Detroit filed for bankruptcy in July 2013. On December 3, a U.S. bankruptcy court ruled against parties who had challenged its eligibility for chapter 9 protection.
Since Detroit is the most populous city in the state of
Michigan and is the center of a metropolitan region of 5.2 million, this event has
attracted a lot of attention, inspiring different ‘takes,’ involving in each
case a distinct ideological or psychological prism. For example, Detroit has
long been the center of the American automobile industry, so much so that the
word “Detroit” is used as a metonym for that industry, and that has inspired
some commentators who have seen the failure of municipal finances as of a piece
with the failure of that industry in the face of innovative overseas
competitors and changing public tastes.
This was the take for example, of Mohamed El-Erian, the CEO
of PIMCO. This take is also broadly consistent with a mantra of Detroit’s
emergency manager, Kevyn Orr, who keeps saying that the city is bankrupt
because it is $18 billion in long-term debt. The bankruptcy, then, is the result of a
balance-sheet problem: liabilities are overwhelming assets.
Another take is that the city has been overspending in its
operational budgets, such as by overpaying its unionized employees, both during
their working life and during their retirement. Political scientist Walter Russell Mead, for
example, has said that stock market declines beginning in 2007 “wiped out huge
chunks of the wealth that [public employee] pension systems needed to have a
hope of paying the pensions promised to government retirees under terms more
generous than virtually any private employers now provide.” On this view, the problem is not so much with
the balance sheet as with the income statement: expenses have ballooned to
overcome revenues.
Looking at Revenues
More recently, the Demos policy think tank has put forward a
third view. In a paper by Wallace Turbeville, Demos senior fellow, makes the
following case:
·
This is not a balance sheet problem at all. The
$18 billion figure in particular is “irrelevant … highly inflated and, in large
part, simply inaccurate.”
·
It isn’t a matter of ballooning operational
expenses, either. There have been
drastic cuts to expenses in recent years. Indeed, between fiscal years 2008 and
2013, the city cut operating expenses by $419.1 million, or 38%.
·
Since those cuts came largely at the expense of
workers, the problem surely is not that the workers at calling the fiscal
shots. Finally,
·
The real problem, on Demos’ reading, is on the
revenues side of the income statement.
Breaking down key sources of revenue, Turbeville notes that
revenue from the municipal income tax fell sharply through the period 2008 –
2010: it was $276.5 million in the first of those years and only $216.5 million
in the last, a loss of more than 20%.
That source of income has recovered somewhat from the 2010
nadir; and in the 2013 fiscal year, which ended June on June 30, 2013, it was
at $238.7 million
Michigan has a revenue sharing program with its
municipalities, and as a consequence of that, Detroit received $249.6 million
in 2008. That number grew over the next two years, reaching $263.6 million in
2010, somewhat offsetting the decline of the municipal income tax revenue in
the same period.
But since 2010, the state revenue sharing has dropped off
sharply. It was only $182.8 million in FY 2013. This was a consequence of two
developments. First, the numbers from the 2010 census showed a decline in the
number of people living in Detroit, and revenue sharing is based on that
number. Second, and to worsen matters,
the state legislature amended the revenue-sharing statue to Detroit’s
disadvantage, effective fiscal year 2012.
Restore State Revenue
Sharing
The report accuses the city’s emergency manager of
conflating two very different issues. Ye, it says, there are structural
problems involving the balance sheet, problems that have plagued the city for
years and that “it must address … so it can once again be a vital and growing
community.” But that isn’t why it is in bankruptcy. It is in bankruptcy because
of a cash flow crisis, which must and can be solved in a straightforward
way.
The report then recommends that the state of Michigan in its
own interests as well as in the interests of Detroit, “reverse all or a part of
the cut in state revenue spending” and work with the city to help it grow its
tax base.
Such proposals as changes to the pension funds or
monetization of the Water and Sewerage Department should simply be dropped.
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