Driven by data; ridden with liberty.
Detroit became the largest US city to file for bankruptcy, with an estimated $18bn debt to 100,000 creditors. Michigan’s Governor Rick Snyder said: “Let me be blunt. Detroit’s broke.” Michigan-appointed Emergency Manager Kevin Orr announced a moratorium on all payments of Detroit’s unsecured debts, with creditors asked to accept only 10% of what they are due.
In 1950, Detroit was the richest city in the US, and possibly the world, bustling with a population of 1,849,600. The city’s population has contracted drastically, with Detroit hosting only 951,270 people in 2000 and 684,799 citizens in 2010. This demographic decline has eroded the city’s tax revenues, with falling property values, lower collection rates and simply fewer people to tax. Income tax revenue fell by $44m – about 15% – since 2008 alone. Detroit is levying nearly all taxes at their statutory maximum rate, and the city’s tax burden per person is the highest in Michigan.
The city government will pay about 42.5% of its total revenues on ‘legacy expenditures’ in 2013: the combination of debt servicing, pension costs and retiree health benefits. By 2017, legacy expenditures will soar to nearly 65% of its revenues. Detroit currently spends 48% of its budget on basic services, such as the police; skyward legacy costs break the city’s budgetary equations. The Emergency Manager Kevin Orr notes that no other city reports legacy costs greater than 20% of its income. Demographic shifts have pushed one of Detroit’s retirement plans to a precarious position, as in 2011, only 39% of the scheme’s workers were ‘active’ – paying in – whilst the rest were recipients. Of the estimated $18bn debt: Detroit has $5.9bn debt for the city’s Water and Sewage Department, $5.7bn of unfunded retiree healthcare liabilities, $3.5bn of unfunded pension liabilities and $2.9bn of other government debts.
This constriction of Detroit’s budget is wrecking considerable human cost: the Detroit Police Department will take 58 minutes to respond to an emergency call, only one third of the city’s ambulances are in service, 40% of street lights do not work. Detroit’s murder rate is 11 times the national average, and 79% of these murders were unsolved in 2008.
About half of Detroit’s debt is to pay for retirement benefits, both pensions and healthcare. People are now living longer, but that forces government retirement plans, usually built on prosperous assumptions, into expanding deficits. The promises to pensioners now cost much more, so these entitlement schemes need to sustain solvency by retiring people later.
Detroit used to be the manufacturing hub of the United States. Now, silence haunts abandoned theatres, houses crumble in shame, and the golden dilapidation attracts tourists. The fate of the auto industry has been disentangled from the fate of the Motor City, with only two assembly plants inside Detroit’s limits. No single factor can explain the city’s beautiful and horrible decline, but mismanagement, corruption, riots and rapid demographic changes have all played a role. Bankruptcy is a solemn moment, but the pyre of unfunded liabilities may spark the rebirth of Detroit.