Detroit: A City under Financial Distress

Rick Snyder, Republican governor from Michigan, has declared the city of Detroit to be in a state of emergency due to its inability to balance its budget and pay off its debts. According to the Citizen’s Research Council, Detroit owes bondholders more than $14.1 billion. In order to handle the municipal budget crises, the state legislature in Michigan had passed a law in 2011 that gave the emergency managers- that are appointed by the governor- for cities with budget problems more power. To tackle Detroit’s budget problems, Snyder appointed Kevyn Orr to be the emergency manager (EM) of the city, who will have the authority to cut the city’s spending, restructure departments, restructure debts, sell off city assets, change local laws, renegotiate labor contracts and dissolve the city government. This measure will effectively remove power from the elected local officials in Detroit. Whereas mayor Dave Bing has accepted the appointment of EM, some politicians like city council president Charles Pugh ardently oppose outside interference that is not compatible with democracy. Congressman John Conyers (D-MI) thinks that there is racism involved in the appointment of an EM, because majority African American cities are mostly targeted with EM. Rev. Wendell Anthony called this “a step in the direction of voter suppression.” Benton Harbor, Pontiac, Ecorse and Flint have already been placed under EM. Detroit, however, deserves special emphasis due to its large size.

In my article, I want to first step back from the political wrangling over solving Detroit’s fiscal problem and provide a brief historical account of the city of Detroit, focusing especially on the impact of the loss of the manufacturing industry that had made Detroit a vibrant city in the US. I will explain how the state is implicated and partly responsible for the fiscal crisis in Detroit. Then I will describe some potential harmful economic and social impacts of EM on Detroit. EM’s plan to restructure city departments and reduce the size of the public-sector workforce, especially firefighters, police officers and teachers, will reduce the spending power in the economy, which will lead to a further deterioration of the economy, while no additional business investments can be attracted by taking drastic steps to reduce city services and laying off city workers.

Detroit has been a city that had been struggling with fiscal problems for a long time period. Detroit started out as a flourishing automobile city, harboring Ford and GM, and attracting hundreds of thousands of immigrants as workers at the beginning of the twentieth century. Between the end of WW II and the early 1970s, Detroit experienced its most prosperous time period with strong manufacturing supporting sound city finances. But increasing automation and outsourcing in the car industry, and competition with foreign car makers enormously deteriorated the economic situation of Detroit. Manufacturing jobs were lost, the white middle class left the city, and the tax base necessary to support city services were reduced. Unemployment, crime and poverty increased. About 20% of homeless people in Michigan live in Detroit (that has about 7.2% of the state population).

But the current fiscal dilemma of Detroit is not only caused by the loss of manufacturing, but also by specific state policies. A state law that was passed in 1998 had required all cities in Michigan to reduce their personal income taxes every year, leading to fiscal crises. The appointment of an EM will not improve the fiscal situation of Detroit, because the EM is not allowed to raise taxes, but only cut spending. Without raising revenues, Detroit will have very few chances to solve its budget crisis, let alone experience economic improvement. Furthermore, the state could also help out Detroit with financial aid. However, governor Snyder had already announced that he will not use state funds to help out Detroit, despite the fact that earlier in 2012 the state of Michigan had announced a $457 million surplus, a lot of it based on raising taxes for public worker’s pensions, lowering the earned income tax credit for the working poor, and removing deductions or tax exemptions going to middle income people, while giving $1.7 billion dollars in tax breaks to businesses in the state and even reducing revenue contributions to the city by 10%. Snyder and the state politicians have not only weakened the fiscal position of Detroit and other cities, but are now unwilling to support the struggling cities when they are in need.

The social and economic implications of a state takeover of Detroit will be severe. The city of Pontiac, which is already under emergency management, has seen its crime rate increase following the cutbacks in its firefighter and police services. The EM of Flint has cut city employee wages by 20%, and employee pensions by 50%, while doubling water and sewer rates for residents within the past two years. Even before the appointment of EM, Detroit mayor Bing has imposed 10% in pay cuts to city workers. What do all these austerity measures mean for Detroit’s economy that will likely see even more austerity under EM? One report by the Institute for Wisconsin’s Future argues that cutting wages, pensions and health care for state workers in Wisconsin will yield in 9,900 job losses in the private sector, because a loss of purchasing power of public-sector workers will be felt in other fields of employment as well. Between 2009 and 2012, the public-sector across the US has already shed 627,000 jobs, most of which in state and local governments. Private-sector businesses will be reluctant to make investments themselves, when the government does not drive the hiring process. And any job gains that we do experience are far smaller than they could have been if the governments would create jobs. This process of reduced public expenditures will undermine economic recovery, which is a pre-requisite to improve the fiscal health of cities like Detroit. While the governor of Michigan might be making grand pronouncements about how much he cares about fixing Detroit’s fiscal crisis, appointing those emergency managers can not be shown to improve Detroit’s finances or economic health.

authority to cut the city’s spending, restructure departments, change local laws and renegotiate contracts.
Bing in favor of EM, Pugh against EM
Conyers thinks EM is racist; Wendell Anthony voter suppression; Detroit owes $14.1 billion to bondholders; EM can sell city assets and restructure debt
20% of homeless in Michigan in Detroit
governor won’t use state funds to help Detroit
state $457 million surplus
lower EITC, billions of tax breaks for companies
giving $1.7 billion dollars in tax breaks to businesses in the state and even reducing revenue contributions to the city by 10%; Pontiac more crime; Flint lower wages.
history of Detroit
Flint doubles sewer and water rate in 2 years
Bing has imposed 10% in pay cuts to city workers
Wisconsin might lose 9,900 jobs with public sector cuts
627,000 public-sector shed 2009-2012

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