As reported on mlive by Mike Wilkinson of Bridge Magazine, serious questions remain as to whether Detroit will be able to survive its historic Chapter 9 Bankruptcy.
Detroit has the distinction of the murder capital of the U.S. and is also the most populous U.S. city to ever seek bankruptcy protection. But, the real questions are:
Can Detroit make it after it emerges from Chapter 9 Bankruptcy?
Does the city generate enough money to fix what ails Detroit if billions in debt are cut? Are the city’s costs too high? Does it pay its workers too much? Are pensions too generous? Can the city endure a reduction in both spending and revenue and revive what is by most measures the most dysfunctional large city in America?
Theoretically, Detroit doesn’t suffer from a revenue problem. It has huge tax sources from casinos, utilities and income taxes. Moreover, Detriot gets the largest chunk of the Michigan’s revenue sharing. But, the only gambling taxes have remained stable.
But, property and income tax revenues are falling like a rock. Moreover, revenues alone do not a budget make. Cities hire workers, buy materials and provide services that cost, in places the size of Detroit, billions of dollars.
While revenues are falling, operating expenses and legacy/pension costs will bury Detroit in debt in perpetuity. Many experts who have studied Detroit’s fiscal troubles are based on the the degree to which the city’s pension and retiree healthcare plans are underfunded. For decades, Detroit failed to fund these plans during its glory days, leaving the pension fund short $3.1 billion.
Even worse – is the fraud or mismanagement with some pension proceeds. And in an effort to address the pension debt, the city made more bad financial moves, like borrowing $1.4 billion in 2005 and 2006 to shore up the funds. The loan became a fiscal millstone when the city agreed to an interest-rate “swap” to ensure low interest rates. When it backfired, it created an additional annual payment of $50 million.
More disturbing is the city’s $4.3 billion commitment for retiree health care. By comparison, Los Angeles, a city six times larger than Detroit, has a $5.5 billion health-care bill. But L.A. has put aside more than $3 billion. Detroit, at the time of its 2009 comparison to Los Angeles, had set aside just $25 million.
To work, a city has to grow and for any significant growth, a city has to be attractive. To be attractive the city has to fix its mess. Only time will tell what will happen to Detroit – and the future of cities like Flint and Saginaw – the “mini” Detroit’s to the North – hang in the balance – which is tilting the wrong way. These cities need to offer more than a liquor store on every corner, “buy here, pay here” auto lots, resale shops and pay day loan stores.