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    Detroit Needs Responsible Government, Not a Bailout

    10/01/2013

    I attend Hillsdale College in southern Michigan. It’s a pleasant place, the people are friendly, the landscape of the college is beautiful, and the academic rigor is intellectually stimulating. Some of the things that I’ve learned since becoming a temporary Michigander are that  the weather is utterly and truly unpredictable, that Ohio State fans are worst people on earth (their words, not mine), and that native Michiganders insist that “soda” is something you bake with and “pop” is the thing you drink. (They’re wrong.) 

    But one of the most important things I’ve learned from my new neighbors is how truly corrupt and poorly managed the city of Detroit is. Last summer, to no one’s surprise, the municipal government of Detroit declared bankruptcy. My friends and professors expressed dismay that the city that once held 1.8 million people and had the highest per-capita income in the United States had fallen so far. The city now owes money to 100,000 creditors, it has $20 million in debt and unfunded liabilities, 47 percent of its residents are functionally illiterate, and violent crime rates are 5 times higher than the national average. These are just a few depressing facts that made me stop and ask, “How did we get here?” 

    The answer is decades of corruption and mismanagement by the city government. Let me give you just one example of abuse.

    This story comes from a Wall Street Journal article detailing an investigative report of how Detroit City Council members have been illegally skimming the city’s municipal pension fund for decades. According to the report, they have “exceeded their legal limits in real-estate investments and awarded retirees in some years more than a 20% return on their annuities even as the funds lost value.” These excess payments, which had nothing to do with their original pension benefits, have cost Detroit more than $1 billion—money which the government has had to borrow because tax revenues have been falling as more people leave the city. As the New York Times reported, the 23 year practice of “overfunding” was justified as follows: 

    “People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.

    Of all the non-pension payments, she said, 54 percent went to active workers, 14 percent went to retirees and 32 percent went to the city, which used its share to lower its annual contributions to the fund. The excess payments were often made near the end of the year, when recipients needed money for the holidays, or to heat their homes. 

    The city’s pension fund operated by discounting liabilities based on future speculation of returns. In plain English, this means they spent money under the assumption that they’d make even more money in the future in order to afford their initial spending. When those returns failed to materialize, the municipal government would borrow more money to make up for the losses, and eventually creditors decided loaning money to Detroit was a bad idea. The end result was to declare bankruptcy.

    If Detroit wants to turn around, then the city government needs to stop spending money it doesn’t have and focus on creating an environment that encourages the marketplace to flourish. But given that the City Council’s latest great idea is to have livestock trim the overgrown grass, it seems unlikely Detroit will make progress anytime soon, and Washington D.C. certainly isn’t going to help.

    The Federal government somehow believes that the solution is to throw even more money at Detroit. Despite assurances made by the Obama administration in July, the White House announced Friday that it would allocate $300 million in aid for the city of Detroit. Proponents of this measure like Mark Skidmore, an economist from Michigan State University, claim that we should think of the measure as a “stimulus”: 

    “It’s not big enough to be called a bailout. What they are trying to do is enable key investments that are needed to help the city once it emerges from all of these immediate [financial] challenges… It becomes much more difficult to do the things a city is required to do without those kinds of investments and reinvestments, so it seems like a sensible thing for the federal government to step in and assist.” 

    Washington has its own problems to focus on. The Heritage Foundation aptly reminds us: 

    The federal government is $17 trillion in debt — making it larger than the entire U.S. economy. Social Security’s excess costs are $12 trillion. Medicare’s are $43 trillion. State and local bailouts are bad because they reward and enable further fiscal misbehavior. But, they would also push the nation closer to a big debt tipping point.

    Is federal intervention, in what amounts to a back-door bailout, really a “sensible thing?” Haven’t we already observed how everything the municipal government of Detroit touches results in inefficiency and waste? Detroit has repeatedly proven that those who run the city government are poor stewards of taxpayer dollars. The American people understand that a bailout will only encourage the type of destructive behavior that led to Detroit’s collapse. Why doesn’t the Obama Administration?