The City of Detroit Bankruptcy

Posted by PITHOCRATES - July 22nd, 2013

Economics 101

There is nothing more Dangerous to a City’s Finances than a Shrinking Tax Base

The federal debt is at record levels.  Because federal spending is at record levels.  But those on the left say there’s nothing to worry about.  And try to expand federal spending further.  With more government benefits to hand out to the people.  And an ever growing federal bureaucracy.  Full of new jobs with generous pay and benefits.  All funded by the taxpayer.

Businesses in the private sector cannot operate like this.  Because businesses have to pay their costs with the things and/or services they sell.  That people willingly buy.  So there is a limit on the costs a business can incur.  But not so with government.  For the government has the power to tax.  To forcibly take more money from the people against their will.  Something businesses just can’t do.  And when that fails they can borrow money by issuing bonds.  Which are generally easy to sell.  Because governments have the power to tax.  All but guaranteeing that they will repay those bonds.  And when that’s not enough the federal government has one other benefit businesses don’t have.  They can print money.  Further guaranteeing that they will be able to redeem their bonds.  Making them that much easier to sell.

Government below the federal level, though, doesn’t have that last option.  So when they want to spend more money than they have they have no choice but to borrow.  And hope that their tax base doesn’t erode over time.  For there is nothing more dangerous to a city’s finances than a shrinking tax base.  Especially when the city has a huge and growing public sector.  Enjoying generous pay and benefits.  Especially pension and health care benefits for retirees.  Where promises made must be kept decades into the future.  During which time a lot of things can happen.  Such as that tax base shrinking.

Detroit’s Tax Base plummeted while the Size of the Public Sector did not for Government Never grows Smaller

This is the problem the City of Detroit has.  And it is why they filed the largest municipal bankruptcy in U.S. history.  Thanks to the automotive industry and World War II destroying most of the industrial economies of the world, Detroit became an economic power house.  And one of America’s grandest cities in the 1950s.  Paris of the Midwest they called Detroit.  Automotive capital of the world.  The Motor City.  The mecca of American manufacturing.  Having one of the richest middle class.  And one of the largest black middle classes.  Everyone was doing well in Detroit.  So the City of Detroit did the only rational thing a city could do with a swelling tax base.  They exploded the public sector.  All paid for with higher taxes.  Including a new city income tax.

But that growing public sector soon turned Detroit into a business unfriendly city.  With more red tape, regulatory costs and a corporate income tax.  And rising union demands during contract negotiations made it even less business friendly.  So businesses started leaving the city.  Taking their jobs with them.  And people followed.  Then the race riots hit in 1967.  Five days of unprecedented violence.  Thus beginning the great white flight from the city.  And the great population decline of the City of Detroit.  Culminating in the nation’s largest municipal bankruptcy in history.

At Detroit’s peak her population topped out at about 1.8 million people.  Today there are but 680,000 people remaining.  A loss of 1.12 million people.  About 62% of her peak population.  So Detroit’s tax base plummeted.  But the size of the public sector didn’t.  For government never grows smaller.  So Detroit continued on with the overhead expenses of a city with a population of 1.8 million people.  With the tax revenue of a city with a population of 680,000 people.  Making bankruptcy inevitable.

The Problems of the City of Detroit are the Problems of the Nation Writ Large

At the height of Detroit’s industrial might there were approximately 300,000 automotive or manufacturing jobs in the city.  Today there are a mere 27,000.  That’s a loss of 273,000 jobs.  That’s 273,000 breadwinners whose families are no longer in the city.  If each of them had on average 2.5 children who remained in the city with their parents that would have added about 1.2 million to the city’s population.  Which corresponds pretty closely to the 1.12 million the city actually lost.  So we can see how the loss of the jobs devastated the population.  But we can also see what it did to the city’s finances.

Let’s assume these breadwinners had their children when they were in their 20s.  So the breadwinner was still in the workforce when their children were 20 and had entered the workforce.  Let’s say this happened over a 40-year period.  So, on average during that 40-year period, there were an additional 136,500 jobs per year.  Let’s say they each owned a house and paid property tax of $750.  Over 40 years that’s about $4.1 billion in lost property tax revenue.  If each of these workers earned $35,000 on average over those 40 years and paid a 3% city income tax that’s about $9.8 billion in lost personal income tax revenue.  Finally, if we figure a 50-50 split between labor and material, a 15% overhead and a 2% net profit we can extrapolate that $35,000 average personal income into approximately $448 billion in lost corporate revenue over those 40 years.  At a city corporate income tax rate of 2% that’s about $9 billion in lost corporate income tax revenue.  Adding these all together we see a total loss of tax revenue to the city of approximately $18.8 billion due to the loss of 273,000 jobs.  Plus or minus.

This is a crude guesstimate with an emphasis on crude but it could be close enough to explain what happened in Detroit.  For with the falling tax base Detroit turned to borrowing more and more money to pay for an oversized public sector.  To service a disappearing population.  With those pension and retiree health care benefits being especially burdensome.  Which forced the city to borrow so much it left them with a debt of $18.5 billion (very close to the $18.8 billion in our little exercise above) that they don’t have a chance in hell of ever repaying.  Leaving bankruptcy as the only option.  Unless the federal government steps in.  Which probably won’t happen.  And shouldn’t happen.  For Detroit is not the only government suffering under the weight of unfunded pension obligations and retiree health care benefits.  If they bail out Detroit then they’ll have to bail out all other states and municipalities.  Which they can’t afford to do.  For the federal government has its own problems with pensions (Social Security) and retiree health care benefits (Medicare).  And they’ve just added a new government benefit that will dwarf the costs of Social Security and Medicare.  Obamacare.  All while burdening the economy with a slew of anti-business regulations that has chased jobs out of the economy.  And out of the country.

So the federal government can’t step in to save Detroit.  For the federal government is working to ‘out Detroit’ Detroit.  As the problems of Detroit are the problems of the nation writ large.  What’s happening in Detroit will happen in other states and cities across the country.  That are spending more money than they have to support an oversized public sector.  And in time what’s happening in Detroit will happen to the federal government.  Bailing out these states and cities will only hasten the downfall of the federal government.  Which the federal government will do whatever it can to prevent.  For while the nation can survive a city like Detroit going bankrupt the nation cannot survive a federal bankruptcy.  Because the numbers are just too big at the federal level.

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The UAW and Public Sector Unions devastate Three Michigan Cities

Posted by PITHOCRATES - February 24th, 2013

Week in Review

It’s not been a good year for Detroit.  Well, it’s been more than a year.  It’s been a few bad years.  Actually, it’s been a great many bad years.  Since 1970.  When Ford Motor Company Chairman Henry Ford II joined with other business leaders to form Detroit Renaissance.  To revitalize the City of Detroit.  And some 42 years later, the City of Detroit is still struggling (see Detroit’s Misery Can Be Its Turning Point by Micheline Maynard posted 2/23/2013 on Forbes).

Detroit boosters were dealt a one-two blow this week by the kind of outsiders they have come to resent.

First, a state review panel declared that a financial emergency existed in the city, making it likely that Michigan Gov. Rick Snyder will appoint an emergency financial manager with sweeping powers.

Then, Forbes weighed in by declaring Detroit the nation’s most miserable city, based on a series of criteria that include crime, unemployment, foreclosures and home value…

Although General Motors is based in Detroit, and Chrysler recently opened an office there, the automobile industry is not going to provide the vast numbers of jobs the city needs to become solvent.

And there lies the problem for Detroit.  A city that grew big and rich off of the automobile industry saw a steady exodus and a declining tax base when the automobile industry declined.  Live by the automobile.  Die by the automobile.  And it’s just not Detroit.  A couple of other Michigan cities broke into the top 10 of Forbes’ America’s Most Miserable Cities 2013.

#7 Warren, Mich.

Troy and Farmington Hills are part of the government-defined Warren metro division. Like Detroit, the Warren metro has seen home prices collapse–off 53% the past five years.

#2 Flint, Mich.

Flint has been demolishing homes as the city shrinks with residents leaving in search of jobs. Only Detroit has a higher net out-migration rate. Flint ranks third worst for violent crime, behind Detroit and Memphis.

#1 Detroit, Mich.

Violent crime in the Detroit metro was down 5% in 2011, but it remains the highest in the country with 1,052 violent crimes per 100,000 people, according to the FBI. Home prices were off 35% the past 3 years, which is the biggest drop in the U.S.

If you seek a pleasant peninsula* you’d do better looking for one where the UAW isn’t dominant.  Perhaps Florida.  For the UAW is a city killer based on these Michigan cities.  (*The official state motto of Michigan is “If you seek a pleasant peninsula, look about you.”)

The Big Three dominated these cities.  Where fat pay and benefit packages were passed on to consumers in overpriced vehicles.  The Big Three’s monopoly on car sales allowed them to make fat profits.  And pay enormous amounts of taxes to the cities that had the factories that assembled their cars.  City coffers were so flush with cash city governments grew.  And city workers enjoyed fat pay and benefit packages.  This was the high water mark of the UAW.  Just after public sector unions had joined them on the gravy train.  But then something happened that devastated the UAW.  Consumers got choice.  They no longer had to buy overpriced ‘rust buckets’ the Big Three was putting out during the Seventies.  For the Japanese gave them choice.

And so began the great decline of the Big Three.  Quality and value did them in.  It’s what the people wanted.  While the UAW wanted consumers to pay more and get less.  So they could continue to enjoy their fat pay and benefit packages.  As the jobs went away so do did the taxes.  The cities bloated with all those government workers with their fat pay and benefit packages tried to maintain the size of their governments even while the tax base was declining.  Reducing other government services as they had little money left over after paying those fat pay and benefit packages.

With fewer and fewer jobs available people left these cities.  Empty houses dotted the horizon.  And housing prices fell.  With the tax base continuing to decline.  Poverty rates rose.  As did city services for the impoverished.  Leaving even less for other city services.  Causing a further exodus from the city.  Urban blight followed.  As did crime.  Causing a further decline in property values.

Low interest rates helped boost housing prices.  For awhile.  President Clinton’s Policy Statement on Discrimination in Lending kicked off subprime lending in earnest as lenders bowed to the Clinton Justice Department to put more low-income and minorities into homes they couldn’t afford.  Creating a huge housing bubble.  Built on easy credit.  Artificially low interest rates.  And the adjustable rate mortgage (ARM).  When rates went up all those low-income and minorities who bought houses they couldn’t afford defaulted on their higher mortgage payments.  Creating the subprime mortgage crisis.  Giving us the Great Recession.  Creating a flood of foreclosures.  A free fall in housing prices.  And more of the same that helped put those three Michigan cities into the top ten of Forbes’ America’s Most Miserable Cities 2013.

Michigan recently opted to become a Right-to-Work state.  Greatly angering the UAW and those public sector unions.  But it may be just what Michigan needs to reverse the great decline caused by the UAW and the public sector unions that devastated some of Michigan’s greatest cities.  One thing for sure it can’t get any worse.  Not when being a union state for so long secured three places in the top ten of Forbes’ America’s Most Miserable Cities 2013.

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The City of Detroit can’t maintain her Parks but the Private Sector Can

Posted by PITHOCRATES - February 10th, 2013

Week in Review

Detroit, the Motor City, the automotive capital of the world (at one time), is an example of what government should NOT do.  The city got rich off of the automotive industry.  They imposed a city income tax.  Greatly expanded the size of city government.  With the public sector unions negotiating generous pay and benefit packages.  Just as the UAW was giving their members generous pay and benefit packages.  And why not?  Detroit WAS the Motor City.  And nothing was going to stop that cash cow.  What could possibly go wrong?

As it turned out, a lot.  Competition came in and offered quality cars for less.  And the great decline of the Big Three began.  As did all that tax revenue to fund that expanded government with those generous pay and benefit packages.  Fast forward to today and Detroit is a shell of what it once was.  Half of its population is gone.  Drowning under the cost of that expansive city government.  And forced to close city parks because there’s just no money left after paying for those generous pay and benefit packages (see Detroit to Lose 51 Parks – Impact on Residents by Marilisa Sachteleben by Marilisa Sachteleben posted 2/4/2013 on Yahoo! News).

Detroit’s City Council nixed a plan to lease Belle Isle to the State of Michigan last week. In response, Mayor Dave Bing announced plans to close 51 area parks, cut maintenance at others, and greatly reduce recreation center budgets overall, says the Detroit Free Press…

The Detroit Free Press reports that revenue lost from the collapsed Belle Isle deal means that groundskeeping on Belle Isle will be limited. The Belle Isle Conservancy was able to get the island’s historical aquarium reopened in 2012 after being shut down for several years. With less money, it may be difficult for Belle Isle attractions to remain open…

Detroit resident Syed Mohiuddin of the Michigan Muslim Community Council is very concerned about park closures. He said, “My wife and I live downtown, and we are definitely affected by the announcement. Park closures are not an option. To the contrary, we need to invest more in parks to make our neighborhoods safer and community healthy. How do we do that given the state of our budget? Partnerships. Corporations, suburban religious groups, and others can and should partner with city government and community organizations and find solutions for each and every park. They are just too important to sacrifice, not in the name of politics, not in the name of budgets.”

He’s right, you know.

One local park group came up with such a solution: the Clark Park Coalition. Clark Park, at 1130 Clark St. in Detroit’s Southwest-Mexicantown neighborhood, was forced to close over 20 years ago due to financial troubles in Detroit. Concerned neighbors, activists, organizations, and youth programs put their heads together to preserve Clark Park. They formed a nonprofit partnership with the city recreation department.

Currently, Clark Park’s collective provides year-round programs to over 1,200 youths in the area. It maintains a regulation-size outdoor ice hockey rink (the only one in Metro Detroit). Free daily summer lunches are served to over 100 youth. Activities at Clark Park include baseball, arts and crafts, field trips, soccer, golf, fitness training, softball, tennis, roller hockey, gardening, and ice skating. Kids can come to the park center for homework help, mentoring, and computer assistance. There are community service activities for school projects and even opportunities for kids to find jobs.

Imagine that.  The City of Detroit is going bankrupt.  They can’t afford basic maintenance at their parks.  And look at all the private sector did at Clark Park.  This just goes to show you what the private sector can do.  And what the public sector can’t do.  The lesson?  Cities should privatize as much as they can.  And embrace partnerships.  Corporations.  Suburban religious groups.  And community organizations.

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Detroit’s Public Sector Unions may push the City into the Biggest Municipal Bankruptcy in U.S. History

Posted by PITHOCRATES - December 16th, 2012

Week in Review

Michigan just became a Right to Work state in an effort to lure business into Michigan.  Whose high union costs have chased business away from Michigan.  Detroit, The Motor City, auto capital of the world, home of the Big Three, is a dying city.  While Mercedes, BMW, Toyota, Honda, etc, have built new auto plants in the United States not a one of them built in Michigan.  Because of their high union costs.  So Detroit has the Big Three.  But no one else.  And even two of the Big Three recently filed bankruptcy thanks to those union legacy costs (pensions and health care for retirees who outnumbered the active workforce).

So Michigan is bad.  But Detroit is worse.  They’ve lost so much industry that the number one and two employers in the city are the City of Detroit and the Detroit Public Schools.  Both who have unions doing to the City of Detroit what the unions did to the Big Three (see Detroit has “serious financial problem”: Michigan treasurer by Ann Saphir posted 12/15/2012 on Reuters).

A check of Detroit’s finances has found a “serious financial problem” with the cash-strapped city, a step that could lead to the biggest municipal bankruptcy in U.S. history…

That official would have the power to put the city of 700,000 into Chapter 9 bankruptcy if other rescue plans are not feasible or effective.

Detroit, home of General Motors Co., has been hit by a steep population decline, years of severe budget deficits and escalating employee costs, all of which led state officials to begin an intervention process last year.

Detroit’s population peaked at 1,850,000 in 1950.  The city has since lost over half of its population.  First the jobs left.  Then the people.  During this time the size of city government grew.  As did the public sector union pay and benefit packages for those public sector workers.  The city’s costs soared as their tax base disappeared.  So it’s no surprise that the city is facing perhaps the biggest municipal bankruptcy in U.S. history.

At this point in time it’s probably not a question if Detroit will file bankruptcy.  But a question of when.  They’re going to have to do what the Left wants to do for people underwater in their mortgages.  And for students buried in student loan debt with no job prospects (because they got degrees in Philosophy, Religious Studies, Anthropology, Archeology, Area Ethnic Studies, Civilization Studies, Information Systems, etc.).  Forgive their debt.  So these people can crawl out from underneath their debt and return to some sense of normalcy in their lives.  But the Left will not endorse this same solution for Detroit.  Because the city’s debts just happen to be to the Left’s greatest campaign contributors and constituency.  Public sector unions.  The Left will screw banks and mortgage companies every day of the week.  But when it comes to the public sector unions they’d rather screw the taxpayer.

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LESSONS LEARNED #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 23rd, 2010

Detroit – The Motor of the World

Detroit.  Do I need say more? 

If you want to see the ultimate destination of liberalism, go to Detroit.  The Motor City.  The birthplace of the assembly line.  Mass production.  The veritable axle of the Industrial Revolution redux.  Detroit put the nation in motion.  In cars.  And in diesel-electric trains.  If it was big and powerful and moved the world, it came from Detroit.  The Arsenal of Democracy.  Detroit could mass produce trucks and tanks and airplanes to win world wars.  And did.  There was nothing Detroit couldn’t do.

Henry Ford.  Thomas Edison.   Albert Kahn.  Some of the greatest names in science and industry called Detroit home.  That place you can point to on your hand.  With pride.  The city grew and became one of the greatest and grandest cities in the nation.

And look at it now. 

Detroit and Government Grow Big

The population of Detroit grew up to and through the 1950s.  That changed in the 1960s.  When Big Government arrived.

Mayor Jerome P. Cavanaugh started it.  He implemented the city income tax in 1964.  The spirit of government spending was in the air.  The Great Society would follow at the federal level.  Government spending upon government spending.  Translation?  High taxes in the city of Detroit.

Then there was all the social engineering.  Lots of rules and regulations.  Some of it good.  But all of it complex.  And costly to business.  Compliance costs and taxes.  Not things that attract businesses.  Not a big deal when the Big Three rule the automobile world.  But that would change.  In fact, that would change because of the compliance costs and taxes.  The Japanese entered the market.  And they were selling better cars for less.  Add all of this together and you get the 1970s.

The Fall of Detroit

Detroit grew to be business unfriendly.  So business left.  And then the people left, following the jobs out of Detroit.  Then some of the social engineering made others leave the city.  School bussing, for one.  Families choose their houses based on the school district the house is in.  Of course, poor families can’t afford to live in those nice neighborhoods with the nice schools.  And Big Government thinks this is just not fair.    So they bussed the poor kids to the nice schools.  And bussed the kids from the nice schools to the not so nice schools.  Thus encouraging the people from the nice neighborhoods to leave Detroit.

They call it white-flight.  A lot of jobs and affluent people left Detroit.  Leaving behind the less affluent in the not so nice neighborhoods with no jobs.  Not good for any city.  Government services grew to help care for the poor.  The Great Society offered Aid to Dependent Children.  Which, according to noted economist Thomas Sowell, destroyed the black family.  Fathers ran away from their responsibilities.  And the state stepped in to raise their children.

Add all this together and you get a lot of people with no money and a lot of idle time on their hands living in rundown neighborhoods wanting for the basic necessities of life.  And that’s never good.  Detroit became infamous.  Crime and drug problems.  Devil’s night arson.  Street gangs.  Murder capital of America.  Crime and drug infested public housing.  Decrepit schools.  Truancy.  Low graduation rates.  And to solve these problems caused by Big Government, one man turned to Big Government.

Culture of Corruption

Coleman A. Young was mayor forever.  From 1974 to 1993.  And he was a Big Government guy.  He took the city from bad to worse.  And he fixed the racism problem.  By implementing racist policies.  After the white-flight, the city was predominately black.  And so would their police, fire department, public sector employees, etc.  They based hiring on color.  Not merit.  This accelerated the white-flight.  And set up a culture of corruption.  Which usually happens when you hire people based on who they know or who they are rather than on merit.

Young was hostile to the suburbs surrounding the city.  He called them hostile suburbs.  Why?  Well, that’s the problem you have with socialism (Young was an admitted socialist).  It just doesn’t work in an open society.  If the tax and compliance costs are too great in Detroit, people can move out of Detroit.  And they did.  Even the city cops didn’t want to live in the city.  They moved out if they could (by concealing their actual residency).  Or they lived clustered together in the city.  The real estate community called one such cluster Copper Alley.  It was near one of those hostile suburbs.  And it was one of the good areas in Detroit to live in.  Young hated this.  And the suburbs that offered safe sanctuary from oppressive, socialist policies.

Detroit was one of the most corrupt cities during Mayor Young’s tenure.  It was crony capitalism at its worst.  Everyone was corrupt.  Even the authorities were forever investigating the mayor.  (A later mayor was doing a lot of the same.  And he went to jail.)  It was during the Young administration that a couple of humorous slogans started to appear on T-shirts.  “Welcome to Detroit.  Now get the hell out.”  And “Detroit.  Where the weak are killed and eaten.”  High praise indeed for the Murder Capital of America.

Detroit’s Future – Returning to the Plow

So what happens after a city suffers at the hands of Big Government for a few decades?  Well, the population declines.  Because no one wants to live in the city.  About a million people have left Detroit since its peak in the 1950s.  And if that ain’t a repudiation of Big Government, I don’t know what is.

So what is the current mayor doing?  Well, the city is broke.  City services are in shambles.  So they’re going to move people out of sparsely populated neighborhoods.  Pack them closer together.   And abandon large tracts of land.  Just let the land return to nature.  Or plow it into farmland.  If anyone wants to buy it.

Ironic, really.  The city that made the world move forward is moving backward.  A sad ending indeed for the Motor City.

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