How Detroit Can Build From Bankruptcy

Detroit’s bankruptcy is inflicting much pain on the city. But this pain won’t be in vain if the city uses it to make structural changes that put its fiscal house permanently in order.

Specifically, this would involve finding the most cost-effective way to provide city services, lowering taxes to stop the population flight, and keeping long-term government costs in check.

One step in the right direction Detroit has taken is outsourcing residential solid waste collection to save $6 million annually. City leaders should determine whether competitive contracting could produce savings in other services currently provided by the city. There is talk about handing Detroit’s Water and Sewerage Department to a regional authority. It’s also worth exploring whether a private operator could lower costs more. The private firm hired by New York City in 2011 to review the operation of its water and wastewater system operations has identified between $108 million to $130 million in annual savings and enhanced revenues.

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.

This has allowed cities like Phoenix, Charlotte and Indianapolis to lower costs dramatically. Tulsa reduced building maintenance costs by $900,000 over five years. Existing public employees won the bid, but streamlined themselves and lowered taxpayer costs.

A 2005 Columbia University report found that Indianapolis saved $230 million overall in the 1990s by subjecting over 70 city services to managed competition.

Detroit should also look to reduce long-term maintenance costs by leasing city assets. For example, city-owned parking assets could be maintained and operated by a private sector management firm, something Emergency Manager Kevyn Orr has floated in the past.

Indianapolis entered a lease of its downtown parking system in 2010, receiving $20 million upfront and an estimated $300 million in shared revenues over the 50-year lease, allowing it to shed its operations and maintenance costs and make major infrastructure investments.

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.

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.

Detroit could follow San Diego’s approach and protect its teachers, police, and firefighters by shifting them to a system where they are not dependent on the city’s ability to properly save to pay their pensions. There, a ballot measure in 2012 created 401(k)-like accounts for employees that didn’t depend on annual contributions from the city.

When the city fully implements the plan, actuarially estimated savings might add up to $950 million over 30 years.

Detroit can set a path for long-term recovery by privatizing and outsourcing city services, enacting substantial pension reform, and creating a less onerous tax code. Or it could wait for the next fiscal crisis.

We hope for better things.

Anthony Randazzo is director of economic policy and Leonard Gilroy is director of government reform at the Reason Foundation. This op-ed was originally published by The Detroit News on February 18, 2014.