and Detroit was a virtual ghost town with few people or businesses left to provide tax revenue. (If you’ve never seen Andrew Moore’s Detroit Disassembled, you should. The post-apocalyptic images are breathtaking.)
Dallas is no Detroit. We have shiny new buildings, towering downtown cranes, and stunning new bridges. We can’t seem to build things fast enough. I mean, it took a Dallas businessman, Fossil founder Tom Kartsotis, to figure out how to capitalize on the Motor City’s edgy attitude by inventing a retro-style company with products taglined “Built in Detroit” (at least until the FTC told Shinola in June that it needed to clarify the items are made from imported parts).
But despite the visible construction in Dallas, much of the economic growth has been north of the city proper. And, it turns out, we’re not particularly good at math, especially when it comes to long-term investments. Or anticipating economic downturns. Or choosing Napa Valley real estate. So we find ourselves in a similarly precarious predicament to our northern neighbors.
Detroit exited bankruptcy at the end of 2014. One of the interesting aspects of their plan was their “Grand Bargain,” an $816 million cash infusion made up of private foundation money, state money, and $100 million from the Detroit Institute of Art. What’s an art museum doing bailing out a pension, you ask? Good question. If you didn’t follow the bankruptcy, you might not be aware that Detroit, which has a world-class, city-owned art museum, was facing the prospect of having to sell off its $4.6 billion collection, piece by piece, to pay off the city’s debt. To avoid auctioning off Vincent Van Gogh’s Self-Portrait With Straw Hat, a creative agreement had to be reached. And it was. By people committed to saving the city that built many of their companies and foundations.
More than a year out of bankruptcy, it turns out Detroit is in danger again, after the DIA prepaid much of its $100 million obligation. Prepayment sounds like a good thing, except that it means the money is back in the pension’s hands, subject to the whims of the pension’s investments. We in Dallas know too well how that can go.
What does Detroit’s plight mean for Dallas? The Manhattan Institute recently looked at the viability of similar “Grand Bargains” for cities not in bankruptcy. The study focused on other Rust Belt municipalities: Buffalo, Chicago, Cleveland, and St. Louis. The study posited that if organizations like the Ford Foundation have made their money from the cities they are in, then maybe they should have a role in saving those same cities. The answer was that philanthropic foundation-based bailouts, while not optimal, can work. Listen to Howard Husock from the Manhattan Institute explain why here.
We are no Rust Belt city, but check out the chart above. We are second only to Chicago in pension liabilities. And we’ve got Detroit beat by a long shot. What was best for Detroit may not be best for Dallas, but we need to start thinking creatively. And heed their warning.
