How quickly has Detroit Mi deteriorated

Detroit, financial distress, errors in the system, downward spiral, guide to the community

Detroit. Error in the system. Renouncing Solidarity - Part 4

November 24, 2014 / Dr. René Geissler

Detroit has declared itself bankrupt. How could it possibly come this far? There are a number of reasons for this. Probably the most important is the system of municipal income and its effects against the background of economic development. This system has a few surprises in store. I've already mentioned that there are bonds and Chapter 9. What does not exist is a financial equalization between strong and weak municipalities. For us it is inconceivable, in the USA a form of the principle of competition. The lack of this element has consequences. Detroit felt it.

Shrinkage in Numbers

Let's look at a few numbers. Population first: Detroit has lost more than half the population since 1950. That in itself is a problem. But it is also a symptom of other problems. Namely, the unprecedented change in the automotive industry on which Detroit depended entirely. On the other hand, there is suburbanization, which we will have to talk about later in the blog.

Well, such a curve cannot remain without consequences for the budget of a city in any country. But how does the curve affect Detroit?

Gambling as a source of income

To this end, I compare the income of 2004 with that of 2013. I choose 2004 because it was the last reasonably tolerable legally compliant household. 2013 because it is the last one before bankruptcy.

In 2004, Detroit earned just under $ 1.9 billion. Half of this is from three sources. A few words about this:

  • Property Tax: This is a tax on real estate ownership in the city area. They also exist in Germany, but to a much lesser extent. In Detroit it is also relatively small in proportion by US standards. The real estate value is re-estimated by the city every few years. (The last time this happened in Germany was 1964.)
  • Municipal income tax: Not the share of a community tax as in Germany, but an independent, additional tax for the citizens of the city. 22 cities in Michigan raise them. Detroit is of course included with a tax rate of 2.5%. Not the suburbs.
  • Key Allocations: The term is a rough translation of the "state revenue sharing" that exists in Michigan. (Does not exist in all US states.) Based on the weighted population, money flows from the country to the municipalities. There are no need factors. A compensation of the steering force is not associated with this.

Of the other income items, the casino tax is worth an excursus. Gambling was one of the lifeguards Detroit threw in the late 1990s to create jobs, inner-city living, and tax revenue. Morally questionable, but in need ...

As Figure 1 shows, from the year 2000 a new shrinkage began in Detroit at an unprecedented pace.

Downward spiral

What was the 2013 budget like?

He was smaller. By more than a quarter. Nominal. What happened? Let's look again at the main sources of income:

  • Property tax: In terms of revenue, it is based closely on the real estate values ​​of the city. In a shrinking, poor city like Detroit, this value only goes one way. Downward. In addition, many citizens simply no longer pay the tax, file for bankruptcy or leave their house behind in a hurry. At some point, the city administration itself no longer had the administrative power to collect taxes.
  • Municipal income tax: The unemployment rate rose exponentially, employment fell, and so did income as the basis for income tax.
  • Key allocations: The population shrank, and with it automatically the sum of the country’s donations. In addition, the state of Michigan changed the distribution formula in its own favor.

Detroit cannot directly contribute to the development of these three types of income. The socio-demographic trends and decisions of the country affect this income system in this way.

And the casinos ... Detroit has had no luck financially for 30 years. In 2009 there was also bad luck. The city had bought interest rate derivatives to hedge bonds. The city's budget situation deteriorated so much that it suddenly and unexpectedly came due in 2009. The city failed to pay and pledged part of the casino tax.

Street lights stay dark

What does a city do when confronted with this revenue development? At some point she will probably file for bankruptcy ..... But in the years before that, Detroit tried a lot. The rates of property and income tax were increased up to the legal maximum and actually beyond. (The country has not looked very closely.) And expenditure has been cut, facilities closed, maintenance has been foregone for decades, etc. This can be measured in terms of numbers in terms of personnel positions. Detroit cut almost half of its workforce in ten years. In some departments even more. It also makes it clear why only 40% of the street lights worked. Why the office of the OBM used to have 100 people is not so easy to understand.

It is clear that this downsizing leads to a loss of quality. The abstruse result: nowhere in the country were the taxes higher and the benefits worse than in Detroit. This drove the middle class out of the city bit by bit and lost further income. A vicious circle.

Financial equalization triggers astonishment

The problem of shrinkage can only be solved in the system of municipal income. In Germany there is financial equalization for this. This term caused a lot of confusion among the American interlocutors. I translated it as “fiscal equalization” because it doesn't exist. How can it work that the rich give up for the poor cities? They don't do it voluntarily in Germany either. But everyone is aware that he has to exist in order to prevent such downward spirals.

How would it be in Gelsenkirchen without financial equalization?

It seems that in this system of structural change, Detroit had no chance. But it didn't use it either. Find out on Wednesday: The other, the dark half of the road to bankruptcy.

Photo: Dr. René Geissler