Can Detroit be Saved?

Story first appeared in The New York Times.

DETROIT — Other cities and towns have teetered at the edge of financial disaster lately, but Detroit, the capital of America’s auto industry and once the nation’s fourth-largest city, has just become the most striking test case for a key question: Can a city that has fallen so far be saved?

A giant plot of land — 139 square miles — with only half the residents it once had, Detroit has watched in recent years as tax revenues have slipped too low to support its costs, its debts have swelled to a stunning $12 billion, and, this spring, its money nearly ran out. Now, after months of wrangling over how and when and whether the State of Michigan should intervene to stem the hemorrhaging finances, officials here said that a historic deal, approved Wednesday, granting the state oversight powers puts Detroit on a path to recovery at last.

The deal, which creates an advisory board to oversee financial decisions, spared the city from fates that many viewed as far worse: a complete takeover by a state-appointed manager, bankruptcy or default. But Detroit’s problems are far from over, and the new deal by no means assures success.

The financial woes of this city, now dependent on a tax base of just 713,000 residents (amounting to what is now only the 18th most populous city in the nation) are huge and fundamental — too sizable, some critics say, to be solved by monitors. Oversight agreements tried in other places have taken many years in some cases, and results have been mixed.

And, unlike full state takeovers that some cities have unhappily undergone, these sorts of deals require a high degree of political compromise and getting along, those who have worked on them elsewhere say. Detroit is still bitterly polarized over whether state involvement is needed at all.

Around Detroit, residents tell of a city where streetlights fail, buses run late and no one can be sure when the police will turn up. While some business owners and young entrepreneurs tell of a renaissance of private industry in the city, the poor level of municipal services has created a deep-down pessimism about the notion that things will change now.

States have long used a range of methods to step in when municipalities have fallen into trouble, and some have worked. In the 1970s, a financial control board helped pull New York City from the edge. But the powers — and results — of such boards and appointed receivers vary widely, and some experts expressed doubt that Michigan’s oversight of Detroit would go far enough.

Under a so-called consent agreement, approved reluctantly this week by divided Detroit leaders, a nine-member financial advisory board will be appointed to guide the city, which will be required to report any budget shortfalls swiftly and to hire a program management director to help oversee reforms. The agreement also will reopen union contract talks, and permit sharp cuts.  It also considers the possibility of privatizing some city services and consolidating departments — powers that union leaders, who had been negotiating separate concessions with city leaders in recent months, object to furiously. And the deal cleared the way for refinancing of debt to solve the city’s imminent cash crisis.

Though many residents objected to the agreement as a seizure of city control, the Governor could have chosen a more sweeping step under Michigan law and called for an emergency manager to take over many of the powers of the local officials, as well as the ability to throw out existing labor contracts. Detroit leaders loudly opposed that plan, as the Governor, who has been widely criticized over his use elsewhere in the state of the emergency manager law, which is now the target of a repeal effort.

The political pressure not to send in an emergency manager grew intense in months of debate here. Some saw the question through a prism of race, arguing that it would amount to a white takeover of the state’s largest city, where 82 percent of residents are black. Others called it a union-busting maneuver by Lansing, the Republican-held capital.

But the governor’s spokeswoman, said that the Governor had always preferred some alternative to a full takeover.

Yet some critics wondered whether the city might be too far gone for anything short of the powers of an emergency manager, whether an advisory board would be willing to go far enough to fundamentally change the city.

Those who have worked within such oversight arrangements in other states offer a mixed picture of how well they work, in part because much rests in the individual details of the troubled city’s supervision deal and how much (or little) power an oversight body is granted. John F. Street, the former mayor of Philadelphia, said an oversight board there that began in the 1990s mostly proved to be useful.

The  managing director of an independent advisory firm, Public Financial Management, who works on such arrangements in states like Pennsylvania, said that the boards were rarely instant fixes, and can take years for cities to emerge from. They also require a high level of collaboration and consensus-building, he said, under sometimes tense political conditions. In the case of Detroit, feelings seemed  to have reached a boil for some already — even before the new board has been named.

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Michigan Economy Up After Mild Winter

Story first appeared in The Detroit News.

Bolstered by the mild winter and continuing weakness in housing, the auto rebound is spreading to other parts of the Michigan economy, boosting economic conditions to their best level in six years.

According to a new Comerica Bank estimate of the state economy, the recovery is starting to reach beyond Detroit's Big Three. That trend also is reflected in the February jobs report released Wednesday, which showed that during the past 12 months the state added as many jobs in business and professional services as it did in manufacturing.

Another piece of encouraging economic news released Thursday was the state's announcement that personal income in Michigan grew at the strongest rate since 2000, just before Michigan entered its decade-long "one-state recession."

Comerica's index measures nonfarm payrolls, exports, sales tax revenues, hotel occupancy rates, continuing claims for unemployment insurance, building permits and motor vehicle production.

All seven of those improved in January, sending the index up 7 points, to a level of 98, the highest since January 2006.

Despite potential threats, including higher gas prices and defense spending cuts, Dye sees the economy emerging from its halting recovery to a stronger expansion.

While the economy got a bit of a boost from the mild winter, which kept home heating and other bills down and left more money in consumers' pockets, there's more to the current improvement than warmer temperatures and short snowfalls.

With auto sales recently topping an annualized rate of 15million vehicles, consumers seem to be unleashing some of the pent-up demand they've been holding in since 2007. The auto industry also benefits from the lack of any significant improvement in the housing market. With home values down and still dropping in most of the country, consumers aren't shopping for new homes.

Experts see rising gas prices as a threat to auto sales for the Detroit carmakers, now that they're offering more fuel-efficient models. The experts added that they see gas prices easing and dropping to $3.60 to $3.70 a gallon by summer.

And while higher gas prices may trim some pickup and SUV sales, car sales won't be lost to the foreign nameplates as in past periods of increased fuel prices.

Warren And Ann Arbor: A Tale Of Two Economies

Separated by 50 Miles but Worlds Apart, Michigan Cities Embody the State's Ailing Industrial Core and a Potential Road to Rebirth
Story from the Wall Street Journal

Michigan's economy is the worst in the country, dragged down by its dependency on an ailing auto industry. But in a lab at Accio Energy in Ann Arbor, engineers Dawn White and David Carmein are driving in a different direction.

They have built what they call an "aerovoltaic" device, a two-inch loop of piping that generates electricity -- without moving blades or turbines -- when air flows through it. The engineers' next step: linking a series of these loops into screens that they see eventually generating wind electricity where windmills are too big, dangerous or noisy to go.

Innovative companies like Accio are common in Ann Arbor, home to the University of Michigan, where a highly educated population has created a burgeoning economy, and a street-corner conversation can develop into a company and create jobs.

Michigan's economic future rests on making the state look more like Ann Arbor, and less like Warren, 50 miles to the northeast, where factory buildings and warehouses built on the riches of the Big Three auto makers bear signs saying they are "priced to sell." The latest blow came earlier this month, when Chrysler LLC shut down its two plants in Warren as part of its bankruptcy filing.

It won't be easy. Much of the Michigan economy has been shackled to Chrysler, Ford Motor Co. and General Motors Corp. Yet even after years of watching the auto industry decline, the state has struggled to free itself from dependence on the Big Three.

"The old economy made Michigan rich and it made its work force get wages and benefits that were beyond anybody's dream," says Donald Grimes, a University of Michigan economist who paid his way through college in the 1970s by working summers at Ford and GM plants. "There is absolutely nothing that is going to replace those jobs."

The divide between Ann Arbor, with a population of 116,000, and Warren, population 126,000, is large and widening. Ann Arbor's unemployment rate of 8.5% in March trailed the nationwide rate of 9% and was well below Michigan's overall rate of 13.4%, based on nonseasonally adjusted figures. By contrast, Warren's unemployment rate of 17.3% is among the highest in the state. The average family income in Ann Arbor was $106,599 in 2007, compared with $69,193 nationally and $60,813 in Warren.

That economic gulf wasn't always there. In 1979, the average family in Warren made $28,538 annually, not much below Ann Arbor's average of $29,840. But in the past 30 years, the U.S. economy has undergone a sweeping transformation that has benefited cities like Ann Arbor and hurt manufacturing hubs like Warren.

As transportation and communication costs fell, and countries like Japan and, now, China, increased their manufacturing capability, Michigan's advantages have faded. Those same forces of globalization benefited educated workers -- an area where Michigan largely fell short.

Except in Ann Arbor.

Over the years, the city developed the types of schools, cultural institutions and amenities that made it an attractive place to live and work. Google, whose co-founder Larry Page attended the University of Michigan, opened an Ann Arbor campus in 2006. About 70,000 people commute to this city, about 40 miles west of Detroit, each day.

Accio Energy got its start in 2007, based on plans two of the founders hatched at Zingerman's Deli, Ann Arbor's renowned gourmet-food destination.

Accio got some of the seed money for the three-person start-up from Mary Campbell, an area venture capitalist who met Ms. White in a running group. Jeffrey Basch, a former General Electric automotive development worker, is Accio's general manager. Ms. White met him while helping shuck corn at an organic produce company that Mr. Basch's wife, another former Ford engineer, started and Ms. White helped fund.

In Warren, which has the largest concentration of auto workers in the country, job transitions are more difficult to make. Just one in five of Warren's workers between the ages of 25 and 64 holds a bachelor's degree or higher, a relic of the days when a college degree wasn't necessary to find a job that paid well. By comparison, three-quarters of Ann Arbor's work force has at least a college degree.

"I got out of high school and went right into it," says Arthur Kupiec of the Chrysler job he started in 1972, when he was 18. "Back then, jobs were all around and the economy was booming."

Mr. Kupiec worked at Chrysler's truck plant in Warren until last year, when he took an early retirement package. "Believe me, I didn't want to leave, but I said, 'You know what, I have to get something while I have something,' " he says. "I'm only 55 years old, and I'm just at home putzing around."

Ann Arbor's burgeoning start-up culture hasn't fully shielded it from the economic downturn. The city's shops and restaurants are a weekend destination for many in Michigan, but with the state in trouble, they have seen business drop.

And despite Ann Arbor's educated work force, employers here find Michigan's reputation as a failing manufacturing economy can deter potential hires from moving to the state.

At HandyLab, an Ann Arbor firm that makes a DNA-analysis device, Chief Executive Jeffrey Williams says he has had a hard time finding Ph.D.-level workers with highly specialized skills. His company, which has doubled to roughly 60 employees in the past year, has 10 job openings.

"It's definitely gotten much harder with all the stigma around Detroit," he says. "Somebody tries to pigeonhole us as Detroit, we say, 'No, it's Ann Arbor, it's a completely different environment.' "

In another blow to Ann Arbor, Pfizer Inc. in 2007 announced that it was closing its research facilities in the city, where 2,100 people worked. But unlike idled auto workers, who often find there is no market for the manufacturing skills they have honed over the years, Pfizer's researchers generally found work elsewhere.

While some of America's once-dominant industrial centers, including Pittsburgh and, a generation earlier, New York City, have been able to make the transition away from a manufacturing-dependent economy, others, such as Cleveland and Buffalo, have floundered. Warren, for its part, does have well-trained engineers and designers -- GM's technical center is there -- and Wayne State University is building an advanced technology education center in Warren. Web design, internet marketing, and Michigan SEO companies thrive in a strong tech sector.

Meanwhile, with the automotive industry's latest troubles, more people in Michigan are breaking with the past and coming to see a college education as an economic necessity.

Treashure Banks, 20, is studying business at Macomb Community College and working at the school part time. She still isn't sure what sort of company she wants to work for, but there is one thing the Detroit native has always been clear on when contemplating her future career.

"It was never automotive, never," she says. "We need to have some new ideas. We need something new."

VC's From 60 Firms And Banks To Gather In Ypsilanti

Story from Detroit Free Press

Investment dollars may be scarce, but that isn't stopping venture capitalists and entrepreneurs from converging in Michigan early next week.

Employees from 60 venture capital and private equity firms and banks plan to attend the 30th Michigan Growth Capital Symposium on Tuesday and Wednesday at the Ypsilanti Marriott hotel.

In search of the next Google or Starbucks, these investors will hear presentations from 16 Michigan companies as well as 16 firms from other states and Canada in industries such as the life sciences, energy and information technology.

The Free Press recently spoke with David Brophy, who started the annual conference and still oversees it as director of the Center for Venture Capital and Private Equity Finance at the University of Michigan's Ross School of Business. Here are some excerpts from the conversation:

QUESTION: Given the depressed economy, what is your outlook for venture capital firms in Michigan?

ANSWER: It's tough for venture capitalists per se. But most of the firms successfully raised new funds last year. On balance, they have a little more dry powder than last year. I'm hopeful that even in this bad time, we're going to come out of it strong.

Q: What is your advice to Michigan entrepreneurs with promising businesses that are struggling to find capital?

A: Make connections. You have to go out and make yourself known. Talk to others, help others and they will help you.

Q: What can Michigan do to grow its venture capital industry?

A: Build better companies like Lycera Corp., a pharmaceutical firm that recently obtained $36 million in venture capital financing. We need Lycera to stay here. We need people to spin off from Lycera and make new companies. We need 10 other Lyceras. That's nothing but hard work.

Q: What is the major trend in venture capital these days?

A: Energy is dominant. Energy is very central to what's going on here in Michigan.

Q: How do you see Michigan's economy evolving?

A: Michigan has been characterized as big business, big labor and big universities, none of whom cared about tech-based companies. But Michigan has a very skilled workforce. If we play our hand right, this will emerge as a strength for Michigan.

Beer Industry Vital to State Economy

Support Your Local Brewer
Story from ABC Detroit

A new study shows that the beer industry contributes almost $5 billion to the Michigan economy every year.

It also shows that the industry, made up of brewers, importers, distributors, suppliers and retailers, supplies more than 60,000 jobs, paying more than $1.75 billion in wages and more than $340 million in federal, state and local taxes.

According to the study, the industry directly employs 37,578 people in Michigan. Indirectly the industry helps provide 33,658 jobs at licensed retailers, including supermarkets, convenience stores, restaurants, stadiums and other outlets.

Nationally, the beer industry directly and indirectly contributes more than $198 billion annually to the U.S. economy and provides nearly 1.9 million jobs - generating nearly $62 billion in wages and benefits. The industry also paid $41 billion in business, personal and consumption taxes in 2008. Consumption taxes included $3.8 billion in federal excise taxes, $1.7 billion in state excise taxes and $5.7 billion in state and local sales taxes.

The study was conducted by the National Beer Wholesalers Association (NBWA) and the Beer Institute.

Detroit's Game Plan For The Final Four

City is Counting on Basketball to Lift it Out of Economic Doldrums, at Least for the Weekend
As Originally Posted to the Los Angeles Times

Reporting from Detroit -- Not everyone in this city cares about college basketball, certainly not the guy standing outside a downtown office building with a ladder.

A cold wind rattles down the avenue as Joe Gwisdalla and the rest of the maintenance crew hurry to replace a row of exterior lights above the sidewalk.

"We're just doing what we're told," he says.

The owners want the building looking sharp for hordes of fans expected to arrive for this weekend's Final Four, the NCAA's annual extravaganza that is equal parts basketball championship and celebration.

Detroit might seem like an odd place to throw a party these days, what with rising unemployment and foreclosures, the economy dragged down by a staggered auto industry that has come under pressure from the federal government.

Yet, Gwisdalla notwithstanding, much of the populace appears eager to give itself over to "March Madness."

"Every day we're getting slapped with something. You can't even watch the news," said David Frank, an engineer at a nearby General Motors plant. "If nothing else, we get a weekend off."

It helps that a local team -- Michigan State -- upset top-seeded Louisville to reach the Final Four. But once you know something about this hard-knock city, it makes sense that people would turn to sports in a time of need.

The way Greg Barbee sees it, his hometown has "always been a national joke." The attorney is talking about a legacy that includes the bloody riot of 1967 and a chronically high crime rate giving rise to the nickname "Murder Capital of the U.S."

More recently, Mayor Kwame Kilpatrick resigned in disgrace and served jail time for obstruction of justice after trying to cover up an extramarital affair with his chief of staff.

Now the Big Three automakers -- the heart and soul of this region -- have fallen on desperate times with the Obama administration using the threat of bankruptcy to demand an industry-wide overhaul in exchange for billions in federal bailout money.

The psychic toll has extended well beyond auto workers.

"All the brow-beating that we've been getting -- it hurts," said Joe Renkiewicz, who manages a hat shop near Ford Field, where the games will be played.

And that's where sports enter the picture.

When the people of Detroit brag about their teams, they don't just talk about winning.

The Red Wings in hockey, Tigers in baseball, Pistons in basketball and Lions in football have long traditions. Cherished stars -- Gordie Howe, Steve Yzerman, Bill Laimbeer and Joe Dumars -- personify the city's blue-collar image.

So it is no surprise that locals still credit the Tigers' victory in the 1968 World Series for healing wounds from the riots and point out that their ardent support of the Red Wings earned them another, more favorable nickname, "Hockeytown."

"When you go to sports bars, you see people smiling and laughing and talking," said Lyn Lewis, a retired professor of sociology and criminal justice at the University of Detroit Mercy who has observed the city for more than three decades. "It's a freedom the likes of which I haven't seen in any other setting in Detroit."

At the Hockeytown Café, across the street from the baseball field, the general manager said business is up despite a down economy.

"It's not far from their minds, that they don't have a job or might not have one next week," Steve Davidson said. "But this is a way for people to forget their troubles for a while."

The question this weekend: Can sports also brighten the city's economic outlook?

Ticket sales have been sluggish at an average cost of $447 on StubHub.com, which helps fans resell their seats. That's significantly below the going rate for previous seasons, StubHub spokesman Sean Pate said, blaming the economy, the size of the 72,000-seat Ford Field and something else.

"Detroit is not a tourist destination," Pate said.

There has been skepticism about whether the Final Four can add $30 million to $50 million to local coffers, as predicted. Estimates can be tricky because some revenue flows to outside ticket brokers and merchandisers, and a special event can divert discretionary income from local businesses.

At a Ford dealership near the river, the finance manager says a basketball game won't move cars off the lot.

But with hotel occupancy rates down 17.1% from a year ago -- tied for the biggest drop among the nation's top 25 markets, according to Smith Travel Research -- downtown hotels were reporting strong business and tourism officials spoke of surpassing an expected 100,000 visitors.

"People think that because the auto industry is crumbling, our city is going down," said Renee Monforton, a spokeswoman for the convention and visitors bureau. "That's not true."

The Detroit area has some recent experience when it comes to hosting major sporting events. The Super Bowl came here in 2006 and, before that, baseball's All-Star game and golf's Ryder Cup.

This time around, crews are collecting trash and fixing traffic lights along streets pockmarked with boarded-up storefronts. Several abandoned buildings were razed near Ford Field, replaced with parking lots.

Perhaps no one has a better feel for what the Final Four means to the city than Michigan State players who hail from the area. Guard Kalin Lucas, who grew up with his grandmother about two minutes from the stadium, said he has received "about 1,000" requests for tickets.

"Family, friends, some people who I haven't talked to in years," he said.

Durrell Summers, another Spartans guard, has seen a change around his home state.

"Now that we're here, I think there are smiles all around Michigan, not only Detroit," he said. "We're going to do the best we can to win, to keep it going, keep the sun shining."

Michigan State Coach Tom Izzo has been making that point all week. After the Spartans upset Louisville to earn a Final Four berth, he said, "Let's face it, every state has been hit this year. It's been a tough time. But ours has been hit maybe as hard as anybody's. . . . I'm just hoping we're something to embrace, to be involved with."

That the Spartans are not favored in a field that includes North Carolina, Connecticut and Villanova only makes them more appealing. An underdog team for an underdog city.

Officials expect a larger-than-usual Michigan State contingent to make the 90-mile trip from East Lansing without tickets, wanting to be in Detroit simply for the atmosphere. The school's athletic director, Mark Hollis, told reporters it was the "Spartan Stimulus Plan."

Frank, the auto engineer and a Michigan State alumnus from the Magic Johnson era, put off a vacation so he and his family could drive in from the suburbs.

"I'd love to go to the game, but with the economics I'm facing here at GM, I can't afford the tickets," he said. "We'll go to a tailgate, then find a bar and watch on television."

Which helps to explain what Gwisdalla and his co-workers were doing outside that office building this week. Management wanted new lights across the façade.

"They want to make it look nice," he said.

Green and white. The colors of Michigan State.

2010 Could Be Recovery Year For Michigan Economy

Story Posted at Detroit Free Press

Comerica Bank’s chief economist has some good news for long-suffering Michiganders: better days could be coming next year.

Dana Johnson predicts that the state economy’s rate of decline is going to start slowing soon. “With some luck, 2010 will be the first year of recovery,” he wrote in his new economic report about Michigan that was released this morning.

Johnson estimates that Michigan’s real gross domestic product, or the total value of all goods and services produced in the state adjusted for inflation, will drop by 5% this year. That means 2009 will be the sixth consecutive year of recession for Michigan.

If that prediction comes true, the state’s real GDP will have declined by almost 10% in the last six years, which Johnson said could qualify as a depression.

“The Michigan economy has probably just gone through what will end up being the most abrupt part of the contraction that began back in 2004,” Johnson wrote. “The near catastrophic strains in the credit markets that emerged this past September and October put the national and the state economy into free fall.”

Johnson warned of more short-term economic pain for Michigan due to the ongoing restructuring of the auto industry. But he expects the job losses, pay cuts and plant closures to start tapering off next year. And he anticipates that nationally, car sales should improve in the second half of this year “as credit becomes cheaper and more available and job losses slow.”