Last summer the Detroit Governor realised local governments' greatest fear with the words, "Basically, we're broke". Once a symbol of industrial power and the US automobile business, Detroit has become the largest US city ever to file for bankruptcy, with debts of almost $20bn.

For a place that was once described at the ‘Paris of the Midwest' and credited as creating middle class America, Motown has fallen a long way from the wealth and dynamism of the 1950s when it manufactured 4 in every 5 cars in the US.

The city is in a dire state. 78,000 buildings are left abandoned, the homicide rate is at a 40 year high, and unemployment has tripled since 2000. Moreover the resilience of local services has been stretched to breaking point. Only a third of ambulances are operational and the typical police response time totals 58 minutes, compared to a national average of eleven.

Meanwhile, this side of the Atlantic, questions have been raised as to whether the same could happen in the UK. With similar macroeconomic conditions and deep cuts to local government funding, fear of financial failure has been a growing concern for local authorities.

Zurich Municipal first noted local government budgetary distress in 2010. Following the Spending Review that detailed a 26% reduction in central government support for local authorities over the parliament, our Tough Choices report ranked the risk of financial failure as a high likelihood over the coming years.

More recently, the National Audit Office reinforced concerns over service continuity. In a publication last year, it was acknowledged that the accountability framework for local government to manage extensive financial failure is largely untried and there could be a serious break-down of service provision.

However, it is important to note that it is hard to conceive of a situation where a local authority in the UK could find itself on the brink of administration.

Councils have a legal requirement to set a balanced budget, forcing tough spending decisions to be taken, and there are provisions in place for the government to take prompt action.

Moreover, UK local authorities show few of the hallmarks that have characterised Detroit through its continual decline over the last 60 years.

Serious mismanagement, population collapse of 1.2 million people to 700,000 and irresponsible promises by the city's political classes have defined Detroit but, thankfully, have less relevance for UK municipalities.

Nonetheless, Detroit does hold important lessons. Its problems largely come from the pensions of city workers and retirees, burdened with an obligation to its present and future pensioners that amounts to half of the $18bn debt.

At the moment the city is on an unsustainable course whereby it pays 38 cents in every dollar towards legacy costs, projected to grow to 65 cents in every dollar by 2017.

Similarly, in the UK, a notable risk in the long-run for local government is adequately addressing the mounting pension costs. The release last year of accounts by UK local councils showed a £54bn pension shortfall in 2011. Failing to take action in the short-term to prepare for today's ageing baby boomer generation could have serious future financial repercussions.

Risk-weighted reserving for future liabilities and uncertainties, therefore, is absolutely critical to sustainable financial management. Robust scenario planning is important in understanding ‘financial risks' if authorities are to be prepared for multiple incidents, ranging from natural events such as fire or flood to the continued delivery of children's day care.

Local authorities must also seek to manage spiralling social costs, for example rising youth unemployment, which will ultimately impact their tax base and service demands.

Perhaps most significantly, though, some have argued that Detroit's troubles fire a warning shot across the bow of the UK's localism agenda.

The events in Michigan have been seen by commentators as a spectacular example of how, when local councils get it wrong, it is central government that is left to pick up the pieces.

The reminder comes at a timely moment. The government is making changes that create financial opportunities for local authorities but also increase their financial risks and uncertainty.

For example, in April this year, the partial localisation of business rates was introduced. While the change will incentivise councils to promote local business growth, as they will keep a share of increased business rate income, there is also the risk of greater exposure should incomes fall.

The same could also be said as authorities shift their role from default providers to ‘specifiers' of local services. Innovative models of outsourcing services can represent substantial savings to councils' bottom line, but the resilience of third parties cannot be guaranteed and can result in supply chain collapse.

However, local authorities have demonstrated clear proficiency of their management capabilities over the last few years through a tough financial period.