Today it’s official. Detroit is bankrupt. Not like metaphorically bankrupt as politicians tend to say in order to criticize opponents’ fiscal policies. Actually bankrupt, as in filed under Chapter 9 of the bankruptcy code.
This is the largest city to ever file for bankruptcy, and obviously no large city goes bankrupt without a complicated array of problems. But the basic reason Detroit needs to do this is pretty simple. In 1950 there were 1.85 million people in Detroit. In 1970, it was 1.5 million. In 1990, it was a million flat. By 2010, it was down to 710,000. When your city is shrinking like that, you end up with a tax base that’s inadequate to maintain the fixed infrastructure or to pay off pension costs that were incurred in more prosperous times. Shedding legacy obligations is a necessary part of the fix. You can shed legacy obligations without filing for bankruptcy by just stiffing pensioners. But the scale of Detroit’s fiscal problems are so enormous that doing it entirely that way would be cruel and pointless—bondholders need to take a hit and this is the way to do it.
