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.

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  1. Something to keep in mind about crony capitalism is the fact that Smith and other Enlightenment thinkers who talked about economics were about as opposed as could be to government manipulation of business.

    What we need is a constitutional amendment establishing the separation of business and state.

    1. Where is FoE?

      I guess you can’t be first all of the time.

    2. What we need is a constitutional amendment establishing the separation of business and state.



      I’ll ride my unicorn off into the sunset on that day.

    3. Rent-seeking is a bug, not a feature.

  2. This case illustrates why those who shout “freedom of association” or “those are the rules” or “its part of the CBA” are so way off the mark in criticizing the proposition that ballplayers who use PEDs or college athletes who secure remuneration for their appearances or autographs should be applauded by libertarians as the individual right to do what they do trumps the crony capitalist’s right to insist upon you and I financing the enforcement of their regimes.

    1. Try again when the crank wears off.

      1. Okay socialist.

  3. In reality, it is a body slam hip check for Motown and a hat trick for Red Wings owner, billionaire Mike Ilitch.

    Fixed that for you, Ms. Dahlmia. Obviously not much of a hockey fan, eh? 🙂

  4. OT, sorry. I saw this at WaPo and just HAD to post it:

    11:31 AM CDT

    Cruz, like all the other tea party darlings, is a wholly owned subsidiary of Charles and David Koch Industries.

    Stupid working class idiots who vote for these guys are voting against their own economic self interest. They’re voting to see their wages, Social Security and Medicare benefits reduced so that the Kochs can get another massive tax cut. They’re voting for less regulation of the Wall Street banksters and for a return to the bad old days of Health Insurance company ripoffs.”

    1. Awesome.

      Yes, this is exactly what happens. Medicare and SS benefits get reduced, and the money is instead deposited DIRECTLY to the bank(ster) accounts of teh EVUL Koch Brothers?.

      And it would have WORKED, too, if it hadn’t been for those meddling Proglodytes…channeling money DIRECTLY to George Soros’ bank(ster) account, instead…

      1. Ok, I confess I have been stirring the chamber pot a bit that is the WaPo comment board. It’s truly amazing how they will deride “tea party bush conspiracy theorists” and yet, they believe in a conspiracy so vast, and so sinister, that it couldn’t possibly be true.

        1. What amazes me still (but probably shouldn’t) is the rote, talking-points bullshit. Including from some of my longtime friends (whom I may need to cut loose if teh stoopid continues).

          No reasoning, no change of position in light of new information – talking points, talking points TEATHUGLICANBUSHLTLER KOCHTOPUSSARAHPALIN!!111one1!

          1. I know. The progs, libs or whatever they call themselves are the least introspective people I’ve ever encountered. They simply cannot or refuse to take a step back, and examine their rhetoric. Hey, I admit I like Bush at first — I was in my 20s and he seemed better than Clinton. But when I saw what he did, and who he surrounded himself with, I turned on him. The Left doesn’t ever do that. I don’t know why, but they don’t ever lose faith in their guy or their cause, even when both are demonstrably proven wrong.

            1. You guys keep talking about fake scandals when we really need to be focused on corporashuns!

  5. Newspaper headline for Ilitch’s robbery….”He Shoots He SCOOOOOOOOOOOOORES!”

  6. Given, you know in a heart beat if it ever came down to honoring private debt holderss versus letting public employee unions have their way who would get the ass fucking. So, qho in the world of capitalism of the voluntary kind would be willing to take the risks when capitalism of the crony kind is all Detroit has left going for it.

    Wenzel just wrote this up moments ago:

    Detroit-Linked Michigan Interest Rates Go Crazy


    Michigan’s Finance Authority is offering an interest rate 14 times higher than that on top-rated bonds to sell $92 million of one-year notes for Detroit’s public schools, reports Bloomberg.

    Today’s offering is the first tied to the city since it sought bankruptcy protection July 18. The bonds are backed by state aid payments.

    The securities maturing in August 2014 are being offered with a preliminary yield of 4.5 percent, according to three people familiar with the sale who requested anonymity because the pricing wasn’t final. says Bloomberg. That compares with a 0.32 percent interest rate on benchmark AAA munis due in one year.

    Note well this event. When financial problems spread to other cities and states, and when interest rates overall are much higher, some cities will be forced to pay rates in the double digits. I they can raise money at all. You heard it here first.

    1. Hit submit when I was aiming for the edit button. Sorries. BTW, noted only six grammatical and spelling errors. Quite a bit under my par!

  7. The arena is being sold as a win-win that’ll position the city for a post bankruptcy comeback.

    That Broken Windows Fallacy thingy – how does it go, again?

    1. It’s different this time, duh! We have the right Top. Men. in place now!

  8. Detroit, again. It’s a great example of cronyist-interventionist government in action, but when will it just die? We’ve been reading about it’s well-documented dying breath for decades.

  9. The whole thing sounds kinda crazy to me dude.

  10. like Albert responded I am amazed that a single mom able to profit $8568 in 1 month on the internet. have you read this web page… & my classmate’s sister-in-law makes $73 every hour on the laptop. She has been out of work for 7 months but last month her check was $17103 just working on the laptop for a few hours.

  11. You don’t become a billionaire by spending your own money.

  12. You do want more Stanley Cups, don’t you? Or are you anti-Detroitian or something? I mean, it’s not like the Lions are gonna bring you a Super Bowl anytime soon, right? And the Pistons are sputtering. That leaves the Tigers who can maybe snag one. But all hopes rest on the Red Wings!

  13. The Renaissance Center in Detroit opened in phases from 1977 to 1981. It’s purpose, loudly trumpeted in the media 30+ years ago, was to revitalize the economy of Detroit. It didn’t. A new Red Wings stadium will likewise fail to meet its grandiose purpose.

    1. But just think about all the hot dog, T-shirt, and ticket scalping revenues.

    2. But this time will be different!

  14. like Thelma responded I am startled that a mother can make $6821 in a few weeks on the computer. did you look at this web sitego to this site home tab for more detail—

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  16. “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.”- Trying to understand the New Reason Math.

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