Will we heed the warning?

Rosenthal: Detroit sounds warning for Chicago

Windy City isn't Motor City, but we don't want to travel same road

July 21, 2013

No matter how much horsepower you produce, you can't outrun math.
Like automakers General Motors and Chrysler a few years earlier, Detroit late last week finally acknowledged its numbers never would add up and filed for bankruptcy protection. This is the destination after decades of struggling to reconcile growing legacy costs and obligations with a shrinking economy.
Sound familiar anyone? Anyone?
Chicago is not Detroit. Not lately anyway. The two cities share a heritage as great industrial cities on the Great Lakes. Chicago's economy has been more diverse and proved more resilient, enabling it to better hold on to its population and tax base over the past half-century while autocentric Detroit veered off course.
"By any kind of functional accounting of the last 10 years or more, it's been apparent the city is bankrupt," said Matthew Cullen, a former GM executive who helps manage investments and businesses for Quicken Loans founder and Chairman Dan Gilbert. "It was a situation we were aware of and many of us feel like the only thing that's different as of (Thursday's filing) is we've turned to confront this issue as opposed to thinking we could hide from it."
Here in Illinois we have our own problems. Chicago's bond rating got a significant dressing down from Moody's Investors Service, which cut the Windy City's rating three notches on the same day of Detroit's Chapter 9 filing. Yes, we can spend all day highlighting the differences between the two cities, but we're also spending more than we should. To blithely ignore the warning signs of what happened in the Motor City is as dangerous as thinking you can blow past the flashing lights at a railroad crossing.
"Even a vibrant urban area is not immune from balance sheet issues that you need to pay attention to," Cullen said. "If you're creating legacy costs and pension and health care obligations and so on, there's a point you reach whether you're General Motors or Detroit or the city of Chicago or somewhere else where the law of big numbers gets to you.
"People are going to have to pay attention (or one day) they'll look up and realize they should have done something 20 years ago. That's our circumstance. People are talking about bankruptcy today, but it's the actions of the last 20 years, the corrupt politicians, the lack of business involvement in the direction of this city to make sure its leaders were doing the right thing. All of that's needed to maintain a city as strong as Chicago."
Cullen's civic involvement includes serving as chairman of Invest Detroit and the Detroit RiverFront Conservancy. He's also volunteer chief executive of the local light rail initiative, which received a great deal of philanthropic support. And he's leading Gilbert's Opportunity Detroit initiative to spark downtown development.
"The solution in Detroit is going to be investor angels. It's going to be a public-private partnership," said Therese McGuire, a professor of management and strategy at Northwestern University's Kellogg School of Business. "They've been on shaky fiscal ground for a couple of decades.
"The main problem for Detroit that Chicago doesn't have is that their population and economy was just dying. From 2000 to 2010, they lost 25 percent of their population. Only one other city lost slightly more population in percentage terms, New Orleans, and that was because Hurricane Katrina hit them."
Not only will Detroit investment have to be strategic in the years to come. So will disinvestment. Detroit now has 700,000 people living in an area that Cullen said probably could accommodate 2.5 million.
"We have too much of this city where there's a house or two on a block," Cullen said. "It's like operating an auto plant at 35 percent efficiency. We'll just be bankrupt again in two years because there's no way to deploy resources effectively across that kind of infrastructure. You can't provide sewer and lights and police and trash pickup to a place that's so inefficiently populated."
So perhaps some underoccupied areas will be allowed to go fallow. Others may be turned into green spaces or urban farming. It's pretty imagery for what everyone hopes is the end of an ugly era.
Gualberto Ranieri, an Italian whose work over the years has planted him in London, Chicago and now Detroit, where he heads communications for Fiat's Chrysler Group, sees this latest turn of events in his latest hometown in terms of the symmetry of two summers 46 years apart.
The first was in 1967, when rioting erupted July 23 in Detroit.
"Perhaps it's a superficial way of looking at things, but I'm a former journalist and not a scholar of history," Ranieri said.
Scholars of history will note that the infamous 12th Street Riots included five nights of violence, looting and arson that left 43 people dead, a couple of thousand buildings damaged or destroyed and the city itself badly wounded. Whatever bravado it had just four years earlier to vie to host the 1968 Summer Olympics was sapped.
Chicago had its riots on its way out of the 1960s, too, but emerged not nearly so scarred. Like all Rust Belt cities, its manufacturing sector took a beating in the years that followed. But Detroit, despite being tethered to flagging auto sales, might have weathered all of that better under stronger leadership.
"We have huge fiscal problems in (Illinois). We don't have anyone who seems to be taking the long view," McGuire said. "For Chicago, (Mayor Rahm) Emanuel is probably happy that Moody's downgraded the debt because he's going to be able to get concessions from the unions and whoever to make things happen. The problem is his hands are tied by the state. That's where our real political problems are."
Bankruptcy allows Detroit to make dramatic cuts that weak-willed politicians might not otherwise pursue for fear of undermining labor support. But this comes at a price that those of us who live in Chicago can't afford.
"Anyone who thinks bankruptcy is a quick fix to long-term debts like pension underfunding is wrong," said Mike Stanton, publisher of The Bond Buyer, which has tracked municipal financial issues for more than 120 years. "The points in …the bankruptcy-court filing about the extreme decline of city services — the long wait times for police, the huge numbers of nonworking streetlights — are not just colorful anecdotes. …Things have to get really bad before you can start thinking about writing off debts, whether to bond investors or pension holders.
"It's definitely better to work on the issue now than to wait for a true crisis."
Ranieri, whose company's "Imported From Detroit" Super Bowl ads have reflected a vision for the city as a scrappy fighter that wears its wounds as a badge, sees disaster setting the stage for something great, much as Chicago rose from the ashes of its Great Fire of 1871.
"Maybe this tsunami is going to be instrumental for Detroit to have a real renaissance beyond the Renaissance Center," he said. "I don't have a crystal ball, but we are in America and we keep seeing it on the core industry level. So why not?"
Just don't ignore the math.
philrosenthal@tribune.com
Twitter @phil_rosenthal

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