Reckless spending and unfunded liabilities spell bankruptcy for Detroit
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.