Why Detroit Went Bankrupt
I worked for the City of Detroit from 1989 to 2020. I had a unique perspective on the City’s finances having been an accountant, auditor, general manager of the Finance Department and fiscal analyst for the Detroit City Council. I spent time in almost every major City Department auditing and analyzing their finances and services provided. I managed the City’s cash from 2008 up to the bankruptcy filing in 2013. I prepared the City’s annual financial reports from 2007–2014. I wrote audit reports and fiscal analyses for the City Council that dealt with controversial subjects. I uncovered and witnessed some of the major corruption in the City. Living in the City for thirty years gave me the opportunity to experience and witness the deterioration of public services and its impact on the citizens.
Racism, neglect, and poverty resulting in the substantial loss of its population and tax base and the deterioration in the delivery of all public services including education and public safety contributed to Detroit’s demise and bankruptcy. This country has spent trillions of taxpayer dollars fighting wars and building the defense industry while at the same time ignoring the poverty and resulting dysfunction in its cities. Many more people have been murdered in impoverished American cities like Detroit than this country has lost killed in action in its wars since World War II ended. What great civilization allows the conditions whereby a large number of its citizens are murdered?
People should know what their government provides for the hard-earned taxes that they pay. They have a stake in the public services provided to them. The services provided by a local government such as Detroit affects the quality of life of the community. Public services such as education, public safety, water and sewer, parks and recreation, public works (street maintenance and trash removal), transportation, housing and code enforcement, and cultural institutions are essential and necessary for any community. When a community receives excellent public services, its residents are healthy, educated, safe and able to compete with residents in other communities. When a community receives inadequate public services its residents’ health, education, and safety are at risk and they are less able to compete with those in other communities.
Governments need to be transparent, and the taxpayers have a right to know how their taxes are spent. Politicians and government workers need to serve the public and not themselves. I witnessed a lot of fraud, waste and abuse in my 30 years with the City. It was a travesty and disservice to the hard-working taxpayers. Good financial and accounting controls should prevent or minimize fraud, waste and abuse. However, when revenues are insufficient to provide good public services, financial controls are usually the first thing to break down. As with many third world countries, the corrupt few takes advantage of the government.
We live in a society that is distrustful of government. Our society in the last sixty years has seen a greater disparity between the rich and the poor. At one time we had a large middle class, but it has gradually eroded. In Michigan at one time the State government tried to ensure that local governments received equitable services and funding. Through fragmentation new local governments emerged in the suburbs competing with the big central City that they surrounded for taxpayers and a better quality of life. Conservatives favored less government and taxes. The State became less generous in funding the big cities and cut back on revenue sharing to them. The wealthier communities with a much higher tax base were able to provide good services for its citizens which enabled them to thrive. The poorer communities lacked the tax base and provided substandard services and its citizens struggled.
Racism was a driving force in the fragmentation. Most White people in the 1950s-1980s did not want to live in integrated neighborhoods with blacks. They created the new suburban cities surrounding Detroit and did their best to keep them segregated.
What has happened in Michigan is cities like Detroit have been left with large legacy costs such as pensions, retiree health care, debt, blighted homes and infrastructure that were incurred when much more people with more wealth lived there. The legacy costs didn’t go with the people who left the City, they remained with the City. As a result, these cities had to pay these large legacy costs out of their meager revenue collections leaving much less for essential services which put their citizens at a disadvantage.
The City of Detroit municipal and infrastructure costs for an area of 139 square miles once borne by a population of 1.8 million at its peak during the World War II years (1941–1945), many of whom were middle income or wealthy, were left to 700,000 people, many of whom were impoverished. Furthermore, the costs to Detroit, estimated in the billions, too teardown blighted factories and homes, especially those abandoned by people during the subprime mortgage crisis (2007–2010), were on such a grand scale of which no other municipality in the country had to deal with.
Healthy property tax collections are the biggest source of revenue for most successful cities. The abandoned homes, foreclosures, and blight depressed property values and property tax collections in Detroit. Detroit not only had excessive legacy costs taking up a substantial amount of its General Fund budget; it also had impaired and less General Fund property tax revenues due to the fragmentation.
Detroit prior to its filing for bankruptcy in 2013 was paying over 40% of its annual General Fund revenues for legacy costs. Annual retiree health care costs were greater than the City’s active employee’s health care costs. Retiree health care and pensions were substantially underfunded resulting in higher annual costs. The legacy costs took revenues away from paying for essential public services. Detroit couldn’t provide basic services and couldn’t compete with the services provided by its suburban governments that had much less legacy costs. As a result, more people left the City and its tax base worsened along with the quality of the services it provided.
The City became impoverished. The education and public safety services essentially collapsed. As Judge Steven Rhodes, the City’s bankruptcy judge said, the City was not only financially insolvent it was service insolvent. Without a good education many of Detroit’s citizens couldn’t compete for jobs. Crime flourished and the quality of life was substandard. More people that could do so left for a better quality of life in the suburbs.
As the City’s financial challenges mounted the City laid off a large number of essential employees. The City’s financial and internal controls broke down and fraud, waste and abuse were rampant. Employees, business people, Councilmembers, and even a mayor took advantage of the City to enrich their selves, which further reduced the quality of the public services.
The City borrowed to maintain operations but services continued to deteriorate and more citizens left. By 2013 Detroit was fiscally insolvent and could no longer borrow or cut expenses to survive. The State forced it into bankruptcy to eliminate some of its legacy and debt obligations. The goal was to cut legacy costs to provide more revenue to improve the City’s public services and the quality of life of its citizens.
Unfortunately, the bankruptcy only dealt with the City’s financial problems and it failed to adequately deal with them. The bankruptcy professionals underestimated the total pension obligation of the City and didn’t provide sufficient relief for it through the “Grand Bargain” or in cuts to retiree’s pensions. Also, secured debt was not cut in the bankruptcy and other debt was incurred per the bankruptcy plan that will place an additional burden on the City’s taxpayers. Furthermore, the abandoned homes mainly due to the subprime mortgage crisis and tax foreclosures added a huge blight cost which the bankruptcy failed to adequately address.
More crucial is that the bankruptcy didn’t deal with the State government’s dysfunction and the core problems of racism, poverty, and lack of satisfactory education and other substandard public services in impoverished cities with a low tax base. The State of Michigan fails to see that it has a role in ensuring fiscal and public service equity among its local governments. The State has set its local governments up for failure by not ensuring public services are equitably funded and distributed among local governments and allowing them to compete against each other for taxpayers. As a result, the State has created ghettos in Detroit, Pontiac, Benton Harbor, Flint, Highland Park and other impoverished cities in Michigan.
An Emergency Manager and Chapter 9 bankruptcy can’t solve the inequity in tax base and public services in Michigan. We need to get back to helping our less fortunate neighbors. Everyone deserves to be provided with equitable public services so they have a chance at a better quality of life.
