TIME’s cover shows Detroit’s Renaissance Center skyline (the iconic image of the 1980 Republican Convention) — "IS YOUR CITY NEXT? Lessons from Detroit’s fight to survive (in global editions, cover line is: "AMERICA’S BROKEN CITIES"), by Rana Foroohar, assistant managing editor in charge of economics and business: "Detroit’s pain is unavoidable if the city is to save itself — and it may ultimately help save other cities too. That’s because America’s cities desperately need a wake-up call to fix their finances. Though nearly everyone agrees that Detroit is in particularly bad shape, many of its underlying issues-crushing debt and unfunded and unsustainable retiree ­benefits-are not unique. … A worst-case scenario comes from banking analyst Meredith Whitney, who famously predicted the financial crisis in 2007: a chain reaction of dozens of big cities going bust. … [W]hile few will go as far as Whitney in forecasting an epidemic of defaults, most believe that further credit downgrades are likely-which will raise borrowing costs for cities and dig them deeper into the debt hole. Chicago was just downgraded, and the big ratings agency Fitch is considering a broader re-evaluation of local-government debt on the basis of the situation in Detroit.

"But city finances are not the same thing as city economies . In much of the country, unemployment is ticking down, tax receipts are up, and the property market, a huge generator of local income, is starting to recover. Detroit is going bankrupt at a time when it actually has a viable plan for growth, under the leadership of Mayor Dave Bing, with ­businesses relocating downtown, riverfront areas being redeveloped and medical facilities expanding. Chicago is at the forefront of some of the country’s most innovative experiments in education reform, private-public partnerships and ­alternative-­energy investment. Meanwhile, other cities are thinking and working outside the box, from Providence, R.I. (crafting compromises with public employees to reduce long-term liabilities), to Miami (funding infrastructure projects with private consortiums instead of public debt). …

"Just as the dysfunction in Washington doesn’t characterize the entire U.S. economy, broken city governments and ­pension systems don’t necessarily define the economic fortunes of cities themselves. … [I]f you stripped government out of the economy, we’d already be at 3% growth rather than 2%. The private sector is in an increasingly robust recovery, and while second-quarter GDP figures are likely to be somewhat weak, many analysts are predicting a good rest of the year for areas like housing, construction, manufacturing and some parts of the retail sector. Meanwhile, government at all levels is still shrinking and cutting, creating a headwind for the overall economy. … [T]he U.S. doesn’t have a debt problem so much as it has a long-term entitlement problem. The same is true for many cities; Detroit, Chicago, Philadelphia and Portland, Ore., may have unsustainable public finances, but they also have interesting strategies for growth. …

"The fall of this iconic city will bring many changes in the way local governments function and cities grow. While the broader re­rating of municipal debt that’s very likely to happen … would increase borrowing costs and reduce the amount of money all cities can raise through bond issuance, it might also prompt many to shift their growth models, rein in unsustainable labor costs and partner in more innovative ways with the private sector (which still has $2 trillion in cash on its balance sheets) in areas like education and infrastructure at a time when federal help is less forthcoming. See the cover and read an abstract. ti.me/13hV0pF

Advertisements