Policy Documents

The Leaflet - The Motor City Bankruptcy

July 25, 2013

The Motor City Bankruptcy

 

On Thursday, July 18, 2013, the city of Detroit filed bankruptcy. With some $18 billion in debt, Detroit is now the largest municipal bankruptcy in the United States.

Fifty years ago, Detroit was the center of the automobile industry and had a population of almost 2 million. Today, Detroit has about 700,000 residents, with an unemployment rate close to 20 percent and average per-capita income about $15,000 annually. Ross Kaminsky, a senior fellow at The Heartland Institute, responded saying, “what is most surprising is not that Detroit has filed for bankruptcy but that it took so long, and that there were enough suckers available over the last few years who bought Detroit bonds despite a future that should have been absolutely obvious.”

Detroit will not be the last city to file for bankruptcy. In less than three years, there have been 33 municipal bankruptcy filings across the United States. A study concerning the municipal government debt crisis recently released by The Heartland Institute and Truth in Accounting pointed out, “the current fiscal state of many of [Cook County, Illinois’] municipalities is unsustainable, and citizens will continue to see more tax increases or municipal bankruptcies unless drastic pension and spending reforms are made.”

One of the main issues Detroit faced was an unsustainable public pension system. Almost immediately after the bankruptcy filing two of Detroit’s largest pension funds sued to block the bankruptcy and actions cutting the city’s $3.5 billion in unfunded pension liabilities. Matthew Glans, senior policy analyst at The Heartland Institute, has developed solutions for future municipalities. “In the short term, per-year pension payouts should be capped at a sensible level, the retirement age should be raised, double-dipping should be eliminated, pension rate of return assumptions should be changed, and workers should be required to make higher contributions. In the long term, sustainability will require governments to follow the private sector’s lead and switch workers from defined-benefit pension systems to defined-contribution systems,” said Glans.

This week’s edition of The Leaflet features Heartland work addressing the Detroit bankruptcy, Social Security, economist Art Laffer’s position on the Internet sales tax, Obamacare delays, President Barack Obama’s climate change initiative, and Common Core testimony in Arkansas.

Respectfully,

John Nothdurft
Director of Government Relations
The Heartland Institute
 

 

Detroit Files for Bankruptcy; Debt Could Total $20 Billion
Finance, Insurance, and Real Estate

Research Fellow Steve Stanek examines in this Heartlander digital magazine article the ongoing saga of Detroit’s bankruptcy. Stanek speaks with several experts about the city’s financial problems and asks how the city got to this point and where it can go from here:

“Detroit has been in decline for 50 years. The city has approximately 714,000 residents, less than half the number who lived there in the 1950s. Detroit’s population has dropped more than 25 percent since 2000.

“For much of the 2000s Detroit city government was virtually a criminal enterprise. On March 11, former Detroit Mayor Kwame Kilpatrick and others, including Kilpatrick’s father Bernard Kilpatrick, were convicted on dozens of corruption charges. The mayor himself was found guilty of 24 charges including racketeering, extortion, bribery, mail fraud, wire fraud, and filing false tax returns. Among other things, prosecutors said Kilpatrick spent $840,000 more than he earned during his 2002 to 2008 tenure in office, much of it by diverting government grants and other taxpayer dollars to personal use.

“Current Mayor Dave Bing has been cleaning up City Hall and working to improve the city, Hohman said, but faces a daunting task because of the many years of mismanagement, corruption and economic decline that preceded him.

“In a statement, Bing said, ‘Today’s bankruptcy filing is an unfortunate event in our City’s history. While it has never been my desire that the City file for bankruptcy, I understand why Kevyn found it necessary to do so. I said when I entered office four years ago that our City was in a financial crisis. I also said we cannot simply cut our way out of this situation.’”
 

 

 

Heartland Daily Podcast: Peter Ferrara on How Social Security Is Going Broke, and How to Fix it
Budget & Tax

In this Heartland Daily Podcast, Senior Fellow Peter Ferrara joined Communications Director Jim Lakely to nail down why Social Security is going broke and how to fix it.

Ferrara points out that even if Social Security paid all its promised benefits, it returns a miserable rate of 1.5 percent or less—and for many workers that number drops into the negatives. Ferrara compares the broken system to a bank you’d never want to use:
“It’s like putting your money in a bank. But instead of the bank paying you interest … you pay the bank interest.”

To make a bad situation worse, Social Security won’t be paying workers anything in 20 years. Ferrara explains it already runs a deficit and is heading towards financial ruin; workers who have paid into Social Security their whole lives won’t even get pennies to show for it.

Social Security is a giant Ponzi scheme, Ferrara explains. The first beneficiaries made out like bandits, and the rest of us are left holding an empty bag. He goes on to outline a plan that would not only fix Social Security but would provide the economy a much-needed boost. Listen in at the link above for an interesting and enlightening conversation on Social Security’s problems ... and the solution.
 

Economist Laffer Backs Internet Tax; Opponents Fear Precedent
Telecom 

 

In this piece from the Heartlander digital magazine Logan Pike discusses a new study by economist Arthur Laffer claiming a measure requiring online and catalog retailers to collect and remit sales taxes regardless of where their customers are located is a pro-growth, pro-jobs economic policy. Pike speaks with several experts skeptical of Laffer’s conclusions.

“There is nothing ‘fair’ about the Marketplace Fairness Act (MFA),” said Seton Motley, president and CEO of Less Government and editor in chief of StopNetRegulation.org.

“This bill does not achieve tax collection uniformity,” he said. “It would only [do so] if it required every brick-and-mortar store to ask every single one of its customers in what city, county, and state each lives, and forced the store to collect those taxes and remit.”
 

What Delaying Obamacare Means
Health Care

Heartland Institute Research Fellow Benjamin Domenech, managing editor of Health Care News, calls House votes to defund and delay implementation of the Affordable Care Act “a strategy aimed at achieving repeal, teeing up votes in the fall that will press the issue even further.” The administration announced on July 2 that it would delay for a year (until January 1, 2015) implementation of the Affordable Care Act’s statutory requirement requiring employers with 50 or more full-time-equivalent employees provide to health insurance coverage.

In his article, Domenech states “this is no small thing, as the issue of business owners battling uncertainty raised by this flagrant disregard of the law was likely to get a court’s attention.” Domenech says it is possible the administration might delay the penalties until after the midterms and then “flip the switch, demanding retroactive reporting requirements and penalties (all the administration has really said is that they won’t enforce the reporting requirements … yet).”
 

Podcast: Jay Lehr, Ph.D.: President Obama's Climate Change Initiative
Environment

Heartland Institute Science Director Jay Lehr was a guest on WIBW Radio in Topeka, Kansas to react to President Obama’s speech on climate change. They discussed green energy, windfarms, coal-powered power plants, the Keystone XL pipeline, and much more.

 

Testimony: Common Core in Arkansas
Education

Last Tuesday, Research Fellow Joy Pullmann testified to the Arkansas Legislature via telephone to discuss Common Core standards. Click the above link not only to view Joy’s testimony, but to read her summary on the Q&A portion as well.

Pullmann says, “Some of my favorite questions had to do with people insisting that the world’s top-performing countries have national standards, so we need them, too. I mentioned that the world’s worst-performing countries also have national standards, and that U.S.-based research has shown high standards have no effect on student achievement.”