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Can Detroit Afford Its Debt?

Monday, 4 Apr 2011 | 2:12 PM ET
Detroit - The Motor City
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Detroit - The Motor City

The startling collapse of Detroit’s population raises doubts about whether the city can afford to shoulder its enormous debt load.

Detroit’s population plunged by 25 percent over the last decade, according to data recently released by the Census Bureau. This means fewer people are shouldering the nearly $3 billion of debt that Detroit, its public schools, the surrounding Wayne County and Wayne County Community College have accumulated. It works out to around $4,137 per person, according to the bond research firm MMA-Research.

The per capita income of Detroit is just a little over $15,000.

“Detroit’s long term and very serious decline gives reason to believe the city may face a choice between providing basic municipal services and the timely service of all of its obligations over the next decade,” MMA writes in its most recent market update.

Despite this, MMA believes there won’t be any permanent losses to long-term bondholders who can hold the bonds to maturity. But investors who need or want to sell in the short or medium term may find prices much lower than they are now.

Part of the issue for Detroit is that its declining population could affect its portion of state shared revenues. It also could affect the ability of Detroit to levy income taxes and utility user fees under statue law.

Tax revenues have been declining—so Detroit is planning to hike property taxes. But with unemployment at around 20 percent and over one-in-four houses in Detroit vacant, this might not result in much additional revenue. MMA, for example, expects revenues to continue to decline.

So does this mean Detroit will default? Not necessarily. The city could still be rescued by the state of Michigan.

The irony is that this means that many of those who fled Detroit for the suburbs would wind up paying the bills for the failing city.

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