Detroit Fiscal Correction Proposal
Several factors have contributed to the financial misfortune of the city of Detroit. The population decrease within the city limits over the past 60 years has been significant, the decrease in auto sales, and the lack of competent leadership, rampant corruption, and exorbitant pensions has only exacerbated the problems of the financially-strapped city. Liberal policies involving tax increases and entitlements have literally brought the once vibrant, economic powerhouse to its knees. The city now faces over $18 billion in unfunded obligations, continued reduction of tax revenue as more people vacate the city in search of better opportunities, and an increasing “brain drain” as a result of the population loss. The challenges facing the city are monumental but not necessarily insurmountable. This short paper will identify several factors that would help set the city on the path to recovery and curtail the potential conflict associated with generational warfare.
The foundation for all financial decisions should begin with an understanding that the City of Detroit keeps the promises it has made to its workforce to ensure pensions are paid according to the contracts that had been previously agreed to in the past. The obligation to youth programs and other various city-sponsored programs should be absolved and only funded if and when pensions, basic services such as water, waist, fire, and police, and current citied employee salaries are paid. Recognizing retired, sick and elderly for their contributions to building the great city of Detroit would demonstrates the true nature of today’s leaders as being honorable and decent. Directing scarce funds to a demographic who’ve barely entered the work force or whose economic situation has not allowed them to contribute to Detroit’s tax-base, would be irresponsible and wrong. These difficult decisions are an unfortunate result of years of financial abuse and poor administrative oversight.
In order to ensure Detroit is able to recover from its Chapter 9 filing, the city must reduce and resize. It simply cannot continue to operate as though it is the same size today as it was 60 years ago. Due to the nearly 60 percent reduction in its population (25 percent in the last ten years alone)[1] and consequently, a sharp decrease in tax revenues, the city needs to consider broad sweeping reduction in services and entitlements at all levels. The city of Detroit will need to band together in the coming years of financial austerity and recognize the most successful way forward must include the support of the city’s residents and not just the city’s leadership.
Former Mayor, Dave Bing’s proposal to relocate families from dying neighborhoods to other areas is an essential step to reducing services. By concentrating populations to specific residential areas, the city would better be able to provide basic and emergency services to those residents[2]. These actions would reduce the overall staffing requirements currently needed to a more manageable workforce. The subsequent savings obtained via a reduction in the number of salaries that would otherwise need to be paid could be applied to the underfunded pension funds currently on hand. Additionally, by reducing travel times for emergency personnel, an immediate reduction in fuel charges would result, city vehicles would depreciate more slowly, and maintenance costs would decrease. Over the course of the next decade, the savings could potentially be substantial. Mayor Bing’s proposal provides an opportunity and an incentive for families to place themselves in closer proximity to the services they demand.
Mayor Bing had also suggested the “recycling” of neighborhoods that are, for lack of a better phrase, not worth saving or are dying. The city would demolish dilapidated homes and vacant businesses and allow for new development from the private market. Senator Rand Paul has suggested various parts of the city become “Economic Freedom Zones” and offer tax incentives to would-be investors. Theoretically, these freedom zones would increase entrepreneurial development, provide jobs and ultimately increase the tax base. Senator Paul proposed a cap on personal and corporate tax rates at 5 percent and abolishing the capital gains tax. When the cost to do business in Detroit is decreased, more people will want to do business in Detroit. Still others suggest Detroit should become the West’s Hong Kong, free from the oppressive taxation that stifles economic growth. Hong Kong has not sales tax, no VAT, no taxes on capital gains, no import/export duties, no interest income or earnings outside of Hong Kong and a top personal income tax rate of 15 percent and have the fourth highest per capita GDP in the world[3].
Creating an environment that is business-friendly is essential to rescuing the city. Arthur Laffer has often championed the idea of supply-side economics and developed the Laffer curve, a simple graph that represents the idea that revenues increase as taxes increase and decrease if taxation becomes too punishing[4]. In the case of Detroit, it would seem the city exceeded the optimal taxation level causing its residence to relocate resulting in a massive decrease in revenues. Detroit must decrease or remove barriers to development and operation if it hopes to regain its economic and financial footing.
Decreasing the likelihood of generational conflict can only be achieved if Detroit keeps its commitments to the elderly, sick and disabled and also demonstrate its desire and commitment to the younger generations by implementing policies that allow for increased opportunity to pursue the American Dream. Promoting policies that increase job opportunities will do far more for the welfare of the impoverished than continuing the madness of endless entitlement spending. Detroit’s financial train wreck is a perfect example of why liberal, Keynesian economics do not work for sustained periods of time.
Pension restructuring is vital to ensuring the city doesn’t make future promises it cannot keep. Pensions should be fair and reasonable and with the recent transition of Michigan to a “Right-to-Work” state, unions will no longer have de facto control of city service employees. This new policy will allow Detroit to seek out services according the mandates of the free market and not be held hostage to Union, hardball tactics. Rick Snyder and the Michigan legislative body have begun discussions on how best the state can assist its largest city with its pension crisis. With $3.5 billion in unfunded pension obligations, it is clear the city needs assistance to lift it out of its paralysis. However, this assistance should not come at the expense of Michigan state residence as a whole and should not relinquish the city of Detroit of the unpleasantness associated with bankruptcy.
There are several programs currently in place to ignite the economic revival of Detroit and they focus primarily on the rebirth of the downtown area. One program provides subsidies to employees who work in downtown to live in the downtown area as well. The belief is with an increased residential population, retail sales will increase and continue to attract investment. This particular approach may be misguided as the futures of American cities continue to evolve and the suburbs of tomorrow become microcosms of robust economic activity[5]. Bill Emerson, CEO of Quiken Loans acknowledges “Detroit never [had] a large residential population in downtown in the past[6]. This may not be the time to go against the grain of natural human migrations. Detroit may find better, long-term return on their investment by investing in the suburban areas of the city. Allowing smaller suburban areas to control the distribution of services and administer directly to their constituency is the essence of true governance. Government at the lowest level, with the smallest infringement on personal freedom is best for the people.
There is no sense in enacting policies and plans to help the city regain its financial footing if there isn’t also a mechanism in place to prevent another financial calamity. The city must pass legislation mandating a balanced budget every year and eliminate baseline budgeting accounting practices. If the city’s leaders cannot agree on the terms of a balanced budget, automatic sequester cuts would take place. In addition to a balanced- budget amendment, legislation should also be passed that sets penalties in place when the city’s leadership fails to pass a balanced budget. Whether this punishment comes in the form of garnished pay or termination of employment, the consequences need to represent the seriousness of their inaction. There must be protections built into the laws the City Council uses to manage the city.
In conclusion, there is no solution that will be completely painless for all parties. For decades, the leadership of Detroit, both elected and appointed, has been guilty of gross incompetence and outright lawlessness. Their mismanagement, corruption, and liberal agenda drove Detroit to the brink of financial collapse. Admittedly, there were several challenging periods the city went though over the past several decades that made things increasingly difficult. The white flight beginning in the 60’s has had a devastating impact on the tax base[7], the massive decrease in auto sales from the big three auto makers, an increasingly hostile environment toward manufacturing, the Great Recession, and very probably a brain drain as a result of the mass migration from the city, all contributed to the city’s decline.
The city can comeback without creating generational rifts. There are many challenges to overcome and the journey back to financial solvency will be difficult. Simply put, the city will not be able to legislate its way out of its current crisis. It has to rely heavily on private investors willing to infuse capital into the city, provide opportunities for employment, and create an atmosphere that is competitive with other major cities in the country. Detroit must determine what makes it special and unique, rebrand its image, and offer something to future residence they may not be able to get in other urban locations and do so without increasing its debt. This may prove too much for a City Council lacking discipline and addicted to spending.
[1] Seelye, K. (Mar 2011). Detroit Census Confirms a Desertion Like No Other. New York Times. Located at www.nytimes.com/2011/03/23/us/23detroit.htmal?_r=0
[2] Muller, J. (Nov 2010). Detroit Must Shrink to Grow. Forbes Vol. 186 Issue 8 p24. Located at: http://web.ebscohost.com.portal.lib.fit.edu/ehost/pdfviewer/pdfviewer?vid=4&sid=62da8e31-4ed2-4f2f-aaab-05bf9a71a159%40sessionmgr198&hid=118
[3] O’Rourke, P J. (Jan 2014). Review ---Turn Detroit Into Hong Kong, USA --- P. J O’Rourke Knows how to Rescue the Motor City: Turn it into Hong Kong. The Wall Street Journal. 11 Jan 2014: C.3. Retrieved from ProQuest via Florida Institute of Technology Distance Learning Library from Graduate Students.
[4] http://www.laffercenter.com/the-laffer-center-2/the-laffer-curve/
[5] Kotkin, J. (February 4, 2010). The Next Hundred Million. Penguin Press HC
[6] H. Leon. (Dec 2013) Detroit :A Comeback Story. Mortgage Banking [serial online]. December 2013;74(3):62-67.
Available from: Business Source Complete, Ipswich, MA. Accessed January 15, 2014.
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