Motown’s fiscal reckoning

3/9/2013

Maybe Michigan Gov. Rick Snyder should sit down with Angela Merkel for a schooner of beer to commiserate over the political problem children they inherited. Like the German chancellor, Mr. Snyder has been doing his utmost to assist an incorrigible, deadbeat government beholden to public unions. And as thanks, he is vilified as an imperialist.

Last week, the GOP governor declared a financial emergency in Detroit, paving the way for a state takeover that he tried to prevent last year. Rather than appoint an emergency manager last year, as was the protocol under state law when a city or school district can’t pay its bills, Mr. Snyder negotiated a consent agreement with city leaders, giving Mayor Dave Bing power to redo labor agreements.

The state also helped refinance $33 million in bond debt and placed $104 million in an escrow account with tranches of aid tied to reform benchmarks. Notwithstanding austerity measures — slashing the work force and wages by 10 percent, reducing pension accruals, and freezing cost-of-living adjustments — Detroit has burned through all of the cash.

Bankruptcy would instigate a long, messy brawl between creditors and unions, which is playing out on the small screen in Stockton, Calif. Under Chapter 9 bankruptcy, the city dictates its restructuring terms, and the U.S. Treasury secretary can intervene.

Thus, bankruptcy could tee up another bailout of Detroit’s labor unions at the expense of bondholders. An emergency manager, on the other hand, is accountable to Governor Snyder and can accomplish nearly everything the city could in bankruptcy and more.

That left Mr. Snyder with three options. He could allow the city to continue operating under a consent agreement, which would essentially require a blank check from the state. Republican lawmakers cashiered that idea. Alternatively, he could let Detroit file for Chapter 9 bankruptcy. Or he could appoint an emergency manager.

The state-appointed receiver can rewrite labor agreements, eliminate retiree health benefits, merge government departments, lease assets, and outsource services — all without consent from city leaders, who have delayed or blocked all of the above. But to rescue Detroit, rather than merely manage its decline, Governor Snyder’s point man will have to contribute to reviving its economy.

Detroit’s population has shrunk by 25 percent in the past decade and by nearly two-thirds since 1960. A decline in manufacturing, rising violence, poor schools, high taxes, and political corruption have driven businesses and the middle class to the suburbs. The unemployment rate approaches 20 percent. Housing values have plummeted, causing foreclosures and reduced tax revenue.

The Detroit News reports that nearly half of property owners are delinquent on tax bills, in part because the city has inflated property assessments to squeeze more money out of its shrinking tax base. Detroit imposes one of the highest property tax rates of any large U.S. city, which is on top of its 2.4 percent income tax on residents and 2 percent corporate tax. Rather than trying to squeeze more from fewer people, Detroit would be better off remaking itself as one giant, low-tax enterprise zone.

It’s tempting for the rest of the country to think of Detroit’s ills as unique and a product of the auto industry’s decline. But the car companies are recovering, while Detroit isn’t.

Today, dozens of cities in Michigan and hundreds across the country such as Los Angeles are slouching toward bankruptcy because of soaring labor costs and retirement obligations. They can’t all be bailed out.

Detroit’s city council, state and congressional representatives, labor unions, and community activists want more forbearance from the state and aid from the feds. Some have even urged Attorney General Eric Holder to intervene on the pretext that the white governor is subverting self-governance in a predominantly minority city.

Mr. Snyder seems to realize that he’ll get no political credit for trying to save Detroit from self-destruction, and won’t be hailed as its savior if he succeeds. But he’s the best hope the city has.