Detroit bankruptcy filing comes after long financial decline
City ranks first among the 50 highest-taxing cities in the US
A view of downtown Detroit from the Detroit River early in the morning the day after the city filed for bankruptcy yesterday.
The main question raised by Detroit’s bankruptcy filing late on Thursday was how the 18th-largest city in one of the world’s wealthiest countries could decline to the point of financial ruin.
Once the US’s economic powerhouse and a national cultural centre as the birthplace of muscle cars and Motown music, “Motor City” is the largest US city to file for chapter nine bankruptcy, the type of court bankruptcy that protects a heavily indebted city or town from its creditors. Eight US cities or towns have filed for chapter nine bankruptcy since 2010, including three in California.
Detroit, the fourth-most populous US city when it was the booming hub of the US car industry, has been dying a slow financial death over the past 20 years. Public corruption, heavy borrowing, mismanagement and violent crime have contributed to Detroit’s demise. The population has fallen from almost two million in 1950 to about 700,000 today. It fell by 26 per cent in the past 12 years alone, leading to a 40 per cent drop in tax revenue. The unemployment rate is more than double the US average, after almost tripling since 2000.
The city has spent $100 million (€76 million) more than it has raised in taxes every year since 2008, borrowing the shortfall. This was despite increasing taxes on the declining population. The debt has been raised at a heavy cost; the city has borrowed on a “junk” credit rating for the past four years.
It ranks first among the 50 highest-taxing cities in the US. Property taxes are more than twice the national average, while the average house price is almost 10 times lower than the next lowest city, Mesa, Arizona.
Detroit’s problems have become self-perpetuating, accelerating the city’s decline in recent years. Reductions in the size of its workforce have deepened deficits in the city’s pensions fund. Its shrinking workforce meant employee pension contributions could not keep pace with retired workers’ entitlements.
In 2004, 51 out of every 100 workers were paying into one of the city’s two pension funds while 49 retirees were drawing on it; by 2011 39 workers were paying into the fund while 61 were being paid out of it. The city had to borrow $1.4 billion to plug a hole in the pension funds in 2008. Since then the hole has deepened to $3.5 billion.
“Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing,” said Rick Snyder, Michigan’s Republican governor.