Out of Control Policy Blog

Bankrupt, but Not Broken: How Detroit Can Build from Bankruptcy

Any day now we should have the next proposed roadmap for Detroit's bankruptcy proceeding. The plan will suggest how much Detroit thinks should be repaid to certain creditors and what cuts the city's pension funds should take. Whatever the details that emerge (and subsequently get negotiated and challenged in court), the discussion will be focused on Detroit in the short-term. But what about the future of the Motor City?

In a Detroit News op-ed today, my colleague Len Gilroy and I outline how Detroit should start thinking about its future beyond bankruptcy, and what long-term challenges lie ahead that it should make moves now to address.

The first challenge will be improving the delivery of city services:

"One step in the right direction Detroit has taken is outsourcing residential solid waste collection to save $6 million annually... Transit presents another opportunity. In recent decades, Denver’s regional transit agency has used competitive contracting to lower costs of bus transit operations by approximately 30 percent, and Nassau County, New York, hired a private provider in 2012 to lower its costs by 24 percent. Further, Detroit should consider using “managed competition”: having public employees compete head-to-head against private firms to provide city services."

The second challenge will be tax rates (and regulatory restrictions):

"Detroit also has the highest property and income tax rates in the state. Savings from leveraging the private sector to provide city services would help it weather the short-term revenue shocks that prevent these rates from being slashed. Without tax relief, the city will have a hard time attracting businesses and individuals and reversing decades-long population decline."

The third challenge will be pension reform:

"Finally, Detroit has to ensure that it doesn’t let unfunded pension benefits risk its fiscal health again. It cannot unrealistically count on receiving a 7.9 percent annual return on pension investments.Moody’s Analytics suggests that a more honest assumption wouldbe annual returns of 4 percent. Unfortunately, lower investment returns will require more retirees to be paid out of general revenues that would otherwise fund city services."

Read our whole op-ed here.

If you are in the Detroit area on Thursday, Reason is hosting a panel discussion on the the topic of this oped. Click here for more details.

Anthony Randazzo is Director of Economic Research


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