Detroit’s Fiscal Emergency

The governor of Michigan said Friday that the city of Detroit was in a state of “financial emergency” and announced that an independent overseer would be appointed to save it from collapse. However, the proposed solutions, which appear to consist mainly of spending cuts, inevitably mean more pain and suffering for Detroiters.

Like just about everywhere else in the U.S., tax revenue available to the city has plummeted. “More than a thousand jobs have been cut from the city’s payrolls since last June,” reports The Guardian. “Some areas of the city have turned off — and even cut down — street lights in order to save electricity.

“The mayor’s office says it has reduced spending to $1.1bn in the 2013 fiscal year from $1.4bn in 2009,” the paper continued. “The city has only managed to keep cash on hand in 2012 because of distributions from the state, according to a Moody’s report.”

A report released by the state last week described Detroit as being close to financial collapse. Experts are concerned the city could face the biggest municipal bankruptcy in U.S. history.

“I believe it’s appropriate to declare the city of Detroit in financial emergency based on the review team report,” Gov. Rick Snyder said during a town hall meeting at Wayne State University. “It’s not hard to justify that conclusion.”

Michigan law says an outside manager could lead the city into bankruptcy if there was no alternative. Once named, that official would have roughly 18 months to reverse the direction of the city’s finances before facing reappointment.

— Posted by Alexander Reed Kelly.

The Guardian:

Detroit has wrestled with financial problems for years. The shrinking auto industry and rising poverty have triggered a massive reduction in population from over 1m in the early 1990s to 700,000 in 2011, according to the US Census Bureau. In November, Moody’s Investor Service put a negative outlook on the city’s bonds and cited a host of imminent financial troubles facing the city, ranging from pressure to refinance its debt to “ongoing political instability”.

In December, the city council attempted to avoid having the state appoint an emergency manager by trying to show financial discipline, including signing contracts with outside companies to find fraud in the city’s health and workers’ compensation contracts.  

“They would need some pretty strong medicine,” said [Alan Schankel, managing director of municipal research for Janney Capital Markets] of the takeover. “There are vast parts of the center of the city that are empty. It’s pretty distressing.”

Incomes have been falling in Detroit since 2007 and the poverty rate is nearly three times the national rate, at 36.2% (the national rate was 14.3%). Median household income in the city was $27,262 in 2011 (the national average was $52,762).

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