Bankruptcy is commonly affiliated with enterprises or companies which are unable to make payment of their debts. It may occur when an enterprise does not assess its risks thoroughly. But do you know that a city can be filed for bankruptcy too? Well, it has already happened to some cities by now, and one of them is Detroit. The bankruptcy was caused by Detroit’s inability to pay its debts as they come due.
In understanding how this disaster might happen, we should take a closer look at the past development of Detroit. Population in Detroit was rapidly increasing until it reached 1.8 million in 1950 due to automobile industry expansion. Since then, the population of Detroit gradually shrinking to only 714 thousand in 2010. The perpetrator of the decline is deindustrialization due to tight competition in the industry which is accentuated by the 2008 financial crisis. In short, decreasing population alongside with increasing unemployment rate leads to a significant decrease in city revenue through decades.
Detroit did not have spending problems, on the contrary, the city operating expenses alone had dropped by 38% ($419.1 million) between 2008 and 2013. Furthermore, the decrease drove down the total expenses by $356.3 million. The decline, however, still could not compensate for the significant decrease in the city income which made bankruptcy is inevitable. A report came through regarding Detroit’s financial health by May 2013 stated that Detroit was “clearly insolvent on a cash flow basis.” On July 18, 2013, the city of Detroit was filed for bankruptcy.
The case is basically caused by cash flow problem due to the city’s inability to bring sufficient revenue to cover its expense. Through better risk management, the city government might identify and anticipate risks before the occurrence of any disaster. Detroit bankruptcy then could be avoided or had a severity reduction.
Reference:
Turbeville, W. C. (2013, November). The Detroit Bankruptcy. Retrieved from Demos: https://www.demos.org/sites/default/files/publications/Detroit_Bankruptcy-Demos.pdf
