Ford and Detroit alarm bells

Recent bond reports from Moody’s on Ford and the city of Detroit should be setting off alarm bells. Both reports paint a picture of the Michigan economy far different that the celebratory tone of most Michigan policy makers and business leaders. (You can find a Detroit Free Press article, entitled Ford investment rating cut to one notch above junk, here. And a Crain’s Detroit Business article entitled Moody’s report a sobering take on the Detroit “comeback” high here.)

Yes the headline statistics about today’s Michigan economy are stellar. Particularly a very low unemployment rate. Good news indeed. But what these two reports portray is an economy that still faces substantial structural challenges. In fact what might be most significant about both reports is that they were written with a strong national and Michigan economy. That Moody’s is questioning in a strong economy both Ford and Detroit’s ability to pay off their loans is why alarm bells, not complacency, is needed now.

For the overall health of the Michigan economy the Ford downgrade is the most significant. The reality is that the Detroit Three are still the engine of the metro Detroit and state economy. The pattern for decades has been that, no matter which party controls Lansing or Washington, the Michigan economy does well when the domestic auto industry is expanding and the Michigan economy does poorly when the domestic auto industry is declining.

This is the real story of Michigan’s so-called lost decade from 2000-2010. Years in which we had a Republican president for eight years and a Democratic president for two. And a Democratic governor for eight years and a Republican governor for two. Up until the onset of the Great Recession a single industry recession far more than a single state recession. The lost decade was triggered by the uncompetitiveness of the Detroit Three. That Moody’s is signaling that Ford now may again be uncompetitive is troubling.

The reality is there is little, if anything, that state policy can do to effect the competitiveness of the Detroit Three. The levers states and local communities have are way too small to make a real difference in the success or failure of the these global giants.

That is not the case when it comes to the city of Detroit. And more broadly the financial health of local governments across the state.

Crain’s writes about Moody’s Detroit report:

“High debt and pension burden.”

“Citywide population is declining and per-capita income is just above 52 percent of the nation.”

“The property tax base remains weak.”

Those quotes aren’t from a report on Detroit’s finances from five years ago when the city was mired in a record-setting bankruptcy. They came from a report issued Friday by Moody’s Investor Service, which offered a sobering reminder that all is not fixed in Detroit, despite the downtown revival and “influx of affluent residents and large-scale developments.”

Without question the so-called grand bargain that got Detroit out of bankruptcy was a major accomplishment by the state’s and region’s political, business and philanthropic leadership. But as great as that accomplishment, it did not leave Detroit structurally on sound financial footing. That can only come with a municipal finance system that allows Michigan local governments the ability over the long term to provide and pay for the basic services, infrastructure and amenities needed to retain and attract residents and enterprises. Michigan does not have such a municipal finance system. If anything over the past two decades, characterized by state revenue sharing cuts and local tax limitations, things have gotten worse.



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