A lesson in municipal public finance or why Detroit is so screwed?

Detroit Free Press graphic.

It should be no surprise that a city so dependent on the American automobile industry, an industry that is failing, is failing too. See "Detroit on brink of financial ruin: As budget balloons, some fear city can't stay afloat" and "What caused Detroit's financial mess?" from the Detroit Free Press.

My joke for a long time is that the desolate Detroit is the endgame of what the automobile industry intended for cities. Instead, people were to live in the bucolic non-city connected to the world via their automobiles. There wasn't much attention paid to what would happen to the already built places, instead people focused on the new.

Detroit has probably more miles of freeways criss-crossing the city compared to most center cities across the U.S., especially for its size, and the Detroit Metropolitan region is one of the most deconcentrated and spread out (sprawled) in the country in terms of land use. Exurban development there is also very very high.

Coincident with the failure of General Motors and Chrysler, the City of Detroit is finally on the economic brink, facing bankruptcy.

Cities have it hard generally. Most are dependent on property tax revenue. Detroit does collect some income tax, as do some other cities (such as Philadelphia and even the micro city of Highland Park, Michigan, which is surrounded by Detroit, but at one time was the headquarters of Chrysler, so an income tax allowed the city to tax Chrysler workers).

But as the city has lost 1.2 million residents over the past 50 years, its property and income tax base has constantly shrunk. It made up for this with monies from the State of Michigan and the Federal Government. (Although revenue sharing from the Federal Government ended in the 1970s.) This has forestalled the city from "reengineering" and rightsizing how the government was organized, how many people were employed, etc., based on linking size to revenues. (Note that property taxes in Detroit are very high--double what they would be for a house at the same price in DC, although you could argue that since houses are valued in Detroit for at least 1/2 to 1/3 of what they would be worth in a strong real estate market region, maybe you could argue it's about the same.)

(The city has had the same problem with rightsizing the school district, which is currently under receivership and the control of the State of Michigan government.)

And then, in the 1990s, Detroit allowed casinos to be built in the city, on the riverfront. (Casinos had been present on the Detroit River waterfront, but across the river on the Canadian side, in Windsor, Ontario, before this).

This made up, for a long time, for declining income and property tax revenues.

But now with the American automobile industry going through massive government-assisted downsizing and resulting massive unemployment within the State of Michigan, state and local income taxes are declining.

Therefore, so is the availability of monies from the state government, which has declining revenue for the same reasons that the local governments do.

As a result of the economic decline--the equivalent of a regional Depression vastly more severe than the economic decline across much of the country--property values are crashing, and foreclosure rates are climbing, meaning that property tax revenues are likely to go into a steep decline. Plus, who in Michigan has money to spend gambling, meaning casino revenues are declining.

It's a quadruple crash--income taxes, property taxes, state grants, casino income are all dropping precipitously.

Sure the State of Michigan is promoting tourism, but without having other thriving industries, municipal tax revenues and revenue sharing will continue to drop. (See "Tourism in Michigan: The triumph of optimism," from The Economist.)

This is why all local economies need to be focused on creating a more balanced economy. (A point that EE makes in the thread in the previous blog entry "Creative and business clusters.")

Locally, it's why I am a strong proponent of infill development within DC, including multi-unit residential. Unlike most cities, DC collects all of its income tax residents on residents. (Of course, 70% of people working in the city do not live here.) New residents generate income tax revenue, property tax revenue if they own, plus sales taxes. And we need to work to keep our revenue stream strong, in order for the city to thrive.

Like most every other municipality in the U.S. (see this CNN story, "Survey: Worst of recession has yet to hit U.S. cities' coffers"), DC too faces tough economic choices as it bears the impact of declining municipal tax revenues. See "Fenty Proposal Cuts Millions in Earmarks: New Awareness Evident in Revised Budget" from the Washington Post.