Detroit Bankruptcy Issue

Detroit Bankruptcy Issue

Detroit Municipality Demographics

Recent studies have shown that the U.S had, from the past, seen several municipalities file for bankruptcy. According to the American constitution, a public institution can file for bankruptcy in the case where the current budget depicts massive deficiencies, notably where the collected income has failed to meet the municipality’s colossal expenditure. Detroit city became a victim of this scenario in 2013, thus making the history as the largest United States municipality to file for bankruptcy. Detroit’s budget had a deficit of more than $19 billion. In demographics, Detroit ‘s 5 million people comprise of white people who represent 70% of the total population, followed by the Black-Americans, who stand at 22% as three %comprise of Asians (Duggan, 2019).  In this regard, the remaining percentage goes to the Native Americans and new minority groups. Detroit’s median household income, particularly among city residents, stands at $57,000. The decline of a vast economic state like Detroit attracted a considerable debate over the decision by its administration to file for bankruptcy.  The fact that Detroit municipal administration filed for bankruptcy means the city had gone down broke and needed alternative strategies of funding its operations.

Detroit’s Major Revenue Generators and Expenditures

According to recent statistics, Detroit city has five significant sources of revenue, which comprise more than 60% of the general fund revenues. These include Property Tax, Income Tax, State Revenue sharing, wagering Tax, and Utility User’s Tax revenue. According to these statistics, Detroit’s Income Tax between 2018 and 2019 was $292.1 and 299.4 million as the Property Tax range between $ 133.1 and 133.8 (Reese & Sands, 2013). Utility User’s Tax stood constant at $40 million between 2018 and 2019. Wagering Tax ranged from $179 to 180 million as the state revenue sharing reads $199.5 and 200.7 million within the same period. The Income Tax emerges via the withholding of yearly and quarterly wages, which stands at 2.4% of the salary per resident and 1.2 non-resident and 2.0 for corporates.

This type of taxes has begun stabilizing as seen in 2014’s $250,000, which is 1.5% growth, and the consistent growth of 1% for 2015 – 2017. Detroit city’s administration uses this revenue to finance various activities and functions as follows (Duggan, 2019). The top five consumers of the said revenue include the police, department of public works, general service, fire as well as housing and revitalization. Here, the Public Safety Department accounts for 42% of the revenue as the remaining departments share the remaining 58% of the same.

Factors Leading to Detroit’s Bankruptcy

Studies have shown that Detroit’s bankruptcy emerged from a declined city’s operating expenses, which had gone down by 38% from the Great Recession. This scenario means that the city’s pension obligation went up by only $2 million. Besides, the city experienced an increased healthcare expenditure by 3.25%, which was less than the federal’s 4% (Duggan, 2019). The significant proportion of the increased cost for Detroit emerged from debt service and financial expenditure associated with complex Wall Street investment, which superseded the combined figure from pension and healthcare (Duggan, 2019). Additional factors for the deficit include a massive decrease in revenue due to the declining city population, a decline of $67 million in the federal revenue sharing, and lastly, $20 million yearly questionable expenditure on corporates.

Detroit’s Alternative Financing

Economic experts have asserted that despite Detroit’s case depicting complexity, it could still apply various strategies to finance its activities. For instance, this municipality could obtain revenue from cutting down on its services, sales, and assets. More so, the city could reduce the amount for paying pensioners and bondholders hence consolidating them towards its operations. The city could also strategize towards obtaining reasonable creditors via a vote (Reese & Sand, 2013). More so, the city could also seek financial help from the state or federal administrations towards funding its operations.

References

Duggan, E., Michael (2019). City of Detroit: Four Year Financial Plan, FY 2016-2019. https://detroitmi.gov/sites/detroitmi.localhost/files/2018-05/four_year_financial_plan_2016-19_corrected_copy_2_1.pdf

Reese, A., L. & Sands G. (2013). No Way Out: Detroit’s Financial and Government Crises. Interrogating Urban Crises Conference De Monforte University Leicester, England September, 23. https://www.dmu.ac.uk/documents/business-and-law-documents/research/lgru/laurareeseandgarysands.pdf