Michigan Taxpayers Have Already Bailed Out Detroit

Again and again and again

Michigan Gov. Rick Snyder, House Speaker Jase Bolger and Senate Majority Leader Randy Richardville submitted a $350 million plan to benefit the City of Detroit. But the state has repeatedly given Motown extra cash and allowed special rules to help get the city out of repeated jams.

When asked last month if extra state help was on the table, Detroit Emergency Manager Kevyn Orr responded: "No. It was made abundantly clear that a state bailout of Detroit's finances was not a possibility."

The proposed deal, which would have to be agreed to by the full Legislature, signals an unfortunate about-face.

Those making the case for a state bailout are either unaware of the long-standing history between Detroit and the state of Michigan, or have chosen to deliberately ignore it. Michigan has rewritten its laws multiple times to give the city more fiscal assistance. In other words, the bailout option has been tried and found wanting.

As Detroit faced a declining revenue base in 1996, the state rewrote its gambling law to allow for casinos in the city, with wagering taxes going directly into local coffers. This tax now accounts for 15 percent of city revenue. Detroit is the only city in Michigan allowed to levy this tax.

Detroit also is the only city that assesses an excise tax on utility use, authorized by state law in 1990. This is tacked onto the regular utility bills paid for by residents and businesses.

The state has written special laws for Detroit's income taxes. Every other city can enact a maximum 1 percent income tax on residents and 0.5 percent on nonresident earnings. Detroit taxes at more than twice those rates — 2.4 percent for residents and 1.2 percent for nonresidents.

Michigan also has huge advantages in state revenue sharing. The state shares the revenue from some of its taxes with local governments. Part of this is mandated by the state constitution, to be distributed by population, and part is determined by state statute that legislators can alter as they see fit. Detroit gets the majority of state revenue sharing — 58 percent of the pot, while containing less than 10 percent of the state's total population.

Yes, Detroit’s revenue decline is a problem. But as a report from the Citizens Research Council of Michigan shows, no matter how you slice it, Detroit gets more revenue than every other municipality in the state, and the city is still a fiscal basket case. In fact, Motown receives twice as much revenue per person as the second-highest municipality in the state.

Additional state assistance has also been provided in the area of borrowing. Michigan rewrote its local government emergency bonding laws in 2010 to allow Detroit to float more stabilization bonds, secured by state revenue sharing payments. Limits were increased from $125 million to $250 million. The city borrowed the maximum. In addition to the $250 million in bonds, the state helped the city borrow an additional $610 million in the five years prior to direct state intervention.

State legislators have also repeatedly affirmed the special privileges received exclusively by Detroit as the city has lost population by adjusting the population rules on a number of laws. The state constitution prohibits "local acts," where it gives one government a preference not received by others, without super majority approval in the Michigan Legislature. Legislators avoid this by not naming specific local governments and instead apply rules that only one government meets.

Since Detroit is the largest city, it received these benefits by restricting it to cities with a population greater than 1 million. With falling population, legislators repeatedly reworked the limits. One bill, passed unanimously by the state House, allows the city to tax and borrow for special assessments without a vote of the people. Other laws continuing to allow Detroit to have its special higher income tax and unique extra utility tax were also passed in 2011.

In sum, Michigan has done nearly everything in its power to return Detroit to solvency, and repeatedly changed the law to help Motown out of its numerous jams. These bailouts have not worked because the city continues to be mismanaged. Worse, the other local governments in fiscal emergencies might now feel entitled to state cash — and there are many local governments with underfunded pension plans.

It is heartbreaking that city officials mismanaged resources so badly for so long. But the state needs to correct their error of continually bailing out the city and ignoring the fiscal malpractice being done; not encourage more of it from its municipalities. The state has a long history of bailing out Detroit — policymakers need to learn the lessons about why they didn't work.

(Editor’s Note: Portions of this article originally ran on the Public Sector Inc. website on Nov. 22.)

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.