Sample Economic Essay Paper on Detroit’s Bankruptcy

Detroit’s Bankruptcy

After filing its bankruptcy case, Detroit brought into question the municipalities capability to disburse their debts. Detroit’s bankruptcy can be attributed to Macroeconomics matters attributed to massive decline in revenue. In addition, the city is challenged by an increase in pension and health resources that are restraining the limited available resources .The paper will implore Detroit bankruptcy, the case it failed in court and interrogate the future of the city.

As the Detroit local government rebound with the recovering economy in the U.S, the problem of pension and health care still continue to escalate. This is despite the low funds status of the municipal pension plans. This indicates that as the population grows, the pension and benefits on local services are desperately affected disappointing payroll growth at the state and the local government level. In dealing with all these fiscal problems, Detroit has faced a setback of substantial flight of residents out of the city. The city’s population and taxes have been on the decline as well as its property values falling. Moreover, the public sector costs are repeatedly increasing which makes the situation even harder.

Gottesdiener reported that Michigan Governor Snyder appointed Kevyn Orr as the emergency manager who is authorized to manage the Detroit’s finances and governance. Gottesdiener further argued that the executive has a duty; as stipulated Michigan’s public act 436, to pay back the money that Detroit owes to Wall Street. Recently, Orr declared that the city will temporary suspend some of its debt payment and ordered that everything in the city be evaluate for the possible fire sale. Orr serves at a critical time when Detroit is at cross roads.

Detroit has made history by being one of the biggest American cities to file a suit with the courts to seek a bankruptcy protection. A Jurist article reported that the city filed a lawsuit to nullify $1.44 billion of debts the city sold to finance by establishing fraud service corporations to implement a debt sales. Wusa 90 termed the Detroit bankruptcy, the largest of its kind in American history. With a population of about 7’000 and Claiming that the pension debts were imposed on them by the state of Michigan, they asked the Judge Rhodes to declare that the city is not obligated to make payments on the pension certificates of participation. The column further reported that the bankruptcy case has been working its way up through in the court system. In his ruling, the judge said that Detroit would succeed with legal challenges emphasizing that the city did not have a right under Michigan law to pledge Casino revenue as collateral to secure the exchanges.

Among its pension responsibilities, retirees’ benefits, debt service and the rules related to Pension obligation certificates (POCS) which present a huge financial burden to the city. A comprehensive annual report of the city of Detroit, released by Martin and Bing, the POCs were issued by during the fiscal year ended June 30, 2005, Total to $1.5 billion, while the retirees pension was at $ 7.2 billion at June 30, 2011. Worse enough, the unfunded amount totaled to $643.8 million. In addition, the government’s pension, retiree benefits, and related costs accumulated to $546.0 million for the financial year ended June 30, 2012(14).

Assigned to municipality bonds, the credit rating are meant to evaluate the likehood of the investors being paid on those bonds this depends on the municipality’s fiscal health. The rating agencies therefore assess and reassess their initial bond rating and downgrade or down grade. In her bid to fix the debt, Detroit embraced a strategy that inculcates cutting the police and firefighters’ pension by a ten percentage. The leaders in charge of those unions rejected the plans as it would cause pain to the former and current employees who not responsible for the Detroit’s bankruptcy. Although Michigan constitution protects the pensions of public workers, the court ruling may undermine those protections leaving the workers susceptible to pension cuts. This is despite the fact that the union leaders opposed their matters.

The city‘s annual financial report of the year 2012, reported a plan that had been implemented to work at eliminating the deficit. This was aimed at improving the current poor economic situation. Among the plans was the city has partnering with the federal government to develop a fast vehicle system that will operate on routes in city’s suburbs like Michigan avenues to downtown (34). This project aims at boosting the local economy after creation of jobs at construction and transit sites and has a long-term impact in economy development in the region. It will also enable Detroit to become a city where people would invest.

Detroit’s bankruptcy has been caused by macroeconomic factors. The decline in the city’s population has significantly led to a decline in revenue as it affects property and income tax base as well as high unemployment. However, after the Governor appointed a competent chief executive, a strategy whose goal is to better the situation has been implemented.

Works Cited

“Detroit emergency manager files bankruptcy; biggest bankruptcy in U.S.” Wusa 90. July 18, 2013. Web. 18 April 2014. <http://www.wusa9.com/news/article/266962/44/Detroit-files-for-bankruptcy>

“Detroit files lawsuit top invalidate $ 1.44 billion of pension debt.” Jurist, 3 February 2014. Web. 18 APRIL, 2014. <http://jurist.org/paperchase/2014/02/detroit-files-lawsuit-to-invalidate-144-billion-of-pension-debt.php#.U1L73lVdXPZ>

Gottesdiener, Laura. “Detroit’s Debt Crisis: Everything Must Go”. Rolling stone politics. June 20, 2013. Web. 18 April, 2014. < http://www.rollingstone.com/politics/news/detroits-debt-crisis-everything-must-go-20130620>

Martin, Jack, and Bing Dave. “Comprehensive Annual Financial Report: For the Physical Year Ended June 30, 2012.” City Of Detroit Michigan. Web. 18 April 2014. <http://emma.msrb.org/EP731053-EP567459-EP968879.pdf>