Bankruptcy Petition

Bankruptcy Petition

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Author Note

Bankruptcy Petition

Detroit, being America’s fourth most populous city, filed for bankruptcy in July 2013. According to Kevyn Orr, who was appointed as the emergency manager, the debt on Detroit is likely to be between $18 and $20 billion. (The Detroit News, 2013)

Demographics

Detroit is the most crucial port that serves as a connection between the Great Lakes and the Seaway of Saint Lawrence. The population of Detroit experienced a significant decline from 1.9 million in the 1950s to approximately 680,000 now. Detroit’s urban area has the capacity for approximately 3.6 million, while its metropolitan and rural areas can hold around 4 million people. The decline in the population of Detroit is the second largest in the country. Its population has been declining for the past 60 years or so. Due to this major decline, a very large number of homes and buildings are abandoned in Detroit. (The Detroit News, 2013)

Major Revenue Sources

Property Tax Revenue

The residents of Detroit pay taxes to numerous entities which include the Public Library of Detroit, its Public Schools, Wayne County & its Community College, a large number of other (special) authorities, and Michigan. Homeowners in Detroit have a total tax rate of approximately $68 million, while for business it is around $86 million. The residents of Detroit with an approximate population of half lac, have to pay the highest property tax as compared with other cities of Michigan. But unfortunately, the major portion of this tax is not used for the aid of city services. (Sgarlata, 2016)

Income Tax Revenue

The income tax rate of Detroit among all other cities of Michigan is the highest. Total income tax revenues for the city of Detroit were approximately $322 million for the year 2002. However, the quantity of income tax was highly reduced due to the significant decline in its employment. The income tax for Detroit for the year 2013, was expected to be around $227 million, which is a direct decline of 30% from the year 2002. (Sgarlata, 2016)

Utility User Tax Revenue

The residents of Detroit pay a tax of 5% on utility users. In the year 2012, the tax produced by the utility users was around $40 million and its budget in the year 2013 was around $43 million (this is a direct decline from $55 million in the year 2003). The revenues created by these taxes were specified initially for the police officers, but the recent changes and modifications in the legislative assigned a certain portion of these revenues for the improvement of the lighting system in different streets of the city. (Sgarlata, 2016)

Major Expenditures

For the past three to four years, Detroit’s total expenditure was distributed among its five major departments. These departments include Fire, Police, Public Works Department, Housing, and Department of General Services. A total of 43% budget from the General Fund is spent on the departments of Public Safety, and the same goes for many other cities of the state. (Sgarlata, 2016)

Impacts

The major impact of the budget deficiencies in Detroit overall is on its population, which is continuously decreasing for the previous 60 years. Another destructing effect was the massive decrease in the unemployment rate of the city, which became three times in 2013, since 2000. Also, in the last forty years, the level of homicide rate was highest. According to Kevyn Orr, the emergency manager, the city was unable to fulfill the most fundamental obligations and needs of its residents. (The Detroit News, 2013)

Alternative Financing Options

Following are some of the alternate financial plans:

By considering the obligation bonds as debt, so that they can be repaid at a much cheaper rate.

By converting the already defined pension systems of the city to different contribution plans.

Moreover, the city government must form the basic tools and instruments that can assist the cities to predict the requirements for change before time and that can make the development and adaptation of a new financial strategy much easier and convenient.

References

BIBLIOGRAPHY Sgarlata Chung, C. (2016). Zombieland/The Detroit Bankruptcy: Why Debts Associated with Pensions, Benefits, and Municipal Securities Never Die... And How They are Killing Cities Like Detroit. Fordham Urban Law Journal, 41(3), 771.

The Detroit News, “Half of Detroit property owners didn’t pay taxes”, February 21, 2013