Tale of Two Cities: Detroit and Stockton on the Brink of Bankruptcy

March 27, 2012 | Lawrence 'D' Pew

Once the heartbeat of the Midwest, Detroit, Michigan, has suffered a long, slow economic decline. In the 1960s, Democrat President Lyndon B. Johnson’s Great Society and War on Poverty would make Detroit the poster-city for social reform. The Great Society was further expanded by later presidents and, in the decades that followed, became precisely what many predicted. The Motor City is now merely a shell of its former glory, its declining population almost completely dependent upon government welfare. Now, 50 years later, the city of Detroit is teetering on the precipice of bankruptcy.

Detroit Is For Sale

Michigan’s official population was 9,938,444 according to the 2000 U.S. Census. In 2010, the population had fallen to 9,883,640. Detroit, still the state’s largest city, had a population in 1990 of 1,027,974; in 2000 it was 951,270; and in 2010 it was 713,777. Today, approximately two-thirds of the city’s children are impoverished and the unemployment rate is hovering around 20%. The city’s two largest employers are the city government and the city’s public school system.

Just last week, Detroit Mayor Dave Bing presented a new plan during his annual state of the city address. A plan to generate cash for the city by selling vacant city lots for $200 each. To sweeten the deal, purchasers will get a $200 gift certificate to the only locally-owned lumber company in the city to buy fencing to secure the lot. Detroit previously tried auctioning vacant properties for a minimum bid of $500, with limited success. The city lots will be offered to 500 adjacent property owners who still have houses.  Mayor Bing’s objective is reasonable – to “reduce blight in our neighborhoods.” This incentive program is intended to get vacant city lots back on the tax rolls. But money is hard to come by in the Motor City these days. For those who have the resources, are they willing to invest more in a crumbling economy and increase their tax liability in the process?

State of Michigan Offers Detroit a Consent Agreement

The city of Detroit has a deficit of about $200 million, despite its mantra of cutting costs and raising revenue. Michigan Treasurer Andy Dillon heads Governor Richard D. Snyder’s emergency review team. On March 12, the Final Stability Agreement Between the City of Detroit, the City of Detroit Financial Review Team and the Treasurer for the State of Michigan, a consent agreement, was offered to the Mayor and city council for review. In a move that takes power away from the elected local government, the agreement creates a nine-member super advisory board that will have, along with the Michigan Treasurer, veto power over the Mayor and council. Governor Snyder has given Detroit’s council until March 27 to review and negotiate terms under the agreement.

Mayor Bing and the city council rejected the governor’s Final Stability Agreement, taking issue in particular with the nine-member super advisory board. On March 18, the Detroit mayor offered a counter-proposal to the governor which would create a state advisory panel that only monitors and reports, but does not take power away from the city’s elected officials. In other words, the city will accept all the help the state can offer without ceding power over its financial debacle. The clock is running.

Revitalization of Downtown Stockton

On the West Coast is another city, Stockton, California, which faces a similar fate. The inland sea port city of Stockton (pop. 292,000) is currently in mediation with creditors pursuant to California’s new AB 506 law which puts the city on a path that could, ultimately, end with bankruptcy. Namely, these creditors include public employee unions whose retirement benefits are unsustainable with the city’s current and projected tax base. After enormous investments were made in revitalizing the city’s downtown, diminished tax revenue (redevelopment was hit with a 60% fall in property taxes) quickly interfered with bond obligations and generous union contracts. Mayor Ann Johnson’s city of Stockton is now on the edge of Chapter 9 bankruptcy.

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The revitalization of downtown Stockton began in the late 1990s, with a focus on the city’s deteriorating waterfront properties. Caught in the housing bubble and its burst, recession hit Stockton hard. “No.1 in foreclosures. Twice named worst place to live by Forbes. One of the highest homicide rates in California,” said Darcy Koster of Bradley’s Bar in the revitalized downtown sector. The owner of Bradley’s expects to close its doors permanently in a matter of weeks as business has fallen off irreparably. The mortgaged commercial building that houses Bradley’s is now worth one-third of what it was purchased for during the real estate boom.

With no reserves left, Stockton faces a mid-year deficit of $15 million, and an out-year deficit of as much as $38 million.

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