Detroit on Brink of Fiscal Catastrophe

Published January 1, 2006

Even as Detroit Mayor Kwame M. Kilpatrick won re-election in November, the city’s financial situation continued to slide, as reflected by a November 21 announcement by the bond rating service Standard & Poor’s.

“The outlook is negative given the economic challenges that could further threaten revenues and create additional budget gaps,” Standard & Poor’s said in announcing a downgrade of Detroit’s bond rating to one step above junk level. “Delays in addressing its structural imbalance have also increased the city’s deficit and led to a deterioration of liquidity.”

In response, the mayor told the Detroit News on November 25, “many companies and other cities are in bond trouble, too.”

City Nears Bankruptcy

The city is spending $15 million more a month than it brings in, according to Detroit Auditor General Joe Harris, who told reporters in October, “insolvency is certain.” He stands by that prediction.

“We have a sorry state of affairs where, not only do we have a financial crisis, we also have an administration that contends things are under control,” Harris said. “The good news is that the public will soon know the truth. The bad news is that it will be too late for anyone to save the city from its own demise.”

Harris said the city’s budget cannot be balanced.

“You don’t just ‘find’ $150 million halfway through the year,” Harris said. “In fact, you don’t just find it at the beginning of the year. That’s 10 percent of the entire budget, and we haven’t taken any meaningful steps to address the structural deficit.

“By that I mean the measures we are taking are Band-Aids. They haven’t eliminated the structural problems that cause the budgetary gap when they sell land or borrow money to plug a hole in the dike,” Harris said. “Next year the hole will still be there, but they won’t be able to sell that plot of land again, and they will have run out of credit.”

City Lays off Workers

Before his November re-election, Kilpatrick issued media statements saying he is willing to “look at all possible solutions to help curb the current budget gap.”

The city has laid off 1,396 people since June 2005 and is continuing to look for additional ways to cut costs, according to a statement Kilpatrick issued in late September.

The mayor addressed the City Council on September 27 to discuss the 2005-06 budget. At that time, his police and fire department restructuring plans called for further cuts of $21.3 million. Kilpatrick has until the end of the fiscal year, July 1, 2006, to close the budget gap.

John W. Skorburg ([email protected]) is a visiting lecturer in economics at the University of Illinois-Chicago and associate editor of Budget & Tax News.