The Renaissance Center, Detroit

The city of Detroit is in deep fiscal trouble. Gov. Rick Snyder may well appoint an Emergency Manager to help prevent a municipal bankruptcy, a state of affairs The Motor City was explicitly warned of almost 11 years ago by the Mackinac Center for Public Policy.

The Mackinac Center published a 28-page edition of Michigan Privatization Report declaring that Detroit needed a “budget boost,” recommending bold privatization initiatives to help fuel the city’s renaissance engine. While city officials did not embrace our ideas at the time, it is never too late to do so. Below you will find a series of articles about Detroit, its budget and ideas for reform.

Our Michigan Privatization Report is excerpted below. The following link to several blog posts and articles from the past ten years on this topic.

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Privatization: The Motor City's Renaissance Engine (Winter 2001, Michigan Privatization Report)

Antoine de la Mothe Cadillac never could have guessed that the small fort he established in 1701 along the strait between Lake St. Clair and Lake Erie would become home to millions of people — including people like Henry Ford, whose vision transformed the entire world.

Indeed, Detroit has nearly three hundred glorious years of history to look back upon with pride, but it is the city's future that is the focus of this issue of Michigan Privatization Report. And that future is in some doubt ...

 

Detroit Exhausts Its Options

Michael D. LaFaive, 11/18/2011

There is an old saw that goes “politicians will do the right thing, but only after they have exhausted every other option.”

For years the Mackinac Center analysts and scholars have tried to persuade pols to do the right thing at the state and local level. We’ve had many successes, but cities like Detroit often acted allergic to sound, free-market policy ideas. That may be changing because Detroit is running out of money and thus, running out of options.

A Nov. 17 report in the Detroit Free Press indicates that Mayor Bing is interested in privatizing management of the city’s transportation and lighting departments. That’s a tepid start to be sure, but one that would move the city in the right direction. In 2000 the Center recommended full privatization of these departments and much more in its special, Detroit-specific issue of Michigan Privatization Report. Some of its ideas and possible savings from that report deserve to be repeated.

  1. The city should contract out for the operation of its busing system. Possible savings: $60 million annually. (Through 2010 the operating subsidy ranged from $70 million to $75 million).
  1. Sell Detroit’s electrical power system to an investor-owned utility. Estimated revenue from private sale in 2000: $301 million to $501 million.
  1. Sell Cobo Conference/Exhibition Center. When we published our 2000 MPR, Cobo was receiving operating subsidies exceeding $15 million. A 1991 issue of Detroiter magazine — 20 years ago — estimated a sales price of $50 million. At that price a private owner might pay $1.9 million in property taxes each year.
  1. Sell the water system for between $1.775 billion and $2.285 billion or just contract out for its management ($47.2 million in annual savings).
  1. Contract out for garbage collection. Savings: $6.4 million annually.
  1. Privatize inspections for mechanical, electrical, plumbing or building permits and licenses. We estimated in 2000 that the possible savings for privatizing these positions could top $5.1 million.
  1. Sell Bell Isle: $370 million in one-time revenue and up to $13.8 million in new revenue. In addition, the city would be relieved of its [then] annual appropriation to Island care of $6.6 million.

If Detroit had only contracted out for operation of their busing, water, garbage and inspections in 2000 and saved only half of what the Center estimated could be realized, the city would have been roughly $592 million to the good over the following decade. Imagine if it had sold assets, too, or saved the full amount of our conservative estimates?

Moreover, what if the city had gone further and embraced other bold ideas such as selling its city airport, contacting with Wayne County for police services or ending the People Mover service? Doing so could have meant that the city would have enough to pay its bills, shed debt, improve services, cut taxes and look for 250,000 people to move to the city instead of away from it.

That is why the mayor and others need to act now and boldly. The future will come swiftly. Governments should be solvent when it does.

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Cost of Benefits is Sinking Detroit

James M. Hohman, 11/16/2011

According to the Detroit Free Press, the city will run out of cash in April 2012, and the largest culprit is the growing cost of employee benefits.

It reports:

"Since 2008, health insurance costs for Detroit employees and retirees have jumped 62% to $186 million a year, city records show. During the same period, the city's contribution to pensions increased from $50 million to $120 million."

Government employment benefits strain budgets around the state. Bringing the cost of these benefits in line with private-sector averages would save taxpayers in Michigan $5.7 billion annually.

The state is already helping local governments stave off bankruptcy. Earlier this year, the Legislature passed a bill that limits the amount that government entities in Michigan can spend on health insurance. The bill is set well above private-sector rates, but it’s a step in the right direction that could save the local governments up to $1 billion if implemented properly.

There are also new incentives to cap local government retirement benefits at 10 percent of an employee’s compensation, as well as the new emergency manager law.

Detroit’s dire straits are indicative of the problem of overly generous benefits. There is more to do to keep local governments away from bankruptcy, and to ensure residents that government services require no more of their money than is necessary.

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Occupiers vs. Detroit's Recovery

Paul Kersey, 10/19/2011

The movement to occupy Detroit has attracted about 50 hardy souls to Grand Circus Park, where they have pitched tents and are awaiting … something. What exactly is supposed to change in Detroit is entirely unclear. The occupiers of Wall Street have this much going for them — things have been done in the banks and stock markets that progressives object to. What exactly has Detroit done except implement the progressive vision as far as it practically could?

The city might get different results if its people tried a different approach.

The tents are a form of avoidance. Detroit once housed a million more people than it currently does. Many of the houses where those Detroiters once lived have been destroyed, but many — certainly enough to house 50 occupiers — stand vacant. Those houses could probably be bought or rented cheaply. It’s all part of one city, so why not express a real, lasting commitment to the Detroit and get a solid roof over your head in the process?

Could it be because the occupiers, deep down, know they don’t have any remedies for Detroit’s suffering? Or could it be because they don’t want to confront the reality of Detroit’s neighborhoods, where their ethic of government-driven wealth-spreading has suffocated honest commerce, strangled economic opportunities and forced hundreds of thousands into an awful choice: crime, dependency or flight.

The terrible decline of Detroit’s auto industry, a history of lousy race relations, complacency bred from decades of prosperity — these explain Detroit’s choices, but do not make them wise. As the occupiers sit in their tents and fulminate against the powers-that-be, Detroiters themselves, both in the city and in the suburbs, can choose another way. They can let go of their alienation, return to the values of a free society, get over their failed romance with big unions and big government, reopen trade, create new opportunities and rebuild their city.

Over the long haul, the only way that the bone-deep divisions between races, between city and suburbs, can ever be overcome is for people throughout metro Detroit to work and trade together, voluntarily and as individuals.

Detroit’s recovery will not begin with some splashy new development. That will come, but it will be more of a tipping point than a first cause. Nor will some grand governmental scheme for spreading wealth around get the city moving again. No, if Detroit recovers, it will start with hundreds of little projects: homes repaired, small businesses started, charter public schools opened. And the occupiers will have little if anything to do with it — unless they decide to emerge from their tents, grab some tools and get to work rebuilding a city.

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Can Detroit's Problems Be Corrected by an Emergency Financial Manager?

Louis H. Schimmel, Jr., 12/05/2005

Michigan Public Act 72 of 1990, as amended, provides for the appointment of an Emergency Financial Manager if it is determined that a serious financial problem exists in a municipality or school district. The appointment of an EFM for the city of Detroit is often discussed as a possible solution for dealing with the city’s continual mismanagement and financial mess.

If it were ever determined by the state that an EFM should be appointed for the city of Detroit, under current law the EFM would not have all of the necessary tools to be successful. There are four major problems that would have to be resolved by amending Act 72 prior to the appointment of an EFM.

The changes needed are as follows:

  1. Under current law, the EFM can be sued personally. Given that actions by an EFM will almost certainly be controversial, and harassing lawsuits are likely, it is essential that an EFM’s personal assets be protected. Making the EFM an employee of the state treasury department with access to the legal staff of the attorney general would make the present lack of indemnification for an EFM largely moot. Harassing lawsuits by local bargaining units or other affected entities or individuals would be defended by the state – an entity that has the depth of financial resources to discourage the filing of frivolous lawsuits.

  2. The present Act lists the powers of an EFM, which are extensive but are not all-inclusive. This can allow the governing body to impede the overall effort of the EFM to deal with the municipality’s fiscal crisis. The Act should state that the EFM replaces and takes on the powers of the governing body (mayor and council or school board.)

  3. Charter provisions, especially in old charters, can prevent or make it difficult for an EFM to make necessary structural changes to address financial problems. The EFM should have the power to review charter provisions that frustrate the process of cleaning up and streamlining a municipality’s financial functions.

  4. Presently, most labor contracts provide for mandatory continuation of an expired contract until a new one is negotiated. This means municipalities have no opportunity to take advantage of lower-cost service providers. Additionally, in the case of public safety unions, municipalities must adhere to the provisions of Act 312, which mandates that when a municipality and union cannot agree on the terms of a new contract they must go to binding arbitration. In most cases, it takes nearly two years or longer to complete the process, and the legal costs are substantial. Furthermore, municipalities rarely reduce costs by going through the Act 312 process but rather, at best, limit the amount of increased expenses. Act 312 should be repealed in its entirety.

Making the above changes to Act 72 would be essential for an EFM to have the necessary tools to deal with the city of Detroit’s management and fiscal problems.

If Michigan is sincerely interested in keeping and attracting new business it needs to face rather than ignore the issue of the state’s excessively high, non-competitive municipal labor costs. High labor costs for municipalities result in high municipal taxes, which in turn make municipalities unattractive and create major fiscal problems.

Currently the auto, airlines and other private sector industries are being forced to deal with their high labor costs in order to stay in business and become competitive. However, Michigan municipalities are handcuffed from dealing with their high labor costs by labor contracts that cannot be terminated. Such contracts prevent the possibility of purchasing municipal services at the lowest possible cost. Unlike the private sector, municipalities can’t move their operations to a market with lower labor costs. Also, unlike the private sector, municipalities can’t go out of business or declare bankruptcy and reorganize to reduce pension, health care, and labor costs.

Michigan needs to remove the shackles preventing the purchase of municipal services at the lowest cost — not only for the few municipalities that fall into the position of having an EFM – but for all Michigan municipalities. Repealing Act 312 would be a giant step in the right direction.

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Detroit Violates Uniform Budget and Accounting Act

Michael D. LaFaive, 06/11/2001

The Mackinac Center for Public Policy recently confirmed with officials at the Michigan Department of Treasury that the city of Detroit was delinquent in filing its annual audit for 2000.

Failure to file the audit violates the state's Uniform Budget and Accounting Act. According to a provision of another law, the local Government Fiscal Responsibility Act, the city's delinquency should automatically trigger a review by the state treasurer.

In a Jan. 2 letter to [then] state treasurer Mark Murray, this author pointed out that the city was delinquent in filing its audit and asked whether the state would be conducting a review of the city's finances as provided by law. On Feb. 1, Murray confirmed that Detroit "has failed to timely file its audit for FY ending 2000."

Murray also stated, however, that his office would not be conducting a review of Detroit's finances even though it is required to do so under Public Act 72 of 1990. "Missing the audit deadline is not as clear an indication of a financial problem as are some other triggers provided" in the law, Murray wrote. "Hence, in the case of a late audit, we would only proceed with a formal preliminary review if there were other indicators of financial problems present."

But the Mackinac Center disagreed with Murray's characterization of the law. "Public Act 72 offers the state treasurer no explicit discretion in this matter. The conditions that constitute city financial problems are clearly spelled out, and one of those is failure to file an audit as required," he said.

The state should adhere to the laws of its own creation and investigate Detroit's financial situation in greater detail-using P.A. 72 as its guide. Such an investigation would give the city an added incentive to keep its books in order and mitigate against charges that the state enforces P.A. 72 in an arbitrary and lackadaisical way.

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Come Fly With Me: Will Detroit City Airport Get Dose of Fiscal Sanity?

Michael D. LaFaive, 10/07/2009

Detroit Mayor Dave Bing has recommended outsourcing the management of the Coleman A. Young International Airport to save money, as recommended by the Mackinac Center back in 1998. When we did so the city had recently provided the airport with a $1.9 million subsidy. In 2007 (the latest year for which data is available), the subsidy was down to $900,000, but the city's ability to afford any subsidy has collapsed altogether.

Bing is not the first mayor to consider privatizing the airport's management. In 2008, Kwame Kilpatrick actually identified a potential contractor called Avport. While outsourcing has merit, at this point, the city should investigate just completely unloading the airport with an outright sale.

Our 1998 description of the airport's problems is worth reprinting:

Forty minutes up the road, Detroit City Airport's woes do not involve congestion but rather a lack of it. City Airport, which last year received a $1.9 million subsidy out of Detroit's general fund, has a low volume of commercial traffic due to its small runway size, poor location in a densely populated area, and proximity to Detroit Metro. This lack of usage led to a 19 percent drop in airport revenue from 1996 to 1997. At the same time, operating costs increased 12 percent and employee salaries and benefits shot up 17.8 percent and 71 percent respectively.

In addition, the airport is in a weak cash position. A strong cash position would allow the airport to meet salary obligations and other operating expenses, expand, and generally maintain the airport. The airport has not bled off its cash overnight. In 1979 the airport balance sheet showed a cash position of $505,543 dollars. Editor's Note: Budget numbers are presented without adjusting for inflation.

The city still had a financially viable airport. Today is a much different story. The airport's 1997 balance sheet shows a cash position of only $59,593, which was not enough to cover the $147,142 in salaries and wages paid to airport employees during the first month of fiscal year 1997.

Furthermore, despite the $1.9 million subsidy, the airport's accumulated deficit has leapt from $1,598,987 to $2,249,452 in one fiscal year. The accumulated deficit is simply the difference between the airport's assets and liabilities. Technically speaking, the airport would be bankrupt if it were not for the city's cash transfers (more than $3 million in the last two years). The airport is in trouble. How long will Detroit's taxpayers be required to subsidize its existence?

Now, as in 1998, we could not ask a better question ourselves.

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