Detroit's Slow Fiscal Death March
State authorities should have let the city go into bankruptcy this summer.
Sometimes you have to go to hell before you can return. That, at any rate, seems to be the game plan of Detroit's current leaders. After a lot of high drama and condemnation of a consent agreement proposed by Michigan Gov. Rick Snyder to clean up the city's books as a hostile takeover by the state's "white" establishment, those leaders finally agreed last week to a version that is so watered down that it has no chance of succeeding.
What all of this shows is that there is no political solution to Detroit's fiscal mess. Nothing short of legal bankruptcy will work.
Detroit's books are in worse shape than January Jones in this season of Mad Men. If Snyder some weeks ago had not extended the full faith and credit of the state to let Detroit borrow $137 million on its maxed-out credit cards, the city would have run out of operating cash by the end of April. In exchange, he had been asking—nay, imploring!—Detroit's elected leaders to sign on to a consent agreement allowing a nine-member financial review board to fix the city's long-standing structural problems.
Under the original version of the agreement, the board would have had sweeping powers to outsource city services, sell city assets, and—above all—take on the city's immensely powerful municipal unions to shrink Detroit's work force and shed its unsustainable legacy costs. These costs, which include lavish health care and pension benefits, account for a big chunk of Detroit's $12 billion total debt, now 33 times the city's net assets. Meanwhile, employee benefits alone make up half of the city's general-fund costs.
But the version that the city council finally approved 5-4 would leave it and the mayor in charge of taking on the unions, something that has as much chance of happening as a 100-degree winter in Detroit. All the board will do is offer biannual revenue estimates to the mayor and council so that they can "live within their means," which the unions won't let them do. Indeed, if they were genuinely interested in solving the city's fiscal problems, they would have welcomed the chance of having the board do their dirty work and take the political blame.
That calculation has prompted four other Michigan cities—Pontiac, Flint, Benton Harbor, and Ecorse—that are bleeding red ink due to similarly intractable union issues to virtually roll out the red carpet for a state-appointed emergency manager. But in Detroit, the manager option as a first step was taboo because the sense of entitlement among Detroit's vast government-employed population reaches heights found only in Greece. And a manager who touched their benefits without exhausting other options would have triggered the same kind of riots that rocked Greece after the European Union demanded austerity measures in exchange for a bailout—especially with national black leaders like the Rev. Jesse Jackson ever ready to stoke the racial flames.
Even the original consent agreement caused Jackson to declare Detroit as "ground zero" in the nation's urban crisis. He joined a coalition of pastors, civil rights leaders, and local officials to condemn the alleged assault on the city's democratic rights that the agreement posed. "We are prepared to go from education, mobilization, litigation, legislation, demonstration and civil disobedience," Jackson thundered. He demanded a bailout from Uncle Sam akin to what Detroit's car companies got, evidently forgetting that the auto bailout involved a significant loss of control for the companies—including the firing of GM's CEO.
Detroit is in a death spiral. Its corrupt political establishment believes that the solution to the revenues being lost as residents and businesses flee the city's high taxes is…even higher taxes. The city's property and income taxes are now the highest in the state, even as receipts from the first have fallen 50 percent over 10 years and the second 28 percent over five years.
But what did Jackson identify as the root of Motown's woes? "Redlining." That's the practice under which insurance companies allegedly base vehicle and home premiums on a neighborhood's racial make-up rather than safety record, thereby deliberately jacking up living costs for the city's predominantly black population. Obviously, the reverend's own experience some years ago—when his fully loaded Escalade was stolen and stripped as he marched for green jobs—hasn't straightened him out.
But by Detroit standards, Jackson is a model of restraint. Democratic Rep. John Conyers, whose wife is doing time for accepting bribes when she was on the city council, has flat-out declared that there is a "racial component" to how Snyder is exercising his emergency powers. The Rev. Wendell Anthony, another local firebrand, has commented that he won't stand by and let Snyder put Detroiters "back in the plantation." But the prize for incendiary comments went to Minister Malik Shabazz, who declared: "Before you can take over our city, we will burn it down first."
Nor are these empty words. Detroit's activists will break into riots and strikes if the authorities use the consent agreement to make the necessary cuts in union wages and benefits. Even sabotage of city infrastructure can't be ruled out. For example, the city's unionized mechanics immobilized the bus system recently when they refused to repair broken buses in retaliation against relatively minor layoffs of drivers.
Given these realities, it might have made more sense to cut to the chase and let the city go into bankruptcy. That wouldn't have been pleasant: Detroit's bankruptcy will hurt Michigan's economy, raising statewide borrowing costs and discouraging businesses from locating here. But if this consent agreement fails, as it will, bankruptcy will be the eventual step anyway. By then, however, valuable time and money will have been lost, requiring even more draconian cuts mandated by a court.
Putting Detroit in prolonged purgatory as the consent agreement has done might be the worst option.
Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, where a version of this column originally appeared.