The city of Detroit declared bankruptcy this afternoon. It was not a surprise. Anyone who follows municipal finance has known for years that Detroit would do this; the only issue was when it would happen.
Detroit has a bunch of problems that make things impossible for it.
1. Detroit use to have nearly two million people in 1950. It now has just 700,000. Reducing the population does not reduce the need for city service proportionately, so the cost per person just to keep the service level constant has gone up and up.
2. The people who moved out of Detroit were the upper segments of society. The wealthy are gone. Nearly all the middle income folks are gone. Nearly 40% of the people in the city live at or below the poverty line. There are just not people left in the city to pay taxes anymore.
3. Business in Detroit has fled as well. No, not all business, but the bulk of the large companies that used to be there are now somewhere else. In this area too, the taxpayers left.
4. One of the main reasons that folks left Detroit was because the costs of the city were just too high. Taxes were just too high. For decades, the city government never, NEVER cut its costs. City employees got better and better contracts even when there was no money to pay for the costs. The city just borrowed more and more money.
5. Right now, Detroit has something like 20 billion dollars of debt. That is like thirty thousand dollars for each man, woman and child in the city. Given the hopeless economic situation in the city, there is no way that the debt will ever be paid back.
6. Employee pensions are underfunded and thousands of retired (and soon to be retired) city employees are not about to get the benefits that were promised them by governments of old.
The estimates I have seen is that those on pensions will get only about 10 to 15% of what was promised to them. Holders of municipal debt may get as little at 5% of what they are owed. It is going to be a disaster for many.
Some voices are now calling on the federal government to step in and take over Detroit's debts. That would be a terrible precedent. Right now, folks need to understand that there is no rescue from fiscal mismanagement. A bailout from Washington would tell governments that they can just spend what they don't have and big brother in DC will save them. It is a recipe for a disaster that would make the Detroit bankruptcy filing look like a pothole on the road to Hell.
Detroit has a bunch of problems that make things impossible for it.
1. Detroit use to have nearly two million people in 1950. It now has just 700,000. Reducing the population does not reduce the need for city service proportionately, so the cost per person just to keep the service level constant has gone up and up.
2. The people who moved out of Detroit were the upper segments of society. The wealthy are gone. Nearly all the middle income folks are gone. Nearly 40% of the people in the city live at or below the poverty line. There are just not people left in the city to pay taxes anymore.
3. Business in Detroit has fled as well. No, not all business, but the bulk of the large companies that used to be there are now somewhere else. In this area too, the taxpayers left.
4. One of the main reasons that folks left Detroit was because the costs of the city were just too high. Taxes were just too high. For decades, the city government never, NEVER cut its costs. City employees got better and better contracts even when there was no money to pay for the costs. The city just borrowed more and more money.
5. Right now, Detroit has something like 20 billion dollars of debt. That is like thirty thousand dollars for each man, woman and child in the city. Given the hopeless economic situation in the city, there is no way that the debt will ever be paid back.
6. Employee pensions are underfunded and thousands of retired (and soon to be retired) city employees are not about to get the benefits that were promised them by governments of old.
The estimates I have seen is that those on pensions will get only about 10 to 15% of what was promised to them. Holders of municipal debt may get as little at 5% of what they are owed. It is going to be a disaster for many.
Some voices are now calling on the federal government to step in and take over Detroit's debts. That would be a terrible precedent. Right now, folks need to understand that there is no rescue from fiscal mismanagement. A bailout from Washington would tell governments that they can just spend what they don't have and big brother in DC will save them. It is a recipe for a disaster that would make the Detroit bankruptcy filing look like a pothole on the road to Hell.
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