Mo­town low­down

Reck­less spend­ing and un­funded li­a­bil­i­ties spell bank­ruptcy for Detroit

The Washington Times Daily - - Opinion -

The Mo­tor City is skid­ding to­ward bank­ruptcy. Moody’s In­vestors Ser­vices down­graded about $2.5 bil­lion of Detroit’s debt on Tues­day, ac­knowl­edg­ing the harsh re­al­ity that this once-great me­trop­o­lis has failed. The city is run­ning out of cash, and its pop­u­la­tion has been shrink­ing. At the same time, its la­bor costs have sky­rock­eted and pen­sion li­a­bil­i­ties for public-sec­tor em­ploy­ees have swelled. It’s the same thing that hap­pened to Greece.

Detroit would have been bet­ter off had Mayor Dave Bing taken up Michi­gan Gov. Rick Sny­der on his of­fer to cre­ate a panel to over­see the fi­nan­cial re­struc­tur­ing of the city in ex­change for $137 mil­lion in state-backed debt. That would have been enough for Detroit to pay its bills un­til the end of the year. The mayor re­fused, and now the city will go broke by the end of May.

Detroit is far from be­ing the first city to go un­der. Har­ris­burg, Pa., and Stock­ton, Calif., al­ready have de­clared bank­ruptcy. In Novem­ber, Jef­fer­son County, Ala., de­faulted on $3.14 bil­lion in debt. Ac­cord­ing to Reuters news agency, 21 mu­nic­i­pal­i­ties have de­faulted on a to­tal of $978 mil­lion in debt so far this year.

With a debt ac­cu­mu­la­tion in ex­cess of $10 bil­lion, Detroit would be the big­gest city by far to go belly-up. Be­cause it al­ready im­poses out­ra­geously high in­come-tax rates, there’s not much Detroit can do on the rev­enue side of the ledger. Cut­ting spend­ing is the only re­al­is­tic op­tion for clean­ing up this fis­cal mess.

As Rea­son Foun­da­tion’s Shika Dalmia ex­plains, Detroit’s bloated public-sec­tor em­ploy­ment rolls soak up an enor­mous share of the city’s gen­eral funds. The gold-plated ben­e­fit pack­ages fre­quently in­clude re­tire­ment at age 55 with a gen­er­ous pen­sion and nearly full health care ben­e­fits. Public-sec­tor unions have re­sisted all at­tempts to ease this bur­den that is drag­ging the city down, and Mr. Bing isn’t in­ter­ested in fight­ing them.

Mr. Syn­der’s re­view team just de­ter­mined that Detroit is in a state of “se­vere fi­nan­cial emer­gency,” which could ne­ces­si­tate wrest­ing con­trol from the mayor and city coun­cil so an emer­gency man­ager can take over. This is all pro­vided for un­der an ex­ist­ing state law that the unions want to see in­val­i­dated so they can pre­serve their gravy train.

That would only de­lay the in­evitable. Detroit faces a bud­get deficit of about $200 mil­lion, and its credit rat­ing al­ready is down to junk sta­tus. The is­sue is not about whether the mayor or the gov­er­nor han­dles the city’s fi­nances, it is whether the bud­get ac­tu­ally gets un­der con­trol. That means re­strain­ing spend­ing on public-sec­tor salaries, ben­e­fits and pen­sions and an end to the posh early re­tire­ments.

If Detroit is ever to re­store it­self, it needs to learn to live within its means. The mu­nic­i­pal gov­ern­ment must hire only as many em­ploy­ees as needed, pay them a mar­ket wage and fund the ser­vices the res­i­dents pay for. Then maybe peo­ple will want to come back to Detroit to live. Oth­er­wise, it’s bank­ruptcy. The choice might not be easy, but it is clear. The lessons learned the hard way in Mo­town of­fer a cau­tion­ary tale to Washington big spenders about where fis­cal in­dis­ci­pline even­tu­ally leads.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.