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Detroit Bankruptcy - Essay Example

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Detroit Bankruptcy

The announcement of bankruptcy by Detroit is a prophesied case. The liquidation of a municipal’s assets cannot happen as a result of the request of a creditor. A municipality is under the state’s jurisdiction as it is defined by the state. The 10th Amendment of the4 American constitution reserves any power not defined by the constitution for the state. Declaration of bankruptcy rulings ate made in U.S. Bankruptcy courts under federal jurisdiction Many factors have indicated reduced financial activity in the city. The population of the city dropped from a 1.5 million figure in the city’s peak in the fifties to a current size of around 700,000 leaving the city a shadow of itself with tens of thousands of abandoned buildings ("How Detroit went broke - Economics - AEI"). This coupled with the deindustrialization of the city have largely affected the collection of the revenues in the city. However, the major contributor of the state of the city is the accounting of the funds of the municipality. Legacy costs These are the bills of the municipality in the form of public employee pensions, healthcare, and other post employment benefits. The Government Accounting Standards Board (GASB) in 2006 required all local governments to report publicly OPEB liabilities but did not require the funding of the shortfalls of the OPEB liabilities (John Macomber). The city of Detroit uses 43% of the entire annual city revenue in making payments of this kind. This leaves only, 57% to run the city and cover the wage bill. In the last few decades, the percentage of the city’s revenue used in the settling of these bills has been on the rise with an estimation claiming the percentage will reach 65% in four years. These unfunded liabilities of the Detroit city funds have acted as a weight pulling down the city finances (How Detroit went broke). Half of the $18 billion debt is accounted in public employee retirement benefits, which are not funded. In 2012, the city spent $145 million on retiree health care benefits, which is greater by more than half of the $99 million used in 2000 ("How Detroit went broke - Economics - AEI"). The accounting methods relied in the evaluation of the finances of pensions of public employees allows rates of return that are overly optimistic on the supposed riskless pension to be assumed (How Detroit went broke). These also make it possible for the employer in the form of the city of Detroit, to contribute annual contributions that fall short of the required amount. These transform the guaranteed benefits such as pensions, into risky ones. The cause effect of these is a pension liability at a $3.5 billion level when appropriate accounting methods are used which is over 5 times the liability under the city’s accounting methods (John Macomber). This is not helped by the ratio of employees to retirees receiving pension, which stands at 2:1. Increased taxes After the post-war manufacturing and expansion, the city started losing revenue because of the high population decrease rates. In response, the city changed its accounting policies and imposed a 1% income tax on all corporations, residents, and non-residents. This aimed to cover the loss in revenues and maintain the city budget (How Detroit went broke). Over the years, the tax rate has been on the rise with the resident income tax doubling only six years after its establishment. A new utility tax came into being in 1971 aiming to maintain the services offered by the city as well as ...Show more

Summary

Name Institution Course Instructor Date Accounting Issues that contributed to the Detroit Bankruptcy Introduction Detroit became the largest city in terms of size and population in the United States history to file for chapter 9 municipal bankruptcy in July, 18, 2013 with an estimated debt of $18-20 billion…
Author : bartonarchibald
Detroit Bankruptcy essay example
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