Detroit: Insolvency bound

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    Commentary

    There’s nothing in the state financial review report given to Gov. Rick Snyder last week to account for his gushing optimism that Detroit can be turned around now or in the foreseeable future.

    In fact, pretending that Detroit doesn’t have irreparable structural problems is exactly the kind thinking that contributed to the city’s slide into an urban wasteland. The governor should acknowledge that the bubble has burst.

    It’s important to understand the reasons behind this dire assessment. Detroit, after all, provides the best example that heavily taxed cities are abandonment prone.

    The numbers don’t lie.

    In 2011, city of Detroit coffers were almost $175 million short in property tax collections, which widened the gap between what the city spent and what it collected. On the other end of the chasm was an accumulated deficit of $327 million and a projected cash-flow shortfall of more than $100 million by June 30.

    The rate of tax collections to taxes levied has been on a precipitous decline for decades. It’s estimated that less than 50 percent of the property tax bill is currently collected. That compares to a 1971 collection rate of 98.2 percent.
    These delinquencies contribute to $14.9 billion in total debt, including unfunded pension and retirement liabilities. If the city cashed out today, its liabilities would exceed its assets. But a more immediate prospect is that the rating of city bonds will drop from their marginal investment grade to near-default status.

    None of this is new or unexpected. The city has lost more than half its population since 1950 — from 1.85 million to just over 700,000 in 2010. Primarily owing to abandonments, Detroit has also lost more housing than it has built every year since 1960. Even today, homes are being abandoned, bulldozed or burned faster than the city can tear them down.

    Some absentee landlords contribute to the vacated building inventory after properties no longer produce income and become unmarketable. Vandalism and arson whittle the value of these assets. Education dysfunction spawns more population flight, shrinking the pool of employed and responsible tenants. So unoccupied dwellings quickly become eyesores that further depress property values and add to an irreversible cycle.

    Further damage to the tax rolls comes from Detroit’s several versions of tax incentives and abatements, which allow “connected” property owners to legally avoid taxes. The city, although overly generous in this regard, has moved no closer to regaining its competitive edge.

    An aggressive foreclosure policy and programs offering negotiated payment plans to delinquent taxpayers is no more effective than suing scofflaw landowners or hiring tax collection agencies. Amnesty programs that “forgive” penalty and interest charges on back taxes result in loyal taxpayers delaying payment.

    Hauling landowners into court, aside from being a heavy-handed collection policy, cause distressed owners to walk away sooner. And although the average age of the housing stock is probably close to 60 years, the neighborhood decline is so severe that it discourages the construction of new market rate housing, particularly in a high crime environment.

    Raising taxes is out of the question. Detroit already has the highest property tax rate in the state. And the city relies on inflated assessments that in some cases are more than 10 times their market price.

    Detroiters, entitled to a fair return on their taxes, get an inefficient, ineffective government that can’t deliver basic services. Outmoded political strategies continue to collide with the reasons why households continue to flee.
    Bankruptcy, while merciful, may not be enough to again make the city a place of opportunity, an engine of economic growth and social vitality. More likely, a declaration of insolvency will increase, not stop the decline as more businesses and residents stampede to the border.

    It bears repeating: Detroit will get substantially worse before it gets marginally better — the governor’s optimism notwithstanding. The trends and the numbers make the case.

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