BY JODIE KIRSHNERAPRIL 16, 2020
“I just go outside for air and go right back inside the house,” Stevie, an African American man in Detroit in his mid-40s, said. “For the past two weeks everything’s looked dead around here.”
As others like Stevie in cities across the country continue to stay home, the economic burden to America’s cities will deepen. The coronavirus, which started as a public-health crisis, is fast becoming an urban economic crisis as well.
Even as municipal leaders allocate funds to try to treat and curb the virus, the funds available to them to do so are plummeting along numerous axes. At the top of the list: The stay-at-home orders that diminish employees’ earnings and their spending. The orders translate into lower income- and sales-tax revenues at the same moment when cities must provide more services to the vulnerable populations who most often call cities home. Stevie, who usually works odd jobs in construction, was already struggling to afford his property taxes before the contagion spread. Now he has seen his opportunities for work disappear. “I’d be willing to go to a job site and then even sleep over there for several days, if they’d let me,” he said.
Meanwhile, it has grown more expensive for cities to raise money in municipal debt markets. Nearly every state has replicated the federal government’s extension of federal tax deadlines for state returns, and the delayed payments will also decrease revenue flows into city coffers. In a survey by the National League of Cities, a nonpartisan advocacy organization, half the local government officials polled expect to draw down financial reserves over the next six months, and a quarter expect to cut services, just when their residents need those services most.
The “B” Word
In the foreseeable future, some state governments may look to municipal bankruptcy as a way to address the problems building in their cities. I spent the last three and a half years studying the impact of Detroit’s 2013 bankruptcy on its residents. Although bankruptcy can enable cities to renegotiate debts with creditors, so that fewer future revenues must go towards debt service, bankruptcy has proved to fall well short of a cure-all for cities. It cannot bring back lost jobs or businesses or magically reconstruct a tax base. In the wake of bankruptcy, cities including Detroit have sought to maintain their newly balanced budgets by welcoming speculative property investment and enforcing fines and fees for civil infractions, avenues for raising revenues that have inflicted further harms on their residents.
Beyond the direct expenses of lawyers and other court fees, bankruptcy can also damage cities’ reputations and create uncertainty that depresses real estate values and dissuades investment. Bankruptcy has triggered reductions in cities’ credit ratings that have made future borrowing more expensive, and when the markets’ concerns have spread across the state, the cities’ surrounding economies have also suffered. Transferring power from elected officials to a bankruptcy judge, moreover, infringes on democratic ideals.
Even in the corporate world, restructuring debt in bankruptcy has helped companies that already enjoyed the building blocks for profitability. Many companies have repeatedly entered bankruptcy before permanently going out of business. Similarly, where municipal bankruptcy has been most successful, cities have used it to address one-time debt imbalances, such as a large, outstanding legal judgment, or to cover losses on misguided investments, and not to reverse deeper challenges.
The Worst Is Yet To Come
Does the crisis for cities that the coronavirus poses look more like a one-off debt or a more far-reaching problem? It seems too early to say. The path of the virus and its duration, and its effects on economic production, remain unpredictable. Early in the Great Recession of the late 2000s, economists forecast that the crash in the subprime mortgage market would not spread to other areas of the economy. Then it did. Some current projections peg the likely fall in economic output in 2020 at 9 percent, or three times the steepest decline in the Great Recession. And though the virus looks, to some extent, external to the fundamentals of municipal economies, it exposes broader weaknesses, especially in governance and safety nets, that the very same austerity measures that bankruptcy represents arguably created.
Though in the immediate aftermath of the Great Recession, federal grants increased to support state and local government spending, by 2011 that spigot had largely run dry. In 2012, Stockton, Cal., became the then-largest city to file for bankruptcy, and by the end of 2012 three more California cities had filed, with nine more declaring financial emergencies. Across the country, without more help from the federal and state governments, cities were failing to manage persistent unemployment, stagnant wages, and rising inequality. Several hundred American cities struggled on the brink of default, shrinking public payrolls, cutting services, and selling public land.
Decisions in the wake of the Great Recession — to abandon cities to their own insufficient budgets — contributed to the very precarity that cities now must navigate. Public health has appeared unusually susceptible to budget cuts, as the financial value of keeping citizens healthy and preventing bad events from happening has seemed difficult to articulate.
In the lead-up to bankruptcy, Detroit, for example, reduced costs by effectively closing its public health department. The city lacked sufficient federal support even to conduct large-scale emergency preparedness exercises. A Hepatitis A outbreak developed and spread throughout the state. In an aggressive move to boost the revenues of Detroit’s water system, in order to leverage its value as a city asset in the bankruptcy, service shutoffs to customers with delinquent accounts surged. During the bankruptcy, the water department turned off water at 900 houses a day, threatening an imminent public health crisis. Moreover, separate attempts as the city emerged from bankruptcy to raise revenues from remaining residents through higher taxes, fines, and fees, for example, have now left those residents with fewer savings with which to withstand personal losses caused by coronavirus.
To the extent that, following the virus’s spread, America’s cities will be left with more fundamental economic problems than simply a one-time, bounded expense, urban success over the next few years will depend not on renegotiating debt in bankruptcy but on enabling people to keep jobs, getting people back into lost jobs, and enabling businesses to reopen. Meaningful economic mobility for individual residents, rather than bankruptcy, would be necessary to stabilize municipal budgets. The more small businesses the country can keep afloat and the more citizens it can keep employed, the faster cities can more broadly regain economic strength.
Federal Aid Must Go Further
Municipal budgets reflect the financial health of city residents and their economic activity. In Detroit, if Stevie could resume construction work, he would pay more income taxes to the city and spend more in the local economy to shore up consumer demand and sales tax revenues. He could finally afford supplies to fix up his own house, potentially contributing to property values in his neighborhood and to higher property tax revenues.
Efforts at the federal level offer a start, but are likely to prove insufficient: On March 18, the Families First Coronavirus Act eased some of the pressures on state unemployment insurance programs. It also raised the portion of Medicaid payments covered by the federal government more than 6 percent, but that was still a smaller increase than during the Great Recession.
Nine days later, the Coronavirus Aid, Relief, and Economic Security (CARES) Act pledged “loans, loan guarantees, and other investments” to “businesses, states or municipalities.” Though that’s a positive step, the money can only reimburse costs stemming from the virus and not previously included in state or municipal budgets. It cannot, for example, boost general revenues, Medicaid spending, or unemployment insurance. Moreover, the act provides about half as much funding to state and local governments as the 2009 American Recovery and Reinvestment Act initially offered them in the wake of the Great Recession. Massachusetts Sen. Elizabeth Warren has sought public guarantees that the funds available under the CARES Act would first flow to state and local governments, rather than to large corporations.
That seems the minimum that government can do to create alternatives to municipal bankruptcy. To choose otherwise would be to abandon people living in cities already on the edge of tragedy. “Poor people in Detroit already been going through hell,” Stevie said. “This is just a repeat, so all you got to rely on is your own faith, and nothing else.”
Jodie Adams Kirshner is a Research Professor at the New York University Marron Institute of Urban Management, and the author of Broke: Hardship and Resilience in a City of Broken Promises, a narrative nonfiction book on the Detroit bankruptcy.