The Most Surprising Thing About Detroit’s Bankruptcy

As I think about the city of Detroit and the recent decision to file for chapter 9 bankruptcy, my thoughts return to my grandparents.

I was born in 1974.  When I was young, I spent many weekends at my grandparents house.  They lived in Detroit, in the house where they’d lived since the 1950’s.  I spent a lot of time there.  I got to hear about the decline of Detroit, and how things were getting worse, not better.

I have these memories from the early 1980s.  That was thirty years ago.

For many, those times would likely be considered good days compared to where things stand today.

1950’s – The Decline Begins

mb-201307detroitThe city of Detroit started to decline in the 1950’s if many reports are to be believed.  That’s when population started to decline, as the suburbs started to rapidly expand, and the postwar boom saw many people leave the city for the ‘new’ suburbs.

1960’s – City In Flames

The 1967 Detroit race riots defined that decade.  I’ve read many books, both fiction and non-fiction, centered around this event.  The common theme among every one is that a slow trickle of decline turned into a burst pipe overnight.  After that, people could not leave the city fast enough.  I’ve seen stories of rioting and such during my lifetime.  In many cases, the affected areas suffered an immediate decline and eventually stabilized.

Detroit did not.

1970’s – Building Walls

The 1970’s saw the election of Coleman Young, the first black mayor of Detroit.  He was, at the time, and still is a polarizing figure.  Proponents argue that he brought together black citizens and gave them a voice that had previously fallen on deaf ears.  His detractors felt that he was combative toward white citizens, business owners, and fellow politicians, all but asking them to turn their back on the city, furthering its decline.

By this point there was little investment in the city.  The major image of the Detroit skyline is the Renaissance Center, which is a beautiful set of buildings, but did not live up to its name, and was built in such in a fortress type fashion that separated it from the city beyond.  It was not until the early 2000’s when General Motors purchased the city that they rebuilt the entire exterior, back and front, to integrate it into the streetscape and the riverfront.

1980’s – Cracked To Pieces

The 1980’s saw the crack cocaine epidemic hit Detroit as hard, as if not harder, than any other city.  The cheap drug claimed many lives and sent crime rates soaring and unemployment soared, while education suffered.  It was around this time that Detroit started seeing major declines in revenue, and services were cut.

It didn’t help that this period saw the major decline of market share for the domestic automakers.  Some of my earliest memories of reading the newspaper always include hearing about plants in and around the city that were shutting down.

Opening?  Not really so much.

1990’s – Steps and Missteps

After 20 years, Detroit elected its first new mayor in 1993 with Dennis Archer.  He was black, but was seen by many as someone who looked out for businesses over citizens.  Thus, he never formed a close bond, though he did lay the groundwork for major projects that reversed the downward trend of some of the areas downtown, namely two  new sports stadiums.  Some of the surrounding areas are now thriving.  The 1990’s served as the turnaround point for downtown, which has been growing fairly steadily since, but unfortunately, the neighborhoods did not participate in this turnaround and have continued to steadily decline.

Unfortunately, Archer also cleared a path for a casino district that never materialized.  A big portion of space along the Detroit River was leveled in anticipation of building three new casinos in a cluster along the riverfront.  That plan never materialized.  The three casinos are now dispersed elsewhere in the downtown area, and to date, the never-built casino district sits deserted.

2000’s -Corruption and Recession

In 2001, Kwame Kilpatrick was elected mayor.  Deemed the ‘hip-hop’ mayor, he was young, full of energy, and brought new energy to the citizens.  He talked a big game.

He’s currently in federal prison on corruption and embezzlement charges.

The United States hit a recession in 2008.  In Michigan, that started a couple of years before that.  In Detroit, a couple of years even before that.

I worked for GM at the RenCen in 2005-06, and the industry was in horrible shape by then.  Companies were losing billions of dollars every quarter with no end in sight.  This decline had already started, and it was taking its toll on Detroit.

By this point, neighborhoods were largely shells of themselves.

Every day, houses burnt down.

Nobody built new ones.

Expenses Rise, Revenues Fall

Say your household budget has you breaking even today. You spend what you bring in.  No problems, right?

Then, expenses go up. Gas prices spike.  New cars cost more.  Food goes up.  You have to start charging money.

Then, you get hit with a pay cut at work.  So, you have to start charging more as the gap grows between what you’re bringing in.

You try cutting here and there, which keeps the gap growing.  At least for a little while.

Costs still go up, and even though you cut to the bone, you still get less and less in your paycheck.

The gap widens.

Your credit card companies start cutting you off.  Or demanding a higher interest rate to keep using their money.

You keep floating the minimum payments and keep adding to the balance.

It’s all still working.

But not really.

That’s how the city of Detroit has been working.

For six decades.

The tax base has been eroding slowly for years.  But, how do you cut costs?

It’s not as easy as it looks.

If you have a street that used to have 50 homes, you had to keep that up. You had to plow the street in the winter, maintain the water and sewage lines underneath it, send garbage trucks to pick it up.

So what happens when you have 4 homes left?  The other 46 have burned down or been torn down or sit boarded up.   What happens?

Well, you still have to keep it up.  You still have to keep up the water lines, the gas lines, the street.  You lost over 90% of your revenues on that street, but your costs, they stay the same.

This is the story of street after street.

And, it isn’t just streets.

Schools.  Detroit had hundreds of schools with hundreds of thousands of kids.  Now, they have a fraction of students that they used to, but schools sized for educating the amount of kids they had in the past.

With a lot less money to support these schools.

So education declines.  Less money is brought in because the tax base is eroding.  More costs go to keep up buildings that get old and fall apart, all with less kids to use them.

They close some.  Oh, do they close some.  Do you know the last time they opened a new school because it was needed?

I have no idea.  The only construction of schools I’ve seen in the school is to replace a couple of buildings here and there.

Police and fire.  Crime goes up.  Homes and buildings burn..  But, when you have over a million less citizens here, and a lot of them aren’t paying their taxes, guess what happens?

They get laid off.  Officers retire and don’t get rehired.  Crime rises. It takes longer for firefighters to arrive to put out a fire.  If you call for police, it can take over an hour for them to arrive.  If they show up at all.  And, they’re not sitting around eating donuts.  There are just too many calls and not enough officers.  Yet, when budget time comes, there are pink slips.

The endless cycle

All of these things have led to an endless cycle.  People see their neighborhoods emptying out, so they leave.  Cops get laid off, crime goes up, and people leave.  Education funding keeps falling and falling, leading to one of the worst public school systems in the country, so people take their kids and leave.

And it hasn’t gotten better.

It can’t get better without something big happening.

Kicking the can

For 60 years, the ‘leaders’ have been kicking the can, not addressing the fundamental problems that have led to us getting where we are today.  They kick the can down the road.  They borrow here, cut some services there, try raising taxes there, and look what we have?  The city has the highest tax rate of any city anywhere close to where we are, and provides the worst services.  Over half the population has left.  Entire neighborhoods are slowly being reclaimed by nature.

All because the fundamental problems haven’t been fixed.

Many out there say that Detroit has an obligation to pay it’s debts.  They can’t.  Thirty years ago when my grandparents couldn’t imagine it any worse, they were probably unable to then.  Through smoke, mirrors, and lots of borrowing, they’ve kept the charade going.

What About A Bailout?

Many out there say that the state of Michigan, which is currently running a budget surplus, should step in and provide money to avoid bankruptcy.  Or, how about the federal government, since, after all, they did bail out the auto companies?

The problem here is that this wouldn’t make any sense right now.  We have sixty years of decline and bad decisions to unwind.  Even if the money fairy came and dropped every dollar that the city owes and allowed debt to get to zero, that wouldn’t solve anything, because the structural and underlying problems would still be there.

I believe that bankruptcy is a chance for Detroit to wipe the slate clean and start over.  For decades, the ‘leaders’ of this city have budgeted and acted as if the decline were going to stop any day.  It’s not.  Right now, almost half the revenues collected (which continue to decline, by the way), go toward debt payments.   Every year the pot gets smaller and smaller.

A new budget needs to be developed from scratch.  A new plan on how to provide education and services needs to be developed.  A new roadmap needs to be charted and a path developed.  Goals need to be set.  Realities need to be faced.

These things can all happen, but only if the city is given the chance to get out from under the weight of where they are today.

I believe this is a defining opportunity for the city.  I believe that this can be the turnaround that citizens of Detroit and Michigan have longed for.  I’ve heard stories that in the 1970’s, New York City was in a dark place.  Things didn’t get bad enough to go into bankruptcy, but big changes were made and the city turned around.

I believe in my heart that this can be the catalyst for Detroit to finally turn around.  Detroit is tired of being the butt of jokes.  Tired of high crime and poor education.  Tired of dragging down the reputation of the entire state of Michigan.

It’s time to allow Detroit to start over and do something that it’s never done in my lifetime, and probably not something that many people can remember: Prosper.

Grow.

Renew.

Things my grandparents once saw in Detroit, and I saw the pain in their faces as they saw their city fall.  If they thought it was bad in the 1980’s, I can only imagine what they would say if they saw it now.  My guess is that it would be unimaginable.

Bankruptcy is not pretty but I believe it’s necessary, and the only question remains: What took so long?

Readers, what do you think about the Detroit bankruptcy?

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Tips On How To Handle Bankruptcy Process

The following guest post is provided courtesy of SmallBusinessLoansDirect.com.

Of course, no one wants to go bankrupt.  But unforeseen circumstances can drive the best of people into dire economic conditions, and, at times, declaring bankruptcy can be the best option.  It is estimated that roughly 60% of bankruptcies are largely affected by medical bills and illness.  If you have suffered through the loss of a job, a home, or unexpected wage freezes or cuts during the recession of the last two years, and if this has forced you to consider bankruptcy, consider these facts before moving forward.

Your Credit Score Can Be Rebuilt

Many folks who are forced into bankruptcy due to extraneous reasons such as massive medical bills tend to think that their credit will never be able to be repaired.  This is simply not true.  Of course, your credit will take a major short term hit, but with steady discipline and dedication, you can rebuild your score.

You Could Get To Keep Your Home

One of the most common mis-perceptions about bankruptcy, especially among those that are forced into it through events completely out of their own control, is that they will lose everything and be forced to live on the street!  This is simply not true.  In both Chapter 7 and Chapter 13 bankruptcy, it is possible to keep your primary residence.  This will depend on several factors, including the amount of equity in the home, the value of the home, etc.

Keep Paying Your Bills

Once you filed bankruptcy proceedings, you will most likely stop receiving bills, calls, and notices from creditors.  This, however, does not mean you are released from the debt obligation.  Remember to keep paying your bills.  If you are filing Chapter 7 bankruptcy, make sure you keep paying the bills for what you want to keep, ie the car, house, etc.

Be Careful About Moving Money

When you file, you will be required to disclose all the money and assets you have sold, transferred, or given away during the previous two years.  Some people will attempt to give thousands of dollars of cash loans to a relative so they do not have to lose it to the courts during the proceeding.  Then, as soon as the proceeding is over, they can get the money back from their relatives.  This is a criminal offense.  Make sure you consult with an attorney when making any transfers of cash or assets prior to bankruptcy filing.

Although bankruptcy is something we all want to avoid, the truth is that bad things can happen to good people.  If events outside of your control have forced you to consider bankruptcy, be encouraged that it is always possible to rebuild your finances.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.