Detroit teeters on the brink despite autos comeback

@CNNMoney January 18, 2012: 5:14 AM ET
The city of Detroit faces bankruptcy, with a shortfall of $45 million by June.

The city of Detroit faces bankruptcy, with a shortfall of $45 million by June.

DETROIT (CNNMoney) -- Detroit automakers are back on their feet, showing their best profits in years. But the city of Detroit's finances are worse than ever.

The city won't have enough money to pay its bills by April, unless Mayor Dave Bing can get the council and municipal unions to agree to steep spending cuts he's announced. By the end of its fiscal year in June, that shortfall will hit $45 million.

There is also the possibility that the state may take over the city, which would open the door for Detroit to file for bankruptcy. That would make it the largest U.S. city ever to suffer that fate.

"The financial situation in the city is quite complicated and there are no easy answers," said Bettie Buss, senior research associate, Citizens Research Council of Michigan, a nonpartisan public policy think tank.

While the auto industry is still a major presence in Michigan, there's relatively little left of it inside the city limits.

Even though General Motors (GM, Fortune 500)' headquarters is in downtown Detroit, the automaker doesn't even rank among the city's top 10 largest employers. Chrysler Group, the sole auto company in the top 10, operates the only assembly line inside city limits.

So Detroit has seen little benefit from the auto industry's return to profitability.

But the auto rebound has helped to turn around finances at the state level. A recent estimate shows state surpluses growing faster than expected, to nearly $850 million by the end of the fiscal year in September.

The auto rebound has boosted collections of both income and sales tax, as well as some business taxes.

The comeback of the American car

According to Chris Hoene, director of research for the National League of Cities, those sources of revenue respond much faster to economic improvement than property taxes, which are the major source of local government revenue. The state has also benefited from its ability to make steep cuts to the financial support it gives to local governments, adding to Detroit's woes.

The problems that have taken Detroit to the precipice of fiscal disaster have been building for years. Even with massive spending cuts over the last decade, the city is still losing population and tax revenue faster than it can trim its budget

"The level of services has been reduced, but not fast enough to balance with the reduction in revenue," said Buss. "And even if you further reduce services, [the city] has significant legacy costs. It has twice as many retirees as active employees. For police and fire, it's three times as many retirees."

A state panel this month began a 60-day review of the city's finances that could lead to the appointment of an emergency manager for the city of Detroit. The manager could usurp powers of the mayor and the council to make financial decisions, and would also be able to throw out vendor contracts and collective bargaining agreements.

Today's best American cars

But the law allowing the state to put an emergency manager in place is being challenged both in court and by a ballot referendum effort, either of which could block a state takeover.

Even with the state's hefty surplus, it's unlikely that those funds will be used to solve Detroit's problems.

"Everybody is going to be grabbing at the surplus -- public education, the universities, Medicaid, corrections," said Buss.

"The city of Detroit is one of a long list of potential recipients. And if you used the money to fix Detroit's problems this year, you'd be facing another $40 million to $50 million shortfall next year, and year after that. Unless you can address the city's structural problem, relieving this year's shortfall is really only a short-term fix."  To top of page

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