Can Detroit Come Back Again?

The city that’s been in a decline for decades tries to dust the “jewel” again.

The city that’s been in a decline for decades tries to dust the “jewel” again
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Detroit has weathered so many storms over the past five decades, it seemed the city had nowhere to go but up – and in many ways, that was where it was moving.

But while Detroit's Big Three automakers have been steering their way to a strong recovery, and a revived downtown has been drawing crowds to glittery new shopping malls and sold-out Tigers games, the Motor City itself has run out of options. The city's staggering poverty and shrinking tax base have finally overwhelmed its finances after decades of struggle, culminating in its bankruptcy announcement this week. Because Detroit and its carmakers have made so many comebacks over the years, some expect a revival. But nobody expects a miracle anytime soon.

"It can be a phoenix rising from the ashes now," says Dan Heckman, fixed-income strategist for U.S. Bank Wealth Management. "But it needs to get its fiscal house in order, and it needs to diversify its economy [beyond autos.] It's going to take a long time."

Detroit's bankruptcy comes as no surprise to its business community, which is "hopeful that the city's revival can continue," says George Hill, chief executive of Diversified Chemical Technologies Inc. His company, with four plants inside the city, has remained in Detroit for the past four decades while other employers and hundreds of thousands of jobs have left.

"We are clearly on the cutting edge of something new and different now, and I'm not entirely certain I like what we are going through," Hill says. "But this city has great resources to draw on. Large ones like [General Motors] and small ones, thousands of entrepreneurs and working people committed to the city's success."

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The city needs to draw on the large resources of the state and region, as well as Wall Street and Washington, to move forward, Hill says. "We all share a realization now. Perhaps we all did not do what we could have done. We really need to invest in the people who will stay in the city to make it work like it has in its jeweled history," says Hill, who lives in downtown Detroit and is actively involved as a leader in the city's African American business community.

Detroit's fiscal collapse comes as most of the rest of the country's cities and states rebound from the worst effects of 2008's financial crisis, Heckman says. While urban affairs experts see Detroit as a special case, they think its recent woes have big implications for municipalities throughout the country that are struggling to manage with $3 trillion in municipal bond debt as well as a U.S. pension shortage that Moody's figures to be $4.65 trillion. Indeed, some worry that Detroit could inspire other cities to use the bankruptcy threat or force concessions from unions and in dealing with investor demands.

Following the announcement of what is the largest municipal failure in U.S. history, Republican Gov. Rick Snyder, in a message on the official Michigan website, said, "Let me be blunt: Detroit is broke."

What comes next will be watched closely by city managers, labor unions and bond investors throughout the United States to see who wins and loses as the city tries to repay an estimated $18 billion in debt. Pensions are a relatively small part of the total, but a growing concern for its aging workforce.

More broadly, much of that debt will be expunged as surely as unpaid Siberian bonds in the era of the Russian czars. But the city has already signaled that it will place a high priority on repaying bondholders. Market analysts expected little impact from Detroit's well-previewed fiscal failure on the municipal market. Indeed, the bankruptcy filing may be welcome news to investors of Detroit debt who had been offered as little as 10 cents for each dollar invested in the negotiations leading up to the filing.

[Read: What to Expect From Bond Mutual Funds in 2013.]

"Historically, municipal bondholders have held a very senior position in bankruptcies," Heckman says. "The city has to makes sure now that bondholders are treated fairly because when it comes out of bankruptcy, it will want to access capital markets. It can't be overly punishing to them if it wants to be in good standing."