Detroit Should Be A Warning To All
There have been warnings about Detroit’s dire financial straits for years, so it really would have been news if the city hadn’t declared bankruptcy.
The shoe finally dropped with last week’s filing, the largest municipal bankruptcy case in American history, with the city owing nearly $20 billion to banks, bondholders and pension funds. It has revenue of about $1.1 billion per year, a number that drops by about $100 million annually, and the city is burdened with a running deficit of $327 million.
Detroit had its share of management problems and corruption over the years, including borrowing money it had no ability to repay and making promises to union employees there was no way of keeping. Many cities, including those like Jamestown and Dunkirk, can breathe a little easier because they don’t borrow money for day-to-day needs or to make pension payments to retirees. Those are key differences. At the same time, there are frightening similarities shared by all Rust Belt cities – waves of industrial disinvestment, tax base erosion and population loss among them.
One reason lies in the history books. The Industrial Revolution brought millions of people from the farm to work in the factories housed in the cities. Those factories and other property owners paid huge sums in taxes that paid for police and fire departments, sanitation systems and infrastructure. Homeowners paid too, but their share was diluted because of the mammoth proceeds generated by industry. Public employee unions negotiated contracts when times were good that included such things as retirement after 20 years of employment and low contributions to health care costs. When factories began closing, there was never a corresponding shakeup of the services government is expected to provide or in the way government pays for those services.
The model outlived its usefulness, but was never replaced. Financial problems for cities that can’t replace heavy industry are likely inevitable, as Detroit has realized. Population loss and tax base make it impossible to pay for services as they were designed decades ago – and that is exactly the situation cities across the country find themselves facing. Bankruptcy may wipe away debt, but it won’t fix such a flawed system.
The real lesson to learn from Detroit is that elected officials at all levels need to look differently at municipal services. The amount of services provided by government needs to be rethought to reflect what is affordable in the new economic realities of life in the Rust Belt. Furthermore, the state and its taxing jurisdictions need solutions to the increasing burdens of health care and pensions for public employees that do more than push the problem further down the road.
It will take hard work and concessions from all corners for Rust Belt cities to avoid taking Detroit’s path. That hard work should begin now, before we’ve gone too far to turn back.