To say that Detroit has seen better days is an understatement. After years of struggling with decreasing auto sales, the city has recently had to deal with extremely high unemployment rates, increasing crime, and an exodus of taxpaying residents from its city limits. In the last decade alone, the New York Times reports that the city has lost a quarter million of its residents. Many have moved out of the city to surrounding suburbs where many of the Big 3’s plants remain, after the major restructuring of their companies in 2009. With only 2 plants left in the city limits, Detroit has lost its industrial base and with it, the tax revenue it once generated.
Many of the plants today are located just outside the city limits, while some are located across the river in Ontario, and as a resulttheir employees have moved with them. Though these companies are returning to profitability, Detroit has lost much of its tax base and revenues have dropped considerably in the past years. Since 2005, the city has taken on deficits to maintain its services. This year the city hired a third party firm to come and evaluate the worsening situation. The group has estimated that the city will run out of money by April of this year.
The city’s financial crisis has prompted speculations that the city will either enter into a municipal bankruptcy, much like Vallejo, CA, or an emergency manager will be sent from the state to help resolve the fiscal issues. Currently there are 3 other cities in the state working with such a manager. The problem here is that though a municipal bankruptcy may be the preferred option politically for Gov. Rick Snyder, it may not be possible. In the case of Vallejo in California, it took nearly 3 years for the federal judge to finish the case- and Vallejo is only 1/8th the size of Detroit.
So how did Detroit, after the auto bailout and the stimulus package, end up in this situation?
- Detroit currently has $2 billion dollars in outstanding debt as a result of deficits from 2005 to today.
- The city owes more than $5 billion dollars in retiree health care costs over the next thirty years and currently has no funding behind these costs.
- While its revenues have been decreasing from its moving population, the city has not made major spending cuts to services or to city employees to offset the lost revenue.
- Though the state’s unemployment rate stands between 9.3% and 14.1%, Detroit’s city officials estimate and unemployment rate close to 30%.
With gas prices on the rise and the auto industry still struggling, the road back to prosperity will be a rough one, but without major reforms to their local government, the services provided by the city and its healthcare/pension programs, the city will continue to run deficits. We can only hope that which ever path the city takes, it will reduce its spending and bring its budget back in line so that the motor city can start to rebuild.BA
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