By Afton Branche-Wilson and Patrick Cooney
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By Afton Branche-Wilson and Patrick Cooney
Executive Summary
What is financial health? It is the ability to control your short-term finances and make choices to enjoy your life, such as supporting a family member or going back to school. A financially healthy individual can also absorb financial setbacks and meet their financial goals (Consumer Financial Protection Bureau [CFPB], 2015). Financial stability, however, comes first: in the short term, this means having money left over at the end of the month, manageable debt, a small pot of savings, and a trusted network to help bridge financial gaps (Siwicki, 2019).
For many low- and moderate- income Detroiters, the necessary ingredients for financial health and financial stability are out of reach. Indeed, just over half of Detroit residents are either financially insecure (32%) or in financial trouble (24%) (DMACS, 2019). Due to low and volatile incomes and disproportionately high costs, tens of thousands of Detroit households cannot maintain consistently positive cash flow, which makes it challenging to build savings, protect assets, or for some, maintain access to a bank account. Without sufficient savings, many households accrue unmanageable debt and have low credit scores. Together, these conditions make the average Detroiter vulnerable to financial shocks and drive experiences of significant hardship, often above what people in peer Rust Belt cities experience. The COVID-19 pandemic is a financial shock experienced at massive scale, and will make it even more difficult for the average Detroit household to make ends meet.
Financial insecurity stems from a set of interconnected processes: a father earning a low and unstable income might have trouble setting aside savings to deal with emergencies, and without the help of a friend, he may take on more credit card debt to fix a broken car. In the future, he sees even more demands on his limited income in the form of interest payments, and finds it more difficult to take advantage of opportunities that could help him move up the financial ladder. Critically, these processes in Detroit operate within a local environment shaped by racial discrimination and a legacy of neighborhood disinvestment, which restricts Detroiters’ access to well-paying employment and affordable financial services. This paper reviews the available data to understand how Detroiters operate in this financial world, including recent survey data on COVID-19’s financial impact, and identifies a set of promising ideas for action at the state and local level to bolster financial health.
Cash Flow: Low and volatile incomes confront high costs
With consistently positive cash flow, an individual can cover recurring expenses with room to spare – this is the foundation of financial well-being. But most households in Detroit lack sufficient income to consistently cover their costs, which is both a function of low and unsteady wages and disproportionately high expenses in the city.
Median household income in Detroit is $33,965 per year, and a full 16.9% of households earn under $10,000 per year (ACS, 2019). This is in part due to the city’s depressed labor force participation rate: nearly 140,000 residents are not working or looking for work (Holzer & Rivera, 2019). Further, many residents work in lower-wage occupations, such as retail or food services, which often fail to offer sufficient and steady wages each pay period (Holzer & Rivera, 2019; Maag, et al. 2017). This comes with financial risk: a retail cashier making $9.45 an hour who sees a cut in hours one week may not be able to trim her expenses enough to make ends meet at the end of the month.
While tens of thousands of Detroiters struggle to earn sufficient and steady income, they also confront a set of disproportionately high basic expenses, including property taxes, auto insurance and utilities:
- Compared with the largest cities in each state, Detroit has the second highest effective property tax rate in the nation (Lincoln Land Institute, 2015). For years, residents’ property taxes were based on an over-assessment of their homes’ true value (Hedman & Pendall, 2018; Atuahene & Berry, 2018). Further, many eligible homeowners are not aware of, or find it difficult to apply for the City’s Homeowners Property Tax Assistance Program, which provides relief for current tax bills.
- Auto insurance premiums average 18% of the median income in Detroit, a much higher rate than in peer cities (Cooney et al., 2019). An estimated 60% of Detroit drivers stopped by police do not have insurance (Reindl, 2017).
- Detroit’s aging infrastructure and population decline has contributed to unaffordable water prices, which have doubled over the last eight years (Zamudia & Craft, 2019; Rockowitz et al., 2018).
Banking is just another costly expense for some Detroiters. One in four Detroiters is unbanked, and owns neither a checking nor savings account (DMACS, 2019). Two-thirds of unbanked households in the metro area cite financial reasons for their status (Barr, 2012). Detroiters may also experience racial discrimination from the banking system that results in unequal access to financial services. A recent study of frontline financial services employees in Southeast Michigan found a pattern of racially and class-biased treatment in their interactions with customers (Friedline et al., 2020).
Given low incomes and high costs, many households struggle to reach the first step of financial stability: having extra income left over at the end of the month. In fact, 19% of Detroit households – or an estimated 50,000 – report that they do not have enough money to make ends meet, while 37% say they have just enough (DMACS, 2019). This reality drives serious fiscal and material hardships for many, and factor into Detroit’s high rates of evictions, water shutoffs, and uninsured driving.
The COVID-19 pandemic may exacerbate this state of financial precarity. On average, Detroit residents surveyed in early April 2020 felt there was a 53% chance they would run out of money within the next three months, while residents with an annual household income of $10,000 or less put their chances at 66% (DMACS, 2020). To help households in Detroit maintain consistently positive cash flow during this public health crisis and beyond, we should consider a set of collaborative actions to increase and stabilize income, enable wider access to bank accounts, and significantly reduce the cost of basic needs.
Savings & Asset Building: Difficulties setting aside resources, building wealth
Limited disposable income makes it difficult for many Detroit households to build savings for short-term needs or long-term goals. With liquid savings, families can cover short-term expense spikes or income drops, which may make the difference between stability and hardship. Families with even a small amount of non-retirement savings, between $250 and $749, are less likely than families with lower savings to be evicted or miss a housing or utility payment when income disruptions occur (McKernan, Ratcliffe, Braga & Kalish, 2016).
According to Prosperity Now, 6-in-10 Detroit households were liquid asset poor in 2014, meaning they did not have enough liquid assets to live at the poverty level for three months without income (Prosperity Now, 2018d). Residents value saving, but two-thirds of metro area survey respondents said it was hard to save because their money goes to necessities (Barr, 2012). In the months following the outbreak of COVID-19, many residents shifted their savings behaviors (DMACS, 2020). Nearly one-third of residents with incomes below $30,000 said they are saving less following the outbreak, but it's encouraging that 40% of residents earning below $30,000 said they are saving more due to the pandemic (DMACS, 2020).
Beyond saving for emergencies and short-term needs, saving for retirement proves a challenge for the average Detroiter. Nationally, just 41% of Black families and 26% of Hispanic families have retirement account savings, compared to 65% of white non-Hispanic families (Morrissey, 2016). Given lower median incomes in Detroit compared to the nation, the proportion of families with retirement savings in the city may be even lower than national averages. Workers of color or those with lower education and income levels are also more likely to work in jobs where their employers do not offer sponsored retirement benefits (Pew Charitable Trusts, 2016). In addition, income or expense swings can also significantly undermine household retirement savings. Locally, 1-in-10 Detroiters reported borrowing from or cashing out a pension, retirement or life insurance policy in the last year (DMACS, 2019).
Similar to liquid savings, maintaining physical and financial assets can help families absorb financial shocks and secure a solid financial future. Insurance, for example, should smooth income following an unexpected situation, yet many Detroiters are not able to rely fully on insurance protections. Homeowner’s insurance is difficult to purchase locally, leaving many homeowners to pay exorbitant rates for substandard coverage or take the significant risk of going without. As for unemployment insurance, in 2018, 13% of employed Michiganders worked in jobs not covered by unemployment insurance (Michigan League of Public Policy, 2018). Compared to peer states, Michigan still provides both the fewest weeks of benefits and the lowest maximum benefit amount (MLPP, 2018). Further, some laid off low-wage and/or part-time workers do not make enough to meet the minimum threshold for wages earned.
Following the damage of the Great Recession and tax foreclosure crises, tens of thousands of Detroiters have lost their homes, which is typically a family’s most valuable asset. In just over a decade, Detroit has shifted from majority homeowner to majority renter (ACS, 2006; ACS, 2018). Due to years of depressed property values, even current homeowners may not consider their homes a valuable asset. Further, the average Detroit home is aged and many need repair, yet current home repair loan products are inaccessible to many low income families due to credit constraints (Ruggiero, Rivera & Cooney, 2020). This means many homeowners are unable to make the improvements needed to bolster property values or maintain safe living conditions. Despite these conditions, property values have improved in recent years: 90% of neighborhoods in Detroit saw assessed property values increase between 2018 and 2019 (City of Detroit, 2018 January).
Many low and moderate income Detroiters struggle to build savings and maintain assets, which limits the possibilities for households trying to plan for the future or take advantage of business and education opportunities. In the short-term, lack of savings also leaves thousands of individuals exposed to financial risk from emergencies. As we explore in the next section, without savings cushions, too many Detroit households accrue unmanageable debts.
Borrowing: Crippling debts and low credit scores limit opportunity
Credit can be a useful tool to conveniently purchase household goods or pay upfront for investments, but many Detroiters cannot use credit this way. Instead, for households who lack emergency savings or are unable to receive help from their networks, credit helps make ends meet between paychecks and covers unexpected costs, which drives unmanageable debt loads for many low-and moderate-income Detroiters. Further, the traditional vehicles for investing in one’s financial future – homeownership and higher education – also fuel debt in the form of unaffordable property taxes and tuition payments. Tens of thousands of residents live under the weight of these debts, and their harmful financial consequences: low credit scores, foreclosures, and bankruptcies.
A 2016 report from the Urban Institute found 66% of Detroiters have some form of debt in collections, including credit card debt, medical debt, and government fines and fees. This figure puts Detroit ahead of the nation (35%), the metro area (31%), and even other peer cities (42%) (Elliott et al., 2016). Today, an estimated 57,518 taxpayers owe delinquent property taxes on homes in Detroit, though an unknown proportion of those taxpayers do not live in the city (Quicken, 2020). In addition, while we don’t have detailed data on Detroiters’ student loan debt, we do know that 1-in-4 Detroiters spent some time in college and did not earn a degree; nationally, the 12-year loan default rate for people who do not complete college is 24%, compared to just 6% for bachelor’s graduates (ACS, 2018; Scott-Clayton, 2017). Debt places a tremendous burden on Detroit households with limited incomes, who must manage regular expenses, delinquent debt, plus interest payments and collection fees.
Outside the formal banking system, many Detroit residents use friends and family as creditors – 34% borrowed money from family or other connections in 2018 (DMACS, 2019). As expected, the outbreak of COVID-19 has likely made it more challenging for Detroiters to seek this kind of financial help, especially residents with the lowest incomes. Fifty-two percent of residents with incomes below $10,000 said they could not ask anyone outside of their household for financial help during the pandemic (DMACS, 2020). Interestingly, two-thirds of Detroit residents have not changed their borrowing behavior in response to the pandemic, per a survey conducted in early April 2020 (DMACS, 2020). However, it is worrying that 20% of residents earning less than $30,000 reported borrowing more money due to the crisis (DMACS, 2020).
For residents unable to keep up with the financial burdens of debt, filing for bankruptcy offers a chance to reset. According to our analysis of ProPublica data, Detroit residents filed at least 43,020 consumer bankruptcy cases in court from 2008 to 2015, which is higher than the number of cases in Cleveland (33,920) and Buffalo (12,231) (ProPublica, 2017). When considered as a proportion of adults over 25, Detroit’s bankruptcy rate during this time (1.17%) was higher than the bankruptcy rate in Buffalo (0.92%) and lower than the rate in Cleveland (1.63%). Compared to filers in Cleveland and Buffalo, Detroit residents are less likely to have legal representation in court, and less likely to be released from debts via case discharge. Nationally, researchers argue racial disparities in discharge rates are due in part to disparate access to representation (Kiel & Fresques, 2017). In Detroit, as elsewhere, for many filers with low and unstable incomes, bankruptcy alone does not sufficiently help achieve a financial “fresh start” (Porter & Thorne, 2006; Seefeldt, 2016).
Adverse financial events such as bankruptcy and foreclosure have taken a toll on the credit outlook of Detroit’s resident population. Here, we can also see the imprint of institutional racism. For example, Black and Latino Detroiters were disproportionately targeted for subprime loans in the mid-2010s, which led to many of the 70,000 mortgage foreclosures in the city between 2005 and 2013 (Ashton, 2010; Seymour, 2016). Further, the tax foreclosure crisis, fueled largely by inaccurate property tax assessments, hit Detroit much harder than many other cities, and likely still negatively affects many Detroiters’ credit scores today.
Compared to residents of other cities, the average Detroiter had a lower credit score, lower credit limits, and a higher utilization of available credit in August 2015 (Elliott et al., 2016). Subprime or no credit directly affects an individual’s ability to gain financial stability, and dramatically limits opportunity in today’s economy. Without readily accessible, affordable credit, an individual may not be able to cover an unexpected medical bill or car repair, and might dip into her retirement savings, sell a valued asset, or take on a high-cost payday loan. Subprime credit also prevents entrepreneurs from accessing sufficient or affordable capital needed to start or grow their businesses.
In developing medium-term solutions to household debt and credit constraints, we must focus on helping Detroiters manage debt and repair damaged credit, while recognizing households still need to borrow affordably to cover expenses today.
Conclusion
Financial instability is a fact of life for many households in Detroit, which leaves tens of thousands struggling to build or maintain the financial cushions needed to move into financial well-being, including sufficient savings and manageable debt. The data show a pernicious cycle—for both residents in poverty and those with moderate incomes—that we must collectively act to address. The COVID-19 pandemic, with its attendant disruptions to income and employment, will only further impair residents’ efforts to strive toward financial health.
There are a variety of interventions that public and private actors can take to promote financial health directly, such as creating income-based water rates, or encouraging private sector employers to reduce volatile scheduling practices. To help residents repair credit, non-profits could offer proven programs that build credit and offer affordable lending. To reduce debt burdens, legislators and administrators could cut government fines and fees and expand access tof higher education funding. As public and philanthropic efforts rapidly change course to address financial emergencies, stakeholders must also continue to address systemic conditions that threaten financial security, such as low labor force participation and volatile wages. Lastly, we must ensure—through both intentional design and rigorous evaluation—that interventions fully reach Black and Latino Detroiters, and avoid perpetuating the racial discrimination that can cause financial instability and complicate the path to financial health.
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