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Detroit's Bankruptcy Trial

written by: •edited by: Carly Stockwell•updated: 11/4/2013

Bankruptcy would seem to solve many problems for Detroit, but it leaves many of its citizens in the lurch. Most hard hit would be retirees expecting to receive pensions from the city who would only receive 16 cents on the dollar. Learn more about what bankruptcy means for Detroit.

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    Detroit Files for Bankruptcy Shocking to some, predictable to others, after negotiations to decrease the size of its debt with various creditors and bond holders, Detroit filed for Chapter 9 bankruptcy in July, 2013. The city was once known as a place that poor people who were willing to work could get ahead. This was due in a large part to the once booming automotive industry. Now the city has a shrinking population and liabilities of over $18 billion. Detroit has decreased in population of two million citizens at the time of the 1950 Census to just over 700,000 citizens today. In combination with a decrease in size, constant mismanagement has create a hole that will be difficult at best to climb out of.

    What Chapter 9 Bankruptcy Means to Detroit Citizens

    There are nearly 20,000 people who rely on the on the city’s pension funds, and there are another 10,000 who are currently employed by the city. It is estimated that Detroit is at least $3.5 billion behind in payments to its pension fund, creating uncertainty in current pensioners as well as people who are considering retirement in the near future. At a time when much of the infrastructure needs propping up, the people who will do the bulk of that work on the ground face an uncertain future.

    Currently, in an effort to decrease the size of its obligations, the city is negotiating to decrease the amount it pays retirees. The current proposal is to pay $.16 on the dollar. A pensioner who could expect to receive $30,000 a year in retirement would receive $4,800. The effect on people with fixed incomes would be devastating.

    Additionally, there have already been massive layoffs offs from police and fire departments. It is estimated that an average arrival time for the police department is nearly an hour. With even more financial difficulties, and a lack of faith by current employees that their full retirement will be there when they need it, those response times may be increased if public safety isn’t able to keep their current employees in the fold as opposed to following the floods of people out of the city and into the suburbs, or even further away.

    In the meantime, if one wants to look at the bankruptcy glass as half full, the city is planning to continue its basic services as well as planning on investing a great deal in urban upgrades over the next five years. Detroit’s leaders believe that if they don’t start to invest in the city again, no one else will be willing to come to the city and make their own investments.

    Detroit and Taxes

    In 2013, the taxes in Detroit are 2.4% for residents, 1.2% for non-residents, and 2% for corporations. Currently the taxes are as high as they are allowed to be due to statutory limitations. Some believe that increasing taxes is an important step in adding financial stability to the city, as well as necessary to improve the current infrastructure. However, many more feel that raising taxes at this time would be the wrong thing to do. Confidence by citizens and some in the business community in the city could be further reduced if taxes are raised, as at least some of the financial issues the city has faced stem from the mismanagement of funds, as well as cases of outright fraud.

    What's Ahead?

    For several years Detroit was the joke of the United States for the failing infrastructure and the migration away from the city. Now Detroit is the focus of pity that a mighty cog in the industrialization of the country has fallen on such hard times. The city has tried to negotiate with those who own municipal bonds and with others they owe money to, but largely without luck, thus leaving the city with what it and its advisors believe is the only choice of filing for bankruptcy. Hopefully, within the next decade Detroit will be an emblem of resurgence as it begins the hard task of rebuilding its once proud reputation.

References

  • Detroit’s Bankruptcy: Pensions, Taxes and City Service Implications - http://www.foxbusiness.com/personal-finance/2013/07/19/detroits-bankruptcy-pensions-taxes-and-city-service-implications
  • Bankrupt Detroit turns to taxpayers and wallstreet to pay for dubious city "upgrades" - https://www.vocativ.com/08-2013/bankrupt-detroit-leans-on-taxpayers-and-wall-street-to-finance-urban-upgrades/
  • Record Bankruptcy for Detroit - http://online.wsj.com/news/articles/SB10001424127887323993804578614144173709204