On Tuesday, voters in Detroit trudged to the polls and re-elected 65-year-old Mayor Dave Bing, giving him five new city council members to accomplish a mission impossible: bring Michigan’s biggest city back from near death. There’s no clear prescription that will work, and Detroit’s recalcitrant public-employee unions will resist the fiscal therapy that will necessarily be a part of any recovery.
Last year, Mayor Kwame Kilpatrick headed off to prison for using city funds to cover up an affair with a staffer. After a few months of an interim mayor, Mr. Bing stepped in to finish Kilpatrick’s remaining time in office neither out of political ambition (he’s announced he won’t seek two terms) nor to get rich (he is donating his salary to the police department). The former Detroit Piston basketball legend who later made a fortune as an auto supplier genuinely wants to use his business acumen to save the city. But Detroit is much closer to the brink than many people acknowledge.
Detroit has been in trouble for decades. It has the highest taxes in Michigan, the highest murder rate in the country, and a dreadful public school system. Only 25% of high school students graduate each year. Its tens of thousands of abandoned homes offer safe haven to drug dealers and criminals. All of this has produced an exodus of businesses-there is no longer a single major department store in the city-and residents. Detroit’s population is less than half of its peak of two million in the 1960s.
With the collapse of the auto industry over the past year and a half, things have gotten a lot worse. Unemployment is now touching Depression levels of around 30%-three times the national rate. Businesses that depend on the auto industry are shutting down and more residents are hitting the exits. This is accelerating the erosion of the city’s tax base, producing a fiscal crisis that seems impossible to escape. The city’s accumulated deficit is currently somewhere between $300 million and $400 million. No one knows for sure because the city has yet to submit its 2008 audit; its annual budget is about $3 billion.
Joe Harris, a former chief financial officer of Detroit, notes that when Mr. Bing took office this summer, the city had enough cash on hand to make payroll, pay vendors and meet other day-to-day needs for about 11 days. To make ends meet, Mr. Bing is planning to issue “tax anticipation” notes to lenders to raise $94 million against expected tax revenues. This money, along with the biannual property taxes that the city collected in August, might keep Detroit running through the end of the fiscal year next June.
But that won’t address the underlying fiscal imbalances. For that problem, Mr. Bing wants to squeeze $5 million in savings every month by asking the city’s roughly 13,000 workers to take a 10% pay cut, a 10% benefit cut, and a 10% staff cut. He also wants to privatize or outsource many city services and consolidate various departments. “Our people [city workers] need to understand that entitlement is gone,” Mr. Bing told the Detroit News in August. “There are people who think we are job providers. We’re service providers.”
Mr. Bing is going to have a very hard time making the city’s entrenched unions play ball. John Reihl, president of the American Federation of State, Council and Municipal Employees (AFSCME) Local 207, regards Mr. Bing’s talk of cuts as a personal insult. “It is just a way to mess with the unions,” he told the Detroit News in July. “It’s not our role to give anymore concessions.”
So far Mr. Bing has shown little indication that he’ll stand up to the unions. For the third time on Friday, Mr. Bing backed off on his threat to lay off more workers if unions don’t accept a wage cut. Yet a recent study by the Mackinac Center for Public Policy found that if state and local government employee benefit packages in Michigan were limited to what is typical for Midwestern private sector workers-including those in unions-taxpayers would save as much as $5.7 billion annually.
The fiscal mess puts Mr. Bing in a Catch-22. He can’t cut the city’s taxes because the short-term hit to cash flow would leave the city unable to pay its bills. But without tax reform the city can’t lure businesses back.
Detroit may simply not be viable in its current form. Political and economic leaders need to rethink the notion that the city can regain its former status as a major American metropolis capable of luring large companies with tax breaks-which was Mr. Kilpatrick’s failed strategy.
Detroit now more closely resembles a frontier town that needs not flashy stadiums and art institutes but basic services: police, firemen and good schools. Mr. Bing needs to confront the hard reality that the city needs to pare back its liabilities, identify infrastructure it can no longer afford to maintain, and (though this is anathema to Detroit’s political class) perhaps auction off portions of its 140 square miles to neighboring counties, shrinking to a size that its diminished population base can support.
Short term, Detroit’s best hope may be to go bankrupt. However, given Michigan law, which has never been tested because no city has ever filed for bankruptcy, it’s unclear if even bankruptcy will fully release Detroit from the clutches of its unions and allow it to start over. The only thing certain is that fate is not kind to a city that allows unions to run amok.
Shikha Dalmia is a Senior Analyst at Reason Foundation. This column first appeared in The Wall Street Journal.