The Corner

Could Detroit Be the Next City to Go Bankrupt?

The city of Detroit is broke. That’s the main finding in the first report by Detroit’s emergency manager. According to the AP:

Detroit’s net cash position — the amount of money in the bank after bills are paid — was a negative $162 million as of April 26. The budget deficit that a few months ago was believed to be about $327 million could reach $386 million before July 1.

The city also owes more than $400 million, including $124 million for public improvement projects. Its long-term debt tops $14 billion.

These large deficits are not for lack of taxes. According to a report released by the Office of Revenue Analysis of the Government of Washington, D.C., of the largest cities in each of the country’s 50 states, Detroit has the ninth-highest taxes. 

Today, the city is in such bad shape that its only option may be to go bankrupt:

If the city cannot avert disaster, the only remaining option appears to be bankruptcy, a threat that looms large over Kevyn Orr’s urgent efforts to make deals with creditors and debt holders.

The 41-page report was filed with the state Treasurer’s office Monday and shows a city flirting with insolvency.

Detroit area turnaround expert James McTevia says Orr may choose to go before a bankruptcy judge “when he gets his back against the wall and he can’t meet payroll and he has to have court protection.”

Why is the city in such a terrible financial situation? Because it spends too much and it suffers from rampant corruption:

Orr, a Washington-based turnaround expert and bankruptcy attorney, was selected by Gov. Rick Snyder to oversee Detroit’s finances. In his report, Orr described the city’s operations as “dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption.”

“Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st century government,” Orr wrote. “A well-run city will promote cost savings and better customer service and will encourage private investment and a return of residents.”

As such, we shouldn’t be surprised that Detroit has lost almost 26 percent of its population between 2000 and 2011. But don’t despair Detroit, the Light Rail is coming to you:

In January, US Department of Transportation Secretary Ray LaHood announced a federal commitment of $25 million to the M-1 Rail project, thus tentatively setting construction to begin in the summer for the 3 mile stretch of rail between downtown and New Center. Gone will be the days when Detroit’s only rail transit is a glorified amusement park ride!

Needless to say this is not going to save Detroit. Another thing that is unlikely to save Detroit without serious reform of its local and state governments is a new initiative to attract immigrants to spur business creation and revive neighborhoods. The Wall Street Journal reports this morning that rust-belt cities are putting a lot of efforts these days in trying to attract immigrants in the hope of reversing long-term declines in population. But immigrants, even more than other people, are attracted to jobs rather than high taxes and high unemployment. If the natives aren’t staying for lack of jobs, its unlikely that immigrants will settle there. That’s unless government officials decide to do the right thing and engage in massive tax and regulatory reform and serious spending and debt reductions. 

 

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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