Detroit Has Run Out of Other People's Money

If there is a cure for Motown's fiscal woes, it's bankruptcy

By Shikha Dalmia

A sigh of relief swept through Detroit recently after a judge threw out a legal challenge to the “consent agreement” the city just signed with the state to clean its books and avoid bankruptcy. The lawsuit, filed by the city’s megalomaniacal legal counsel, represented a level of overreach ridiculous even by Detroit’s lofty standards. But in the tragicomedy that is Detroit, it would have been better if it had succeeded and expedited Motown’s rendezvous with bankruptcy.

If there is any solution to Detroit’s fiscal mess, it may lie in the legal, not political, arena.

Fiscal deficits have been a fact of life in Detroit for decades as residents and industry fled its high taxes, high crime, shoddy schools and erratic trash services, thus eroding its tax base. Now, however, Detroit is flat broke, with a $265 million deficit that it has run out of gimmicks to fix.

As I have noted on these pages previously, it can’t tax anymore because Detroiters are already taxed to the hilt. It can’t borrow any more because its debt is in junk territory. Had Michigan Gov. Rick Snyder not stepped in and let it borrow $137 million on the state’s credit card, Detroit would have defaulted on its debt obligations as well as payment to employees and vendors months ago.

But in exchange, Snyder wanted the authority to clean up the city’s books so that it wouldn’t be back rattling its tin cup again next year. His original proposal would have left Detroit Mayor Dave Bing—an NBA great whose athletic skills far outshine his political acumen—and the city council, a corrupt and dysfunctional entity, in charge of the city’s daily operations. But it would have handed the city’s finances to a board with powers to sell city assets, outsource services, lay off employees and void union contracts.

The last two items are the biggest drivers of Detroit’s fiscal mess. As businesses have fled, government has become the city’s biggest employer. Detroit’s legacy obligations far outstrip its revenues. Its accumulated unfunded liabilities currently stand at $12 billion—about half of which are legacy costs. This puts Detroit’s debt-to-asset ratio at 33:1; GM’s was 22:1 when it went into bankruptcy.

Bing and the city council have shown zero political will to tackle these costs thanks to fierce opposition by the city’s powerful municipal unions, which is precisely why Snyder wanted to bring in an outside board. This was much too threatening for city leaders, who joined hands with unions and professional race-baiters like Jesse Jackson and accused Snyder of orchestrating a white conspiracy to send Detroit’s predominantly black population “back to the plantation.”

Snyder quickly backed off and consented to a far more watered-down agreement that would leave Bing and the council in charge of implementing the reforms—and reduce the financial board’s role to mere oversight and advice. The dirty secret is that Snyder shied away from assuming financial control of Detroit—something he has done for four other Michigan cities with good results—because he understands just how toxic Detroit is and doesn’t want the political headache.

And given that Detroit’s legal counsel, Krystal Crittendon, made even this toothless agreement grist for a lawsuit shows that he is right. Rumor has it that she wants to run for higher office and therefore wanted to prove her bona fides to city unions. She sued on the loopy theory that the agreement violated a city charter provision prohibiting Detroit from entering into a contract with anyone owing it money, which, she claimed, the state did because it had not paid its water bills, among other things!

A judge summarily dismissed her case, but the fact that she decided to make it in the first place demonstrates the level of cupidity—and stupidity—that afflicts Detroit’s political classes. Indeed, it is inconceivable that Bing and the council will force Detroit’s recalcitrant unions to swallow the bitter medicine necessary to return the city to solvency, especially since Bing, contrary to his original promise, is now thinking of seeking a second term.

In any case, Snyder's $137 million credit line will allow the city to finish its fiscal year till July, when new tax revenues will start coming in. But within a few months, Detroit will run out this money. And when it does, absent radical reforms in the interim, Snyder will have to decide whether to continue bankrolling Detroit’s profligacy, engineer a state takeover or let it go into bankruptcy, precisely the options he faces now. Since the first two are not viable, it would have been a blessing for him if Crittendon’s lawsuit had killed the consent agreement and expedited the third. The more time Detroit loses in renegotiating union contracts, the more it runs up its legacy tab, the more draconian the cuts that would have to be imposed and the harder it will be to avoid Greece-style riots.

Many cities across the country are facing unsustainable legacy costs. But Detroit is uniquely impervious to political solutions because the ratio of its public moochers to private producers is far higher than others. There are too few Detroiters with a vested interest in fixing the city and too many with a vested interest in sucking it dry. Only bankruptcy will convince them that there is nothing more to be milked.

Whether even bankruptcy will wipe the slate clean is debatable given that the Michigan constitution deems public pensions a contractual obligation that can’t be “diminished” or “impaired.” Still, given how badly Detroit’s politicians have failed the city, courts are the city’s only hope.