Detroit's Crony Capitalism Problem

Bankrupt Motown gives $450 million gift to the Red Wings owner

Anyone who wants to understand how Detroit got into its current mess should look at the new Red Wings arena that Michigan's powers-that-be recently decided to foist on it. The arena is being sold as a win-win that'll position the city for a post bankruptcy comeback. In reality, it is a body slam for Motown and a hat trick for Red Wings owner, billionaire Mike Ilitch.

The arena is the linchpin of a $650 million entertainment complex that Michigan's business and political elites — who include everyone from Governor Rick Snyder down to Detroit Mayor Dave Bing — have cooked up to revive Detroit after bankruptcy. The plan involves pulling businesses into the vacant areas between Detroit's downtown and midtown section, creating an unbroken development corridor.

If all goes well, the fairytale goes, the Red Wings will get a new facility befitting a team of their stature; the state will get to hang on to its beloved team; Ilitch will get well-deserved returns for his generous investments — and Detroit will get more private investment.

What makes this a particularly good deal for the city, according to Steven Hilfinger, Chief Operating Officer of the Michigan Economic Development Corporation, a government agency that is supposed to boost business activity, is that Ilitch's Olympia Development will foot the major portion of the bill. The rest will be squeezed out of existing pots of government money financed mostly by local business taxes.

The assurance that the arena won't impose any additional burden on average taxpayers has won the support even of local media skeptics who—rightly—question the arena's job and tax revenue projections. There will be no "jeopardy to taxpayers," notes Frank Beckmann, a conservative radio show host. "None of the cash will come out of operating dollars for broke Detroit and Wayne County," said the Detroit Free Press' liberal editorial page editor Stephen Henderson.

But that's at best a half-truth.

The arena itself, the first — and as of now the only certain — phase of the entertainment complex, is expected to cost $440 million in upfront capital expenditures. This entire amount will be financed by 30-year, tax exempt, revenue bonds floated by the Michigan Strategic Fund that is statutorily authorized to extend the state's credit line to "worthy" private projects.

Who will service these bonds? The official story is that the Detroit Development Authority, a government agency that supports downtown business, and Ilitch himself will "share" the responsibility. Both sides, however, will stick it to taxpayers and residents.

The DDA will contribute somewhere from $15 to $17 million annually toward the bond payments. Of this, $13 to $15 million will come from property taxes originally imposed on area businesses to finance a school construction project. The school debt has been retired but the DDA has continued to collect the one-mill tax. The money is supposed to go to the Michigan School Aid Fund, but the Republican-controlled state legislature and Republican Gov. Snyder passed a law in December authorizing the DDA to divert this money to the arena.

In other words, money originally meant for poor inner city children will go into the pocket of a billionaire — and that too when the city is in bankruptcy and creditors are receiving massive haircuts. If the tax won't be eliminated (Detroit is the 9th highest taxed city in the country) or given to schools, surely fighting crime (Detroit is the murder capital of the nation) or installing street lighting (45% of the city has no lights) or picking up trash would be better uses for it?

The DDA has always been something of a slush fund for the business cronies of local politicos. But diverting hundreds of millions of dollars into a project that'll ultimately benefit mainly one business takes crony capitalism to a whole new level.

Mr. Hilfinger notes that his agency canvassed local businesses before proceeding and found only excitement, not opposition, because a revived downtown would boost everyone's bottom line. It is not clear if included in the sample were folks like the late  Detroit Pistons owner Bill Davidson who constructed a basketball arena in Auburn Hills, a Detroit suburb, totally out of pocket.

Ilitch's side of the bargain is even more problematic.

The official line is that his company will contribute $11.5 million annually — or about $35 million over 30 years — of the cost of servicing the bond. This is a pittance compared to taxpayers' contribution. Even this consists simply of lease payments—something that he would have to pay no matter where he parked the Red Wings — and involves nothing extra to defray the construction cost of the new facility.

Even worse, Ilitch, who is notorious for driving a hard bargain, insisted on leasing — instead of owning — the facility because, Crain's Detroit Business reports, that that would save him $1 million annually in property taxes. Far from rebuilding the city's tax base, the arena will deplete it even further. And since this lease will be renewable every few years, should the Red Wings' division ranking drop and ticket sales plummet, Ilitch could walk away from the arena without liability. Taxpayers, however, will have no such luck.

Hilfinger points out that Ilitch has also pledged $200 million toward the "ancillary development" that's part of the entertainment complex — and some unspecified amount of (currently worthless) downtown property he's been sitting on. When everything is added, Ilitch's contribution will add up to 56 percent and taxpayer contribution 44 percent, Hilfinger says.

But there are at least two big problems with this claim.

One: This "ancillary development" won't begin for several years. Should the downtown show few signs of revival after the arena goes up, it is hard to see how authorities could insist that Ilitch and other investors continue to sink money into it, even though Hilfinger says they'll be contractually required to do so.

The bigger problem is that whatever Ilitch "contributes" — parking structures, retail, office space — he'll own and exclusively profit from. It is a verbal gimmick to dub this a "contribution" — as if it were an act of charity. The deal, in other words, forces taxpayers to assume all the risk even as Ilitch gains monopoly rights to virtually all of the revenues.

Detroit is in bankruptcy because special interests — whether Big Labor or Big Business — have diverted its resources to service their — not general resident — needs. The new Red Wings arena suggests that bankruptcy has changed nothing.

A version of the column originally appeared in the Washington Examiner.