More Bailout Money No Answer for Detroit

Published April 22, 2014

The city of Detroit gets more revenue than every other Michigan city because of special treatment in state revenue sharing, casino taxes and utility taxes.

This extra money has not been enough to prevent its bankruptcy, nor were these the only favors extended to Detroit. The state also helped the city fight off insolvency by changing the rules for municipal borrowing.

Given this history, bailing out the city again to the tune of $350 million, as Gov. Rick Snyder (R) proposes, would be unfair to other Michigan residents and communities, and is unlikely to prevent future problems in Detroit governance.

All cities are creatures of state policy. The state determines how they operate, what they can do and what they have to do. These rules govern how cities can raise revenue and whether they can borrow money.

State Eases City’s Burden

Among these rules is a law that allows for emergency borrowing through “fiscal stabilization bonds” that cover spending in excess of current revenue, and are secured by state revenue sharing payments. Note that this debt is not intended to finance long-lived infrastructure projects but simply to pay current bills while the underlying causes of the fiscal imbalance are fixed. Cities used to be limited to $125 million in borrowing with these bonds. The Legislature increased these limits in 2010 to allow Detroit to borrow up to $250 million. The city proceeded to borrow the maximum amounts.

The state’s review panel found that the city had been covering cash flow shortfalls with $610 million in borrowing. This allowed the city to pay its bills as they come due, but it also trades current solvency for future payments that drain the ability to provide services to residents. The city did not fix its basic problems and this further contributed to the debt that it is seeking to mitigate in bankruptcy.

In addition to providing extra revenue to the city, the state also helped it borrow more.

Other Residents Pay Price

Bailing out the city is unfair to Michigan taxpayers. They have in effect already done so courtesy of greater revenue sharing and special state treatment.

Despite this, Detroit slipped into bankruptcy. In other words, the state has already bailed out Detroit and should not do so again.

There is a better way: more aggressive use of asset sales — including part of its artistic holdings — contracting and ending unnecessary services.

James M. Hohman ([email protected]) is assistant director of fiscal policy at the Mackinac Center for Public Policy, where this article first appeared.