Detroit Free Press Explains Why Detroit Went Bankrupt

September 16, 2013

Several dozen TF blog readers have sent me this excellent Detroit Free Press investigation, "How Detroit Went Broke," so I have to post it. The piece is well-researched and lengthy (it summarizes about 10,000 pages of documents), but the key points:

  • Population exodus (from 1.8 million in 1950 to 700,000 today).
  • Outrageously high payments to incentivize economic development deals, with extensive bureaucracy slowing down approvals of everything.
  • A practice of paying "13th month" bonuses to city workers, totaling $1 billion.
  • Heavy spending on city retired employee health benefits, with that expense growing 46 percent since 2000 while city revenue fell 20 percent. This occurred even as the federal and Michigan state governments implemented successful pension reforms that limited liability while preserving benefits.
  • Detroit went on a borrowing spree after 2000, doubling its debt to $8 billion for cash-flow purposes. Generally, the attitude was to buy things now and pay for them later.
  • Detroit has not declined monotonically, but has had recoveries and declines over the years. Leaders did not use the recoveries to stabilize the city's finances. Rightsizing the city's workforce began in earnest only a decade ago.
  • Tax increases that have led to some of the highest income and property taxes in the state, plus a utility tax and casino revenue tax, but declining revenue (see chart below). The taxes helped drive out residents and businesses.
  • Michigan has reduced state aid to Detroit by half over the last fifteen years, depriving the city of $172 million.
  • A failed deal to restructure the city's pensions.

Check out the full report here.

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