Rick Snyder's Artless Bailout Plan For Detroit

It'll set a bad precedent while preventing a deep restructuring

Had Jennifer Granholm, Michigan’s erstwhile Democratic governor, tried to bailout Detroit’s pension system, Republicans would have accused her of ripping off state taxpayers to appease union backers. So it’ll be interesting Rick SnyderDonkey Hoteyto see if they go for Republican Governor Rick Snyder’s proposal last week to do exactly that.

Should Republicans, who control the state legislature, play along, the Michigan GOP will forfeit its claim to being the party of fiscal responsibility.

The basic outline of Snyder’s proposal is as follows: The state will divert $350 million of its tobacco settlement money over 20 years to match a grant of roughly equal amount by private philanthropic foundations. The $700 million or so would then be used to pay Detroit’s retirees – whose pension system is unfunded to the tune of $3.5 billion -- and keep the Detroit Institute of Arts off the chopping block during bankruptcy.

In return, public unions would presumably have to forego litigation to extract more money, allowing the city to exit bankruptcy ahead of November when Snyder faces re-election.  And Democrats would have to agree to some longstanding item on the Republican wish list. (Some ideas rumored to be under discussion include slashing the income tax or converting the school pension system from a defined benefit to a defined contribution plan.)

In short, for about a third of the $50 million that the state lavishes on fat-cat Hollywood producers in film subsidies every year, it’ll: buy labor peace, help poor Detroit retirees, save the DIA, expedite bankruptcy, and force Democrats to offer policy concessions that they otherwise never would.

So what’s not to like?

For starters, the reason that Detroit’s pension system is in such deep doo-doo is that it’s been managed by folks with the ethics of Bernie Madoff – but without the math skills. Among their many exotic practices include handing out investment returns generated in good years as a 13th Christmas bonus check to retirees. If they had saved the money, as per Accounting 101, the pension shortfall would have been cut in half.

Asking state taxpayers to compensate Detroit retirees for money they’ve already enjoyed would be outrageous under any circumstances. But it’s especially so given that the state already hands Detroit almost twice as much revenue on a per capita basis as any other city. Motown is also the only city that is allowed to assess a special wagering tax on its casinos. What’s more, between 2005 and 2011, the state helped the city borrow $610 million.

Rewarding the city’s profligacy even more won’t just create a moral hazard -- encouraging more bad behavior in the expectation of future bailouts – it’ll also prevent the deepest possible restructuring right now.

If Detroit’s various stakeholders don’t want to auction the DIA’s van Goghs and Rembrandts to cover retirees, fine. But what about selling Belle Isle, a beautiful city-owned island that has turned from being a major local tourist attraction into a veritable outhouse due to neglect? Putting it on the chopping block could fetch hundreds of millions. (One local developer has offered $1 billion for it, provided he can turn it into a Hong Kong-style commonwealth.) The city could also generate significant money by selling the water system. (About $2 billion as per a 2000 estimate although that figure would be lower now.)

But the most troubling aspect of Snyder’s proposed bailout is the precedent it would set. According to James Hohman of the Mackinac Center for Public Policy, no distressed municipality in Michigan has at least since 1988 received a bailout, even ones under state receivership. The unfunded liabilities of just the third of all the municipalities that belong to the MERS (Michigan Municipal Employees Retirement System) consortium is currently close to $3 billion. If Detroit gets bailed out, by what logic would all these municipalities be turned down?

The $350 million that Snyder wants Michigan residents to cough up for a Detroit bailout might, then, be just an initial down payment.

Snyder’s scheme to extricate Detroit from a pickle of its making will put state taxpayers on the hook for many more pickles of Snyder’s making. If Republicans go along, Michigan residents will have one less reason to vote for them.

This column originally appeared in the Washington Examiner

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  • Number 7||

    I think Justin Verlander should pay his fair share.

  • JWatts||

    "The basic outline of Snyder’s proposal is as follows: The state will divert $350 million of its tobacco settlement money over 20 years to match a grant of roughly equal amount by private philanthropic foundations"

    "In return, public unions would presumably have to forego litigation to extract more money, allowing the city to exit bankruptcy ahead of November when Snyder faces re-election. And Democrats would have to agree to some longstanding item on the Republican wish list. (Some ideas rumored to be under discussion include slashing the income tax or converting the school pension system from a defined benefit to a defined contribution plan.)"

    That doesn't strike me as too bad a deal. A one time payment of $350 Million with the agreement that it's the only money the Unions get to add to their retirement fund is onerous, but still might be the best deal you can get. There has to be a little pragmatism in politics.

    Furthermore, if they could manage to convert the school pension system to a defined benefit plan, that's a huge win!

  • Stephdumas||

    Maybe Oakiand County Executive, L. Brooks Patterson was on something when he commented some politically incorrect comments about the city of Detroit.
    http://www.city-data.com/forum.....-dead.html
    http://www.detroityes.com/mb/s.....isappoints

  • KRoyall||

    Bailing out Detroit does suck although the part about getting matching private money is pretty good. I would like it if a true Libertarian (like those here at Reason) could be elected to higher office somewhere so they could show us all how it is done.

    It's real easy to sit on the sidelines and proclaim both parties to be a failure, safe in your ideological purity. It's a bit different when you are in the arena. Apparently the Libertarian message is not that compelling to average people because they never seem able to get elected. I guess Ron Paul was elected but his many years in the house produced exactly squat.

  • Homple||

    "It's real easy to sit on the sidelines and proclaim both parties to be a failure, safe in your ideological purity."

    Perhaps both parties haven't been failures, but I've seen precious few successes from either one of them. Could you name a few successes?

  • JD3||

  • concerned cynic||

    Rick Snyder is proposing a Band-Aid for a situation that requires open heart surgery. The real problem is that Detroit retirees will get no health benefits, because they are not on Medicare.

    All Michigan state and local employees should be enrolled in Social Security and Medicare ASAP. If they want more retirement income, let them contribute to a 403b plan. Employer contributions to 403b plans are a matter for the unions to negotiate.

    Michigan should cap Detroit pensions at $3500-4000/month.

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