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Detroit: From Motor City to Record Bankruptcy

The city that was the cradle of the auto assembly line has hit bottom: last week Detroit filed the largest municipal bankruptcy in US history.

The city owes $18 billion…that equals about $25,000 in debt for every resident. Detroit’s general retirement system alone has $2.04 billion in unfunded liabilities, and 23,500 municipal retirees who expect their pension payments.

Last week’s fall from grace comes after decades of decline. As the Big Three automakers slowly moved production out of town, residents followed. The city had 296,000 manufacturing jobs in 1950; by 2011 that had fallen to 27,000 jobs (the biggest employers today are the school system and the city itself). With that, the city’s population peaked at 1.85 million in 1950 – today it is struggling to hold above 700,000. The exodus of residents equals an eroding tax base, and cuts in basic services.

And it equals empty buildings: the city has 78,000 vacant properties…38,000 of those have been deemed potentially dangerous.

Decades of stagnation have taken a toll in other ways: the city’s unemployment peaked at close to 28% in 2009, but it’s still over 16% today. And over one-third of the city’s residents live below the poverty line. Residents have watched a string of officials go from public office to prison.

Last week’s filing was a long time in the making, and came as no surprise to anyone who has watched the city’s long deterioration.

In broader terms, Detroit is unique, and one city is not representative of the muni market as a whole. This doesn’t mean a mass contagion of defaults is about to bloom. But it should serve as a reminder that muni bonds are not without risk.

Looking at a proxy for the muni bond space, iShares S&P National Muni Bond Fund, indicators have signaled a long-term sell, and shares are in a clear downtrend.

Rezny Wealth Management may hold investments in above-mentioned securities; positions can change at any time.


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