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Monday, Sep 01, 2014
Editorials

Thank goodness we're not Detroit

Published:

Detroit, in a frightening downward spiral, had no choice but to ask for bankruptcy protection. Even so, the city, which has promised its retirees far more than its taxpayers can afford to pay, was not ready to face fiscal reality.

A financial manager appointed by the governor made the decision, not Mayor Dave Bing or the city council. Go too deeply into debt and you eventually lose power. That's true of a family, a company and an elected government.

The city has been victimized by industrial decline, swindled by corrupt leaders and poorly led by its most honest politicians. It is unimaginable that similar circumstances would happen here, but that is no reason to ignore the Detroit disaster.

Motor City, with its grand skyline and dilapidated neighborhoods, provides a powerful lesson in the value of a diversified economy, a strong two-party system, and responsible, honest governance.

Urban areas, as Tampa and Hillsborough leaders are well aware, compete in all sorts of ways for the most desirable jobs and most talented workers.

Foreign automakers could have gone to the Detroit area. Instead, they went to places like Alabama and South Carolina, where they were offered incentives, good neighborhoods and schools, and nonunion workers.

People of means could have stayed in Detroit. Instead, they fled to the suburbs and farther. Many are spending their city pensions elsewhere. Detroit lost 25 percent of its population in the past decade.

Some of its leaders looted the sinking ship. Among them is former Mayor Kwame Kilpatrick, who was convicted earlier this year of multiple counts of corruption and bribery. The treasurer he appointed was indicted for taking bribes in a scheme believed to have cost two Detroit pension funds around $84 million.

The general counsel for the pension funds and a trustee stand are accused of bribery and kickbacks. A former investment adviser to the funds has pleaded guilty to conspiracy to pay bribes.

A former member of city council, Monica Conyers, who is the wife of U.S. Congressman John Conyers, recently served a federal prison sentence after pleading guilty to conspiracy to commit bribery.

Detroit's best leaders banked on an economic revival that never came.

Now the plan is to treat bondholders as unsecured creditors, which could mean they will only get back pennies for the dollars they gave Detroit. That raises the question of who would buy Detroit's next bonds.

Tax rates are already damagingly high in Detroit. The city charges an income tax of 2.5 percent on top of state income tax. Sales there are subject to a 6 percent state sales tax.

The Detroit News reports that taxes on a $150,000 house are $4,885 - twice the national average. The newspaper found that 2011 property taxes, as of January of this year, had not been paid on 47 percent of the parcels.

Many working-class neighborhoods are filled with abandoned houses, derelict but lacking for-sale signs.

There is no good case for asking taxpayers elsewhere to bail out a city whose expenses have exceeded its income by more than $100 million for the past four years in a row. The city borrowed heavily and didn't keep up with pension obligations, which now amount to about half of its $18 billion debt.

The city, unable to pay the interest on its debts, cannot continue borrowing. Pensions will have to be cut, and bondholders must expect to lose a big part of their investment.

The passionate argument that benefit promises to retirees must be kept at all costs would be more convincing if those making it could answer this question: Who will pay for the pensions and health care?

The Michigan state constitution does clearly require promised benefits to be paid. It doesn't explain how.

State pensions in Florida are currently in good financial health, but the experience in Detroit should help persuade lawmakers here to move new employees to a pay-as-you-go retirement system that can be modified if growth assumptions change.

Detroit shows how a jurisdiction that cannot afford to get smaller puts both its property owners and retirees at risk.

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