By Nathan KowalskiDetroit, the cradle of the American automobile manufacturing industry, recently filed for the largest municipal bankruptcy in US history. The filing listed more than 100,000 creditors. Detroit's budget deficit is believed to be more than $380 million and long-term debt is estimated to be $14 billion and could be between $17 billion and $20 billion. On average, the Motor City has spent $100 million more a year than they brought in since 2008.What caused the insolvency?Three key factors contributed to Detroit’s fall. First, a steep population decline. The city lost more than half of its population over the last 60 years. In 1950, Detroit was the fifth-largest city in the US with a population of around 1.8 million. Today its population is estimated to be about 700,000, and still declining.Second, with a tax base that’s been cut in half over the last half-century, there’s simply not enough money to satisfy everyone voluntarily. This shrunken tax base has to cover a 139-square-mile city and maintain an overwhelming health care and pension system. It doesn’t help when the city services are crippled by ageing computer systems, poor record-keeping, widespread internal dysfunction and known corruption.Third, there appears to be little concession or shared sacrifice. Kevin Orr, a bankruptcy expert, was unable to convince a host of creditors, including the city's union and pension boards, to take cuts in order to help facilitate the city's massive financial restructuring.What happens when the tank is empty?Detroit has already curtailed or reduced many public services, and this has in part led to a sustained downward spiral. The bankruptcy filing and the attached stigma will most likely accelerate this trend. Here are just a few estimated outcomes and current predicaments:l Further benefit cuts for city workers and retirees are anticipated. Some estimates assume municipal worker retirees will receive less than ten percent of what they are owed.l About 40 percent of the city’s streetlights do not work and half of Detroit’s parks have been closed since 2008.l Police response time is currently 58 minutes versus the national average of 11 minutes. This is in a city which has been named amongst America’s most dangerous for more than 20 years and it is estimated that 70 percent of murders are unsolved.l Based on the documentary ‘Burn’, fires service has been a challenge as well. Ninety-five percent of fires are thought to involve arson. There are only 919 firefighters, down from 1800 in 1954, in a city where fires per capita are up 30 percent.l Many city assets are now being considered for sale to satisfy payments.l It already boasts some 78 thousand structures that have been abandoned.l The whole city will likely need to be reorganised into a smaller area with a smaller core of critical services.What can we learn from this?Governor Rick Snyder was quoted as saying: “The citizens of Detroit need and deserve a clear road out of the cycle of ever-decreasing services. The city's creditors, as well as its many dedicated public servants, deserve to know what promises the city can and will keep. The only way to do those things is to radically restructure the city and allow it to reinvent itself without the burden of impossible obligations ... I have reached the conclusion that this step is necessary after a thorough review of all the available alternatives, and I authorise this necessary step as a last resort to return this great City to financial and civic health for its residents and taxpayers. This decision comes in the wake of 60 years of decline for the city, a period in which reality was often ignored.”This statement is key. We basically have admission of willful blindness. Although the problem in Detroit was brewing for 60 years, no government official or person in a leadership role chose to address it. There was a huge “leadership” deficit far before there was a “fiscal” deficit. Or as Ernest Hemingway wrote in ‘The Sun Also Rises’, “How did you go bankrupt? Two ways. Gradually, then suddenly.”It’s also important to key in on the point about “impossible obligations”. $3.5bn and $5.7bn of Detroit’s obligations are related to pensions and benefits, respectively. These obligations are part of a larger problem that will likely take down more states and cities across the world. Politicians plain and simple have promised more than they could ever possibly repay. In my opinion this is partially related to the short-sightedness of gathering votes for the next election cycle. However, these obligations are also derived from a subset of unrealistic and often times myopic assumptions of the future.The longer leaders continue to engage in wishful thinking, the longer sustained economic weakness can persist which makes any fiscal arithmetic worse, or even impossible. As a society, we have been seduced into creating many entitlement schemes, pension-based or healthcare-based, that can only really be paid for with continued economic expansion or serious accountability.Pardon my philosophical ramblings here, but how can we expect pensions to be paid even though we save relatively little? How can we expect healthcare even though we don’t live healthy lifestyles? For Motor City, it appears the car has died. The engine wasn’t serviced and it was expected to run without ever filling the tank.