At the end of the day, the Detroiter may be the most important American there is because no one knows better than he that we're all standing at the edge of the shaft. – from Detroit: An American Autopsy by Charlie LeDuff.
The lights are literally going out all across Detroit. Currently, 40% of its streetlights are not functioning, which is just one example among many of how the city is failing to meet the most basic needs of its residents. With long-term debt estimated between $18 billion and $20 billion, it's difficult to see how conditions in Detroit will improve anytime soon.
Earlier this year, Detroit filed for Chapter 9 bankruptcy making it the largest municipal bankruptcy in American history. On Dec. 3 at 9 a.m., Judge Steven Rhodes will decide if the city can proceed with its bankruptcy. The ultimate decision will have huge implications for pensioners, bondholders, and ordinary residents, who are wondering if the city will be allowed to revise the terms of its long-term obligations.
Regardless of the judge's ruling, Detroit faces daunting challenges on both the revenue and expense side of the ledger. I recently looked at some of the documents relating to the bankruptcy, and was struck by how desperate the situation has become. Below are some of the more shocking facts I discovered.
1. Detroit's revenue, in inflation-adjusted dollars, fell 40% from 1962 to 2012.
2. The city currently has just 9,700 workers, yet has 21,000 retirees drawing benefits.
3. Detroit's population has declined 63% since 1950, including a 26% decline since 2000. As of December 2012, its population was 684,799 – down from 1,849,600 in 1950.
4. Unemployment has tripled since 2000. As of June 2012, it's 18.3%, which is more than double the national average.
5. The number of employed residents has dropped more than 53% since 1970.
6. Property tax revenues have decreased by approximately 19.7% over the past five years.
7. The per capita tax burden on Detroiters is the highest in Michigan, despite relatively low levels of income for city residents.
8. The total assessed value of property in Detroit declined by 77% over the past 50 years in inflation-adjusted dollars.
9. Without restructuring, the city is projected to have negative cash flows of $198.5 million in FY 2014.
10. Detroit's long-term debt is estimated to be between $18 billion and $20 billion.
11. The city has unfunded pension liabilities of $3.5 billion.
12. Its unfunded health care liabilities are $5.7 billion.
13. In 2012, Detroit had the highest violent crime rate of any U.S. city with a population over 200,000. The overall crime rate is five times the national average.
14. Detroit has just 370 functioning street lights per square mile, compared with 812 for Cleveland and 785 for St. Louis.
15. Detroit has witnessed 11,000-12,000 fires every year for the past decade.
16. Detroit's homicide rate is at the highest level in 40 years, and it has been named one of the most dangerous cities in America for more than 20 years.
17. Its citizens wait on average more than 58 minutes for the police to respond to their calls, compared to a national average of 11 minutes.
18. The city has 78,000 abandoned structures.
19. More than half of its parks have closed since 2008.
It's always darkest...
Detroit's situation is extremely dire right now, and it will require great leadership and shared sacrifice in order to turn things around. Fortunately, there are already some glimmers of hope.
The big three auto companies, for example, are now profitable again after having experienced extreme difficulties in 2008 and 2009. GM (NYSE: GM) and Chrysler still have a significant presence in the city, while Ford (NYSE: F) is based in nearby Dearborn. Both GM and Ford have seen their share prices rise by 29% so far in 2013.
Also, Detroit's downtown is reviving with Quicken Loans founder Dan Gilbert having invested more than $1 billion. Warren Buffett is a huge fan of Gilbert, and was recently very complimentary of the latter's efforts on behalf of Detroit.
Finally, Detroit has a new mayor who appears to possess the kinds of skills that will be essential for turning the city around. The path ahead will be difficult, but at least one great investor is hopeful. At a recent event for small businesses in Detroit, Warren Buffett said that he has a "real love for the city, and the potential is huge." He also said, "The United States with a flourishing Detroit is going to be a lot better than without one." I think all Americans would agree with that.
Note on sources
For the facts listed above, I relied primarily on the City of Detroit's Proposal for Creditors and the actual Chapter 9 bankruptcy filing. I also benefited from the outstanding investigation How Detroit Went Broke by the Detroit Free Press.
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