VerTroit: The Bankruptcy Awaits

Detroit. A lot has been said about Detroit over the past 10 years, all of which was pointing directly to the inevitable outcome: A major US city filing bankruptcy last week.

Which begs the question: If a city as large as Detroit, once one of the wealthiest cities in the world, can self-destruct on a scale not seen in US history in the space of just a few generations, could that same thing happen elsewhere? Could it even

Bit of a fixer-upper....city

Bit of a fixer-upper….city

happen to a state?

To answer that question, let’s do a comparison:  Vermont and Detroit.  To start, let’s look at GDP per capita for both:

Vermont’s total GDP is ranked 5oth – dead last in the terms of total GDP by state.  But in per capita GDP by state, Vermont’s ranked 30th, at $44,000/person.  That’s in the bottom 40% of states.  Even with the worst GDP in the country, a small population keeps this number out of the absolute cellar.

Detroit’s per capita:  $14,213.  To keep this in perspective, out of all the Michigan cities, 634 of them, Detroit is ranked 512.  That’s at the bottom 20% of Michigan cities.  Neither of these scores is something a state wants to show for its efforts, unless, of course, you’re a politician that wants to sell more of the same policies that put the state in this position in the first place.  Then it’s time for more cowbell.

OK, so Vermont and Detroit aren’t exactly hothouses of GDP growth.  But how do businesses compare between the two?  Specifically, how about for Small Businesses?

Detroit: Ranked 24th out of 25 major cities for Small Businesses. Call it 48 out of 50 for a quickie state conversion.

Vermont: Ranked 4th worst state for Small Businesses. That’s 47 out of 50.

In a race to the bottom, it’s not a good thing to be nearly tied for 1st place.  But that’s where Vermont is, tied for Detroit in having the most anchors around its neck in deep water.

Excuse me while I shatter your state through the sheer force of my debt power.

Excuse me while I shatter your state through the sheer force of my debt power.

Finally, let’s consider the Large, Frightening Thing In The Room That No One Wants To Acknowledge:  Unfunded Liabilities.

One of the primary drivers for Detroit’s bankruptcy filing is its unfunded liabilities to city pensioners, largely consisting of public unions – a roughly $3.5 billion liability. But Vermont has a similar unfunded liability to state employees, of $3 billion. Taken on a per-capita basis, Detroit and Vermont’s unfunded liability burden is almost exactly the same:

vertroit

 

 

What goes largely unspoken by the Shumlin administration is how this burden is going to be met, since the state budget, while including some payments into the pension funds, is woefully under-funding them – because the state simply can’t afford to fund them based on historical tax revenues. It’s not even close. Taxes would have to be raised across the board on all incomes to get even close to covering the delta, and/or other budgets would have to be cut in order to meet the liability.  Shumlin, in his 2014 budget address, mentions funding pension contributions “at the recommended levels” early on in his speech, but he does not say what those recommended levels are, or how he proposes to pay for them, since the $3 billion shortfall appears nowhere in projected tax revenues.  He mentioned the word “pension” once in his address, early on, but doesn’t actually address the pension anywhere else.  That’s tidy.

Vermont and Detroit share more in common than the average Vermonter would feel comfortable with, yet Detroit’s

Hey, I warned you about DebtZilla.  But nooooo!  It's OK to ignore unfunded liabilities - until they turn around and bite you in the ass.

Hey, I warned you about DebtZilla. But nooooo! It’s OK to ignore unfunded liabilities – until they turn around and bite you in the ass.

disaster has been a long time coming, and no one seemed able or willing to put on the brakes.  The result is the financial, social, educational, and cultural implosion that is the once-proud city of Detroit.  If our political leadership doesn’t grab hold of these issues now, while there’s time to address them, the slow-rolling economic rot that destroyed a city will continue to erode the economic well-being, and therefore the lives, of the Vermonters that this “leadership” is supposed to serve.

However, unlike the giant monster of debt that Vermont faces, I don’t suspect that we’ll have our very own Vermont Jaeger ready to defend the state against DebtZilla.

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