Don't Bail Out Detroit with State Tax Dollars

It would be unfair to taxpayers statewide

The recent announcement that philanthropic foundations may donate $330 million to help the Detroit Institute of Arts, which would also help city pensioners avoid the consequences of Detroit government mismanagement, sounds like great news.

Unfortunately, there may be a hook: A requirement that the state treasury contribute, which would convert voluntary private generosity into a coerced taxpayer bailout.

A state bailout of Detroit is a terrible idea. It creates moral hazard and adds to the overly generous financial support the city has for years received from state taxpayers.

And it's unfair. People in Ishpeming, Bad Axe and Traverse City who already are paying to support their own local governments shouldn't also have to support Detroit's bad policy choices, mismanagement and corruption. They didn't elect the politicians who underfunded pensions, imposed crushing tax burdens and strangled entrepreneurs in Byzantine regulations, while providing awful public services to boot.

Residents of Grand Rapids, Kalamazoo and Escanaba didn't twice elect a mayor (Kwame Kilpatrick) who now is doing a decades-long prison stretch after being convicted on 24 felony counts, including racketeering. They didn't vote for a city council president (Monica Conyers) who went to prison after pleading guilty to "conspiring to commit bribery." They didn't choose to enable a system in which last August seven city inspectors were indicted for accepting bribes. Michigan's Attorney General reportedly characterized the inspectors as "perpetuating a culture of corruption" that jeopardized the "health and safety of Detroit residents."

It is no wonder 25 percent of the population fled the city between 2000 and 2009.

As mentioned, Detroit has already long enjoyed special treatment from state taxpayers. The Citizens Research Council of Michigan noted in an April 2013 report that in per-capita terms Detroit receives far more revenue sharing money from the state than other municipalities.

Things are tough all over, but in 2010 Detroit received $335 per person from the state. The next highest city, Pontiac, got $176 per person. The 2013 state budget included $235.8 million in optional revenue sharing payments to cities, villages and townships, of which 58 percent was earmarked for Detroit.

From fiscal 2004 through fiscal 2013 Detroit has received $2.5 billion in constitutionally mandated and statutory revenue sharing dollars. This is in addition to other state assistance offered to the city, like taking over management of Belle Isle.

Despite all this state support — or enabling — the city still ran itself into bankruptcy.

The city and state also received fair warning about Detroit's fiscal problems. Fourteen years ago the Mackinac Center for Public Policy published a Detroit-specific issue of Michigan Privatization Report, which among other things admonished the city for not addressing the "monstrous" cost of unfunded pension obligations.

We also informed the state Treasury Department in 2001 that the city had violated a provision of a local government fiscal responsibility law and asked whether the state would send in a financial review team, a precursor to receivership. The state declined to do so while recognizing Detroit had violated the law.

In 2005, we again warned the city that if something wasn't done the state "may be forced to appoint an emergency financial manager" to run the city.

Especially in the light of years of warnings and gross fiscal malpractice, a taxpayer bailout now will set a dangerous precedent. Economists use the term, moral hazard, to describe what happens when people take risks they would not otherwise take because the price of failure is borne in part by others. Bailing out the city directly increases the likelihood of more bad behavior and of bailouts in Detroit and elsewhere. How many more communities might in the future look to the Legislature for fiscal favors instead of simply living within their means?

The bottom line is that Detroit has fouled its own nest and should be responsible for cleaning it up. It can be done by more aggressively monetizing assets, contracting out and dramatically reducing the city’s bureaucracy.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.