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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The likely losers are the city's workers, firemen, police and teachers who have counted on pensions and health care coverage. The city has borrowed heavily to pay the billions in costs and it is seeking large concessions in both present and future obligations. Their interests will be pitted against debt owners and other creditors.

Detroit began piling on debt and pension obligations in the 1950s, when it was the prosperous No. 4 city in America. The city's peak population of 1.8 million, reached during the Truman administration, has fallen to just 700,000, barely remaining in the top 20 after it plunged into a cycle of poverty, job losses, crime and fiscal decline. The fall in real estate prices that hit the entire country accelerated Detroit's decline. "This is a situation that's been 60 years in the making," Gov. Snyder said on Michigan's website.

That's not to say there is no weakness among other American cities. Nearby Chicago and the state of Illinois face problems similar to, if less severe than, Detroit's, and have seen deep cuts in debt ratings. In Michigan, as in other places, the battle has political overtones with its statehouse run by Republicans who now manage an overwhelmingly Democratic city, which has already been placed under emergency fiscal management and federal bankruptcy court supervision.

The largest state, California, narrowly averted a fiscal failure and relied on IOUs to pay bills last year while it sought a permanent fix. It seems to have staved off disaster. In the more distant past, Cleveland, Ohio, flirted with bankruptcy, and America's largest and wealthiest city, New York, required federal help to avoid the same fate in 1975.

The municipal bond market went into one of its biggest declines ever in 2011 after the widely followed Wall Street analyst Meredith Whitney said she saw hundreds of possible bankruptcies. That never happened. The market recovered to all-time highs last year, and Whitney has backed off her bearish stance.

[Read: What's Making Famous Bear Meredith Whitney so Bullish?]

Detroit's ebullient spirit, which survives even as one-fifth of its real estate lies vacant, stems from its long history as the world's car-making capital, despite years of dramatic ups and downs. It rebounded once again after Chrysler and GM both declared bankruptcy in the depths of the last recession. GM's headquarters still towers over the city.

"GM has a big leadership role to play, and they have been working hard on the city's problems," Hill says. But everyone agrees the city's future will need to rely on a more diversified base as the auto industry goes global. Chrysler is now a division of Italy's Fiat, and GM is China's leading carmaker. There is little hope for a huge rebound in auto manufacturing jobs, a hard reality in a city where average home prices dropped below the price of an average car in the depths of the recession.

While the city tries to improve its quality of life and attract new business for the long term, it will be under the supervision of federal bankruptcy court for a period of months and perhaps years as the court reviews the extent of the problem and decides which creditors will be paid and how much. The first step alone could be difficult. "It's difficult to say how deeply in debt the city really is," Heckman says.

Detroit's emergency fiscal manager, Kevyn Orr, who has been working in the city since March, has pushed for more clarity and blames past mismanagement of city's finances for making matters worse. "Everyone knows the problems really well," Hill says. "We don't know the solution yet, but we know what we need to work on. I'm hopeful that we are in the middle of a phoenix rising."