By Rana Foroohar
November 13, 2014

Standing in the middle of downtown Detroit, it’s hard to believe you’re in a city that went belly up.

At 5 p.m. on any given workday, you’ll see the hipster hordes of 20-somethings in skinny jeans and nerdy-cool glasses who work at the dozens of tech and design startups in the center of the city start to convene. Milling into Campus Martius park, they’ll have a mojito at one of the nearby bars or watch an open-air musical performance. Kids play in the park’s sand pit, and teenagers shoot hoops at basketball courts buffered by luxury condos where the waiting list for $2,500-a-month studios can be two to three months long. Neighboring boutiques sell everything from interestingly shaped cork handbags to $800 watches handmade in Motown. Blight? What blight?

Of course, if you walk just a few blocks away, you’ll find plenty of decay–burned-out buildings that sit in the shadow of General Motors’ obelisk-like headquarters. You’ll find homes with roofs that have fallen in. On one abandoned building, a graffiti artist has scrawled Destroy what Destroys you. That juxtaposition is almost as startling as the deal that was approved on Nov. 7 to bring Detroit out of the red. A little over a year ago, unable to keep its lights on or its streets safe, this emblematic American city declared bankruptcy. Now it is emerging from 16 months of pain, humiliation, negotiation and soul-searching with a plan to move on from its default and rebuild.

At first, it seemed impossible that Main Street and Wall Street would ever come to an agreement over the city’s $18 billion debt–specifically, over who would pay for the shortfall. Detroit’s public-employee pensioners were being asked to take huge cuts in their retirement income to pay hundreds of millions of dollars to bankers. Some people were even arguing that Detroit should mortgage the priceless art in its hallmark museum–including works by van Gogh, Whistler and Degas–to keep cops and ambulances on the street.

Then something unexpected happened: A group of private donors, including family foundations with landmark names like Fisher and Ford, banded together with community-development agencies, big businesses and the state itself. They decided that it was inconceivable that the onetime heart of American power–which had already lost half its tax base, more than half its population and a devastating portion of its labor pool–should fall further. They came up with $800 million to offset some of the pension pain and save the art–a “grand bargain,” as it has become known, that gave the city a future.

Suddenly, there were reasons to hope again. The city, its workers and Detroit’s creditors were more willing to make a deal. Residents got creative, and financial institutions took payment in assets that represented a bet on Motown’s future, rather than grabbing what cash they could before fleeing. Union reps accepted 5% to 20% decreases in pension payments–a painful and contentious decision, but much less draconian than what Detroit’s emergency manager, Kevyn Orr, had originally proposed.

In the end, no major stakeholders refused to be part of the almost universally praised settlement that turned the page on the largest municipal bankruptcy in history. As Michigan’s Republican governor Rick Snyder tells Time, “None of this would have been possible without the grand bargain. If people were going to accept this kind of pain, they had to feel that the private sector–and the state–were helping.” It was a rare thing in American civic life these days: compromise.

The symbolism surrounding Detroit has been bittersweet. It is the birthplace not just of the automobile but also of the so-called Arsenal of Democracy that helped the U.S. win World War II and usher in the American Century as well as labor movements like the American Federation of Labor and the United Auto Workers, which agitated for the 40-hour workweek, health care benefits and pensions. But the city came to symbolize the decline of U.S. power in the latter half of the 20th century, dramatically capped by the city’s going under. Now Detroit is adding another chapter to its legacy: the civic laboratory.

Detroit’s resurgence provides a playbook for struggling U.S. cities of all sizes. It offers lessons on how to responsibly manage city finances, how to negotiate with powerful institutions on Wall Street and how to reverse the kind of political, economic, social and geographical polarization that eroded the fabric of the city over many decades. The city’s nascent downtown renaissance, led by local businesspeople like Quicken Loans founder Dan Gilbert as well as quasi-public groups like the Michigan Economic Development Corp., may herald a new era for American cities in which old Rust Belt towns once again become engines of growth.

“Detroit’s bankruptcy has masked what is actually a burgeoning economic revival,” argues urban-development expert Bruce Katz, vice president and director of the Metropolitan Policy Program at the Brookings Institution. “That’s not just happening there, but in many places all over the country–Boston, Philadelphia, Pittsburgh, St. Louis and Cleveland. In fact, I haven’t seen this kind of growth in urban corridors since the 1960s.”

Certainly, Detroit continues to struggle. While the pain of negotiating the terms of bankruptcy are over, the challenges of rebuilding have only just begun. There are plenty of craft cocktails to be found but also many neighborhoods where the water isn’t on regularly. Detroit has put more cops on the streets than it did a year ago, but they give their attention disproportionately to the burgeoning downtown and midtown areas, rather than poorer, peripheral neighborhoods. And yet, for the first time in years, the city is ready to face these challenges.

Bright Lights

At its peak in 1950, Motown’s population was more than double the 700,000 people living in the city today. Like the downfall of all great empires, Detroit’s decline was hastened by a complex of problems, including civic mismanagement, political corruption and systemic labor issues. The malaise of American manufacturing from the 1980s onward hit Detroit harder than any other major city. Talent left, property values declined, growth slowed, and by the mid-2000s the tax base had been all but decimated. Detroit was left struggling to pay its bills.

That’s when Wall Street came into the picture, selling the city on a $1.4 billion series of complex and risky securities deals in 2005 and 2006. When $800 million of the debt (which had been issued in a way that many experts believed was fraudulent to begin with) blew up in the wake of the financial crisis, bankers demanded full payment. “The biggest contributing factor to the increase in Detroit’s legacy expenses [was that debt],” explains Wallace Turbeville, a former Goldman Sachs banker who is now a fellow at the nonprofit think tank Demos. He wrote an influential report in 2013 urging the city to fight back against Wall Street’s demands. Turbeville calls Steven Rhodes, the federal judge who approved the city’s bankruptcy plan, “brave” for throwing out the initial settlement of the $800 million derivatives deal and making financial institutions settle for a fraction of that amount.

The first lesson from Detroit’s bankruptcy is that cities need to manage their finances and dealings with capital markets much more carefully. While there’s nothing in the ruling that prevents the Street from trying to peddle similarly risky deals to city governments–indeed, risky bonds issued by the Chicago public school system are causing that great metropolis serious problems now–it is, in Turbeville’s words, “a shot across the bow to show banks that you can’t do crazy deals with desperate municipalities and think you’ll get away with it.”

Another lesson: communities cannot cut their way to economic success. They must find ways to grow. That’s where Detroit’s downtown boom comes in. While the city lost population for decades, things have turned a corner in the past couple of years. Younger, well-educated people in a wide range of industries from technology to medicine are moving downtown in droves.

Much of the resurgence has been led by Quicken’s Gilbert, who decided to take advantage of the city’s post-financial-crisis “skyscraper sales” and tax incentives during the economic downturn. Gilbert moved his company’s headquarters from the suburbs to downtown, helping launch a property boom in the area partly by funding a variety of new tech businesses and offering subsidized Quicken loans to people working for his firms. “If I wanted to attract kids from Harvard or Georgetown, there was no way it was going to happen in a suburb of Detroit, where you’re going to walk on asphalt 200 yards to your car in the middle of February,” says Gilbert.

He was right. A new study by the nonprofit City Observatory, a think tank funded by the Knight Foundation, recently found that college-educated people ages 25 to 34 are migrating to city centers in places like Detroit at twice the pace of any other demographic group. As Katz puts it, “The landscape of innovation has been dominated by suburban places like Silicon Valley for the last 50 years. But now a new urban model is emerging. Young knowledge workers want to live, work and play in cities.” They are, in turn, encouraging businesses that had once moved to the suburbs to relocate back to those cities.

Talent Murmurations

These migrations are not only reshaping the country’s economic map; they also give us important clues about how the U.S. economy at large can succeed over the next few years. Already, the American cities that are the most economically vibrant–Washington, San Francisco, Boston, Austin, and San Jose, Calif.–are those that have the highest percentage of college-educated 25-to-34-year-olds. They increase a city’s productivity and its GDP. And the places people in that group are settling now, in their most mobile years–places like Buffalo, N.Y., Detroit and Pittsburgh, and other cities with an attractive blend of cheaper real estate and vibrant educational and cultural institutions–are often Rust Belt cities where growth may well be strongest in the future.

The trick for those cities now is to broaden that growth into something more inclusive. It used to be that nobody wanted to go downtown; now leaders have to make sure that people and money leave it and spread throughout the rest of the city. “The comeback is happening downtown, but we need to do a lot more work in the neighborhoods,” says Governor Snyder.

That’s why the city’s next big endeavor is undertaking that work. “For a long time, Detroit was one of the only cities that had separate transit authorities for downtown and the suburbs,” explains Snyder. “One year ago, we knitted those two together so we can connect neighborhoods better.” A new light rail will help move people between downtown and adjacent areas, a project to which companies like Quicken, General Motors and Penske have donated much of the $140 million development money. (The investment may pay off: a similar project in Portland, Ore., generated six times its initial cost in overall economic development.)

There’s a lot more that could be done to leverage the city’s design and manufacturing clout. Southern Michigan still has the deepest pool of industrial designers in the country, a legacy of the auto industry, which is beginning to invest in some local startup firms in the technology space. Ford, for instance, recently acquired a digital-radio company that was started in Detroit. The Michigan Economic Development Corp. is funding four major Silicon Valley–like incubators in different locations around the city, with the aim of spreading growth beyond the overpriced lofts of downtown.

One young urban pioneer, 24-year-old Max Nussenbaum, is already living that dream. He recently left his cushy apartment downtown and crowdsourced $10,000 to buy an abandoned house in New Center, one of the beleaguered areas of town that has started to show signs of life. He and a few other members of the inaugural Detroit class of Venture for America, a nonprofit that seeds urban areas with young would-be entrepreneurs, now live in the house, which they renovated with $200,000 that came mostly from an interested local investor who is banking on the area’s resurgence. Inside, the group has started its own property-management firm and built workspace for other new companies on the ground floor.

Recently, Nussenbaum worked with his block association to get a long-abandoned hospital adjacent to the property torn down, in the hopes that the space will be redeveloped. “Where else could I do what I’m doing–and buy a $10,000 house too?” he asks.

As Detroit moves into a new era, it’s a fair bet that there will be many fewer 10-grand houses–and many more Max Nussenbaums–a year from now.

Contact us at editors@time.com.

This appears in the November 24, 2014 issue of TIME.

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