Early in the 20th century, a French journalist on tour in the US sent a series of reports back to his readers. One dispatch described glowingly the boulevards and parks that made one American city stand out – a rival to the grandest European capitals. That city was Detroit. One-hundred years ago, Detroit was called the Paris of the West. In 2013, it sought bankruptcy protection.
What happened? The many explanations each lead to cautionary tales about what can go wrong when companies are hampered by cumbersome labour arrangements or self-satisfied managers and then face new competition; when the family structure and social fabric deteriorate; when leaders make poor choices or when citizens elect inept leaders. But, Detroit’s history is not over; there are underlying strengths that equal or exceed many other locales and, while success is not inevitable, great progress remains possible.
One element of Detroit’s proposed bankruptcy process, however, will and should be on the radar screens of direct investors and businesses evaluating expansion and relocation options – how a municipal bankruptcy deals with competing creditor claims, especially regarding underfunded public pension plans. Following the auto industry bailouts, generous settlements with Detroit’s public sector unions may set precedents for reduced payments to other creditors, especially bond holders. Such precedents could lead to the perception of additional risk in public sector debt, especially in the many places that have underfunded pensions. Increasing the cost of capital may force more efficiency; more likely it will lead to more taxes and fees and reductions in services.
Some site-selection teams evaluate financial conditions, including pension obligations. Now, more will. So, in addition to looking at the density of current and future talent, direct investors will be cautious about a community’s long-term obligations, what these are becoming and who will likely be called upon to pay the bill – lest where they go comes to resemble some other once grand capital.
Daniel Malachuk works with business and government leaders on global direct investment strategies. He has advised many of the world's leading companies and served in the public sector as director of White House operations. E-mail: email@example.com