Is Detroit bankruptcy a warning sign for Canadian border cities?

Illegally dumped tires sit in front of a vacant home in a once thriving neighborhood on the east side of Detro …
The City of Detroit has announced that it has filed for bankruptcy, which means the once-mighty Motor City could soon be declared financially insolvent and prompt a massive restructuring that could, should any member of its fleeing population remain, set the city on a path to recovery.

That’s the positive spin. The negative is that declaring a sign that everything has gone completely wrong. That a city is so troubled that its only chance for survival is with powerful intervention. It is an exclamation mark that emphasizes the community’s financial failure.

People look for clothes at the Capuchin Soup Kitchen service center, where hundreds of people receive food and supplies everyday, in Detroit, Michigan, December 9, 2008. REUTERS/Carlos Barria
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Tue, 19 Feb, 2013 12:00 PM EST
This is exponentially more troubling in the case of Detroit – being on the border with Canada and geographically tied to Windsor, Ont., it is a gateway to the fear that a Canadian city could sink to similar depths.

Reuters reports that Detroit is the largest city to file bankruptcy in U.S. history - underlining the collapse of a once-proud and iconic city spiraling under the faltering automotive industry.

The newsgroup writes:

[T]he city's name has become synonymous with decline, decay and crime. Detroit has seen its population fall to 700,000 from a peak of 1.8 million people in 1950. The city's government has been beset by corruption cases over the years. Waning investment in street lights and emergency services has left it struggling to police the streets.

[ Related: Detroit files for bankruptcy, stage set for court fight ]

The government owes creditors an estimated $18.5 billion. The bankruptcy filing throws the repayment on those debts into question and could threaten the pensions and benefits of thousands of current and former employees.

It is a messy, dirty business, but it isn't the first U.S. city to throw in the towel. Last summer, three Californian cities declared bankruptcy within about a month of one another. San Bernadino, Stockton and Mammoth Lakes collapsed under the depressed housing market. As housing values plummeted so did the amount of property tax going into city coffers.

Governing.com, a website that tracks U.S. governments and municipalities, reports that eight cities and towns have filed for bankruptcy in recent years, including Detroit, the three Californian cities and:

  • Jefferson Country, Ala.
  • Harrisburg, Pa.
  • Central Falls, R.I.
  • Boise County, Idaho

[ More Brew: Detroit fireworks showcase gets a boost from pals in Canada ]

Governing staff writer Ryan Holeywell says the key issue facing Detroit is that their tax rates are at their current legal limit. Even if the state authorized higher taxes, it's likely residents could even afford them.

Meanwhile, basic services have been gutted. Nearly 40 percent of street lights don't work, and citizens wait an hour on average for responds to police calls. It's unlikely the city could scale back services to a degree that there would be enough savings to meet its financial obligations.

In Canada, where we face similar economic strains, it is unlikely we will see a city declare bankruptcy. Following the bankruptcy spree in California last year, Conference Board of Canada Director Mario Lefebvre said they were confident such a step wouldn't be necessary.

He writes:

Why do we hold this view? To begin, cities in Canada cannot, by law, run operating deficits. Therefore, even if home values were to fall steeply, Canadian cities would have to find a way to balance their books. In the past, this was done by a combination of lifting the tax rate on properties and by reducing expenditures.

Lefebvre said cities are allowed to run deficits of capital project budgets, meaning a sudden housing price correction could put heavy strain on that. However, most cities are hesitant to take on much debt for capital projects.

That breath of fresh air is likely sound relief for the residents of any city, outside perhaps Windsor, which holds to distinction of being tied geographically and financially to Detroit.

But the Globe and Mail reports that the border city should be fine. For one, it doesn't rely on tourism dollars from Detroit, and the city's auto industry is more reliant on the North American market as a whole than just its neighbouring city.

“Perhaps the biggest negative for Windsor is just the perception of the region from the Detroit bankruptcy – colouring the view of potential investors,” chief economist Douglas Porter of BMO Nesbitt Burns told the Globe.

The perception on Windsor’s financial situation aside, Canada seems otherwise distanced from the fall of Detroit. It is a singular failure of a once-iconic city that watched as its key industry decayed for years.

Canadians cities have their own struggles to deal with. But becoming Detroit isn’t one that should keep us up at night.

 

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