Top 10 Reasons Why Detroit Went Bankrupt

The ill-fated city of Detroit has recently filed Chapter 9 bankruptcy. Detroit was once a prosperous and beautiful city known for its automobile sector. Post World War II Detroit’s economy really blossomed when the automobile industry boomed. In 1960, according to the U.S. Census Bureau, in the whole of America, the richest per capita city was Detroit where people were living happily and dreaming freely. Today Detroit’s economy has crumbled and is facing a pathetic financial crisis. This is a problem which was taking its toll since decades. The true catastrophe behind the filed bankruptcy of the city is in the form of its unsecured pension liabilities which will cause unimaginable suffering to its working class. What actually happened to this motor city? Why is it facing a severe debt crisis? Why haven’t the government done anything? What went wrong? Here you will find the answer to all your questions as to what has caused this drastic financial mess in Detroit that has led to its fallout.

 

1. The Vicious Circle

Vicious circle

As mentioned, this was not a problem that appeared suddenly. Detroit is the victim of a vicious circle: Falling economic structure mean that without the temptation of a high-paying job, Detroit is not a preferred place to raise a family in. A city that already was corrupt and undesirable saw its tax base erode and basic country services deteriorate. Of its $18 billion in unsecured debt, the great majority — $9.5 billion — is owed to pensions and health-benefit plans. In short, declining demand, increased competition from foreign companies in automobile sector, failure to adapt, and automation, was all working in a close concert to create a type of perfect storm that made the city’s foundation to collapse and go bankrupt.

 

2. General Motors Downfall

General Motors Downfall

Detroit was standing still on the GM model and when the basic building block breaks down, the likelihood of the building to fall increases. This is what made the city to go downhill with little chances to recover. It was hard for people living in Detroit or for that matter anybody to believe that the day would ever come when the largest automaker in the world would face bankruptcy. When in the mid 70’s the world faced the oil crisis and when in early 80’s the double-dip recession hit the U.S. economy, the Japanese automakers were quite adaptive and quick to respond, they captured the market with low-cost, fuel – efficient vehicles. GM back then was in the denial mode and quite adamant to continue the manufacturing of their large inefficient sedans while consumers were shifting their demand to the smaller, cheap and fuel-efficient compact auto. Shortly thereafter GM began to close factories and when GM filed bankruptcy, the city’s face even more problems. This is akin to investing a large stock concentration in an investment portfolio without giving a thought to diversification. Too much risk tied up in a single entity is rarely considered a good option for investors.

 

3. Abandoned Buildings

Abandoned buildings

Decreasing population, fewer jobs, less economic activity and endemic crime have created a city-sized collection of abandoned buildings. It’s a predominant fact that there are about 78,000 abandoned buildings in this city. We can accommodate only one photograph here, but sadly there are 78,000 more such places in Detroit and those abandoned structures have now become a room for trafficking, drug dealing, and other crime which quite justify why tourism was pushed away from the city, and why other nations around the world issued travel warnings to the city. Hundreds of vacant structures across the city were set on fire and ergo the city organises the “Angel’s Night” drive with the thousands of willing residents patrolling the area which is deemed to be at high risk to provide comfort and healing to the bleeding place.

 

4. Crime Rate was up and there were Non-existing basic City Services

Crime rate

The tax rate residents of Detroit paid to their government was the highest in the state yet they were forced to accustom themselves to sub-standard services. For example, in the first quarter of 2013 it is estimated that 40% of its street lights are not in a working condition; 80% of the time garbage doesn’t get picked up and only one third of the city’s ambulances were in service. The crime rate is much greater than the help police force can render and it’s only because of this reason that in an emergency, your have to actually wait for 58 minutes in an average for the cops to arrive on the disturbed location compared to the national average of 11 minutes. You might remember the Gotham city in the end of “The Dark Knight Rises”, well; the only difference is – there is no Batman to save Detroit from this economic turmoil and growing violence.

 

5. Large Number of Public Workers

Public workers

When the automobile industry of Detroit died many people were left jobless and those who could manage to locate in other cities fled away with the industry. Albeit, Detroit’s population declined in the past several decades, the public sector has kept its growth steady. According to the 2011 analysis of The Detroit News, the city was providing homage to 12000 highly incompetent public employees which is a way too much compared to any other same size city in Michigan. The studies reveal that for every 55 residents of Detroit there was one public employee on the payroll compared to the Indianapolis where the ratio is one employee for 115 residents. To cap it all majority of the public workers in the city were incapable and corrupt adding only to the debt of the city in the form of expenses like healthcare benefits, salaries and pension funds.

 

6. 1967 Detroit Riots

1967 Detroit Riots

The riot of 1967 changed the face of the city of Detroit forever. It brought the city to a place of no hope and left it with horrible results. The riots erupted due to the growing tension in between the blacks and Americans which later turned into a civil disturbance and dashed the city completely. Much has changed since the deadliest 12th street riot which was the worst U.S. riot in 100 years. Over the period of five days, forty-three people died and $50 million in property was destroyed. Post riots, tens of thousands of small business houses closed permanently to relocate in safer neighbourhoods. Nearly 1700 stores were looted and 1400 buildings burned. Hundreds of people were injured and many were left homeless. The Detroit’s economy will never be the same and the affected district laid in ruins for decades.

 

7. Debt Crisis

Debt crisis

Even though Detroit has filed for chapter 9 bankruptcy its battle isn’t over. Declaring insolvency was the only possible solution for debt ridden Detroit to pay back the money it owes to Wall Street. Estimate is what it actually owes to its creditors keeps rising. However, it’s approximately somewhere between $18-20 billion and it is forecasted that by 2017 more than half of its revenue stream would be consumed by legacy expenses. Kevyn Orr, the emergency manager appointed by Republican Governor Rick Syder recently ordered that whatever the city is currently in possession with would immediately be evaluated for the a quick fire sale. There are a number of factors that have impacted Detroit’s finances. But this last resort choice of bankruptcy filing has devastated its public employees as 54.3% of total debt is the pension and healthcare cost which might as well be desecrated in the deal which amounts to $9.5 billion with unsecured bonds of $2.0 billion.

 

8. Dependence on only Automotive Sector

Automotive sector

Detroit’s great strength – the automobile industry – has also been its weakness. The focus in Detroit has been sadly on only one industry – that without a doubt has been its blessing and its curse. Maybe this explains why it grew at such a fast pace through the 20s and then why it faced the steep decline. General Motors, Chrysler, Chevrolet and Ford were headquartered there, and in 1950, employed approximately of 2850,000 workers. Automobile sector has shown the residents of Detroit the best of time and dragged them down to the worst. When the host companies started facing stiff competition, the hopes of the employees working in GM, Chrysler and Ford to survive the fierce attack of its competitors shattered. The Automation, cheaper imported cars by Japanese automakers and steep decline in demand, meant that the industry never returned to those heights.

 

9. Highest Unemployment Rate in U.S.

Unemployment

Unemployment in any place gives birth to a lot many problems and the same thing happened in Detroit. This is both a cause and an effect of the population situation. There were less job opportunities as the automobile sector automated on the production line due to stiff competition and replaced a large number of workers, so people migrated to find work elsewhere. Meanwhile, the high tax rate charged by the city’s government drove employers away and made other companies less willing to locate there. That paved way for unemployment, low standard of living and poverty which further evaporates the tax base and causes more people to leave the city.

 

10. Population and Tax Base

Population

Population size can make or break any cities prosperity and any thriving economy stands on two most important aspects one of course is the population base and other is its tax structure. There was a time when Detroit had everything it ever wanted, it was world famous for its automobile industry. However, Detroit’s population drastically declined when its residents started moving to the suburbs which resulted into reduction in tax collection and as everybody knows tax is the major source of revenue for the government to generate income it gets very much important to have sufficient people to pay off those taxes. In 1950, Detroit’s population was 2 million and today in 2013 its just about 680,000. Detroit’s median home price is a meagre $7,000 and it gets very difficult to generate revenue and manage a city when its citizens don’t fall under the tax base.

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  • http://livetowincoaching.com steve werner

    One of the great downfalls in american history.

    Unfortunately, other large cities are vulnerable also.

    Very sad.

    Excellent review. Hopefully a lesson.

    sw