Social Sustainability in Detroit and Beyond

Mark Skidmore Michigan State University

Presented at

Integrated Network for Social Sustainability

April 9, 2015

Overview

• Detroit • Land Values • Tax Delinquency • Property Taxation and Foreclosures • Publicly Held Parcels Growing

• Fiscal Sustainability in a Broader Context • Government Debt and Unfunded Liabilities • Private Debt, Bubbles, Financial Crisis, and Growing

Income Disparity

Detroit http://www.lincolninst.edu/pubs/2467_Will-a-Greenbelt-Help-to-Shrink-Detroit-s-Wasteland-

Background and History (Detroit Population)

Detroit Population Trends, 1890-2010 Detroit Racial Trends, 1920-2010

Detroit 1940s and 1950s

Detroit Today

Causes (and Effects)

• Manufacturing Decline/Global Forces • Great Recession—Real Estate Collapse

• Racial Tension • Policies (land use, tax rates, public services, schools)

• 40% of Street Lights Are Non-functioning • Highest Crime Rate Among Large Cities • 47 Minute Police Response Time (national average=11 minutes)

• Corruption

Detroit Financial Situation

City of Detroit Balance by Fiscal Year (in millions)

True deficits unrevealed by “debt restructuring”, and underfunding retiree benefits accounts

Major Revenue Sources (millions of real $)

Detroit General Fund Major Revenue Sources, FY93-FY10 Total Debt and Unfunded Liabilities = $18 billion or $68,000 per Detroit household (Median Household Income~$25,000) Bankruptcy 54% Tax Delinquency

Detroit Economic and Demographic Information • Median H/H Income ~$25,000 • Poverty Rate ~ 38% • Population ~701,000 • Population 16 years and over ~554,000 • Labor Force ~298,000 • Labor Force Participation Rate ~ 54% • Employed ~216,000 • Unemployed ~ 82,000 • Not in Labor Force ~256,000 • Unemployment Rate ~ 18% • Social Security (Disability) ~ 34,000 • Social Security (All Types) ~148,000 • Population over 65 ~ 83,000

Land Value in Detroit • Collapsed Property

Market • Many Vacant Property

Sales • Opportunity to Learn

about Land Values in Declining Urban Area

• Where is Land Valuable in the City?

• Viscous Cycle of Tax Delinquency • Public Ownership of

Parcels Is Increasing • What Policies Might

Help Stabilize the Market and Increase Land Value?

Detroit Housing Price Index vs. Consumer Price Index

0

20

40

60

80

100

120

140

160

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Case-Shiller Housing Price Index--Detroit 1976-2013

HPI

CPI

Source: Core Logic and Bureau of Labor Statistics

Detroit Central City Taxable and Nontaxable Properties, 2010

Source: City of Detroit Assessor data, 2010

Theory

1. Urban Land Value Gradient • Monocentric City (Muth, 1969; Mills, 1972) • Modifications

• Non-monocentric City (Dubin and Sung, 1987; Ahlfeldt (2010) • Parcel Size and Distance from CBD (Colwell and Munneke,

1997)

Augmented Land Price Function

Β = Price of first square foot of a parcel A = Area elasticity of price c = Distance from the city center b = Distance from nearest city border

Data and Methods

-The City of Detroit’s Assessment Division provided parcel-level data for this research. -The raw data include information for 444,183 real and personal property parcels, of which we focus on vacant land parcels. -In total there are 93,786 vacant parcels, of which 47 percent are owned by the City of Detroit or some other public entity. -Omit observations for various reasons -Remaining are 3,788 parcels, 4.6 percent of total vacant parcels sold during the 2006-2010 period. -Use regression analysis to generate land value gradient -land value = f(distance from city center, distance from border, other factors) -standard regression with modifications and locally weighted regression

Estimated Land Value Gradient

Predicted Land Values from Locally Weighed Regression

Conclusions

1. U-Shaped Land Value Gradient 2. Evidence of Packard Plant Effect (negative externality) 3. Informs Vacant Land Management Decisions—Decide

which Land to: • Return to Private Ownership • Hold in Public Hands for the Medium to Long-term • Permanently Remove from the Market (green space)

Broader Perspective: Local, State, and Federal Government Obligations

• State and Local Governments • Novy-Marx and Rauh (2013)

• Fully funding state and local government retirement obligations would require a tax increase of $1,385 per household per year

• Federal Government • Recent Year over Year Deficit ~ $1 trillion • Total Debt–

• $18+ trillion or ~$155,000 to $160,000 per household

• Unfunded Liabilities • ~$200+ trillion (Kotlikoff) or $1.7 million per household • Taxes would have to increase by about 60% to pay for promises

we’ve made

International Data on Public Debt

Debt as Percent of GDP, 2012 "Long term, it's not so much a financial crisis that we face. It's more a political and social crisis because these

promises that we have made for ourselves will

be broken." Stephen King HSBC Bank, UK

Expansion of Private and Public Debt all debt--household, finance, corporate and government

Is this debt trajectory sustainable? What happens if debt can no longer be generated at this rate?

Monetary Expansion

Global Central Bank Balance Sheets

Bubble?

Debt and Unfunded Liabilities

• Detroit’s Debt and Pension Obligations Overwhelmed Fiscal Capacity

• Many State and Local Governments in US Face Similar Challenges

• Federal Government, by some Measures, Is in Worse Shape.

• Most Western Nations (including Japan) Face Large Debt/Liability Challenges

• Public and Private Debt Trajectory Unsustainable