Wednesday, October 22, 2014

My Thoughts on the Detroit Bankruptcy

I posted these thoughts on Bigger Pockets in response to this thread, but thought it might be interesting to see what blog readers think.  The discussion basically centered on why Detroit went bankrupt and what the future held.  Feel free to comment below.
1) A portion of Detroit's deficit can be attributed to changes in the state's municipal funding system, changes which victimized urban and fully developed areas and rewarded small towns and open areas.  When the state ran into their own financial issues, they chose to cut local revenue sharing (meant to replace other money lost in another tax change).  That change alone meant $200 million less for Detroit.
2) The real estate collapse hit Detroit worse than just about anywhere else.  Tax revenues plummeted.  Then, thanks to certain unique aspects of Michigan law, residential taxes did not bounce back when prices bounced back up.  It will be 2028 before taxable valuations are at 2008 levels.
3) After Detroit was having problems, bonding interest went up.  Creditors received a lot more interest due to a higher perceived risk of default.  Then, when a default occurs, they want to be made completely whole.  
4) Pension and retiree health care costs did go up, and I'll bet they did where you live, too.  Detroit can be blamed for not doing more about this. 
5) Detroit's population drop started in the early sixties. It has continued since then.  Part of that was not Detroit's fault.  Freeways were built, so people could move to the suburbs.  See also Cleveland and other big cities which are not as big.
6) Yes, there has been corruption, but the actual economic impact of that is insignificant compared to the items above.
7) When the Emergency Manager came in, he realized the problems could not be fixed with the debt load.  If it was as simple as cutting pensions and not being corrupt, well, he did that.  But it was not near enough.   He still took Detroit into bankruptcy.
8) Pensions will be cut (see 4 above), but many of those people do not still live in Detroit, so the actual impact on residents is not as much as you think.
9) Detroit comes out of bankruptcy shedding a crippling debt load.  You can't pay for police and fire when 40% of reduced finances go to pay debt each year.
I am optimistic that Detroit will do better coming out of bankruptcy.  Long term, there needs to be changes to municipal funding in Michigan or Detroit will be joined by plenty of other cities in fiscal disaster.