The Detroit Financial Crisis

By David Green

The national media have trumpeted the neoliberal narrative for Detroit’s financial woes. Detroit is portrayed as a mismanaged municipality whose corrupt politicians have driven the city into the ground. Our municipal debt (including pension obligations) approaches $18 billion. Our former mayor, Kwame Kilpatrick, was recently convicted of racketeering. He and his associates reportedly extorted a 10% premium on all city contracts. Over several decades, the city’s elected leaders allegedly negotiated sweetheart deals with municipal labor unions in exchange for political support. Recently, the New York Times reported in a front page story how Detroit’s pension fund managers had depleted the funds over many years by handing out annual bonuses to pension holders.

Though there is some truth to these charges, this is not the real story behind Detroit’s financial failure. The real story is demography and declining incomes. Detroit is one of the largest cities in the country by area—over 140 square miles of land requiring management. The population has declined from almost two million in 1950 to fewer than 700,000 today. In addition, Detroit has suffered from profound de-industrialization with the decline of the auto industry. One marker for this is that UAW membership has fallen from a high of 1.5 million in Walter Reuther’s day to approximately 350,000 today. This loss of good paying jobs has further contributed to the erosion of Detroit’s tax base. Detroit leads the nation in the percentage of its residents living below the federal poverty line. State revenue sharing to the city is approximately half of what it was ten years ago. During his three years in office, Governor Snyder has cut state revenue sharing to the city by an additional $66 million. Suburban communities have compounded the problem by offering tax incentives to lure companies (and jobs) away from Detroit. Finally, Moratorium Now (a local coalition of community activists, retirees, and youth seeking to halt foreclosures and utility shut-offs) has estimated that criminal fraud perpetrated by large banks (JP Morgan Chase and Bank of America)—which placed 70% of Detroiters in predatory sub-prime loans—resulted in 100.000 home foreclosures between 2005-2010. This, in turn, caused a significant decline in the city’s population and further eroded the city’s tax base.

The solution for Detroit’s financial crisis depends upon the ideological lens through which one views the problem and its causes. From a neoliberal perspective (which views labor unions and regulation with disdain), the causes are mismanagement, greedy labor unions, and corruption. To proponents of this view, the solution is simple—austerity. They envision abrogating union contracts, paying pensioners ten cents on the dollar, and selling off city assets such as Belle Isle (a public park on the Detroit River), the water department, and the Detroit Institute of Art. The easiest way to accomplish this is through an emergency financial manager thereby circumventing the obstacles presented by democratically elected institutions. Last December, the Republican-controlled lame duck session of the Michigan legislature passed an emergency financial manager law weeks after Michigan voters had defeated a similar ballot measure. Furthermore, by attaching a small appropriation to the new law, the legislature rendered it referendum-proof (The Michigan Constitution makes all appropriation laws exempt from a referendum.). The new law mandates emergency financial managers to guarantee payment of bondholder debt service at the expense of city jobs, services, and pensions.

The problem with the emergency financial manager’s plan is that privatization of city services, reduction of retiree pensions and health care benefits, and abrogation of union contracts do nothing to restore Detroit’s long-term financial health. In fact, by reducing the city’s ability to attract population and by reducing the incomes of city workers and retirees (who pay city income taxes), these actions actually starve the city of revenue. The bankruptcy Detroit’s emergency financial manager proposes threatens the hard-earned, collectively-bargained, and state constitutionally-protected pensions of 20,000 Detroit retirees.

There is another solution—one based on human solidarity rather than the dog-eat-dog approach of the market place. The contours of such a solution include:

1)    Federal assistance for Detroit—In return for federal loan guarantees and grants to support a regional mass transit system, weatherization of homes, and investment in the Detroit Public School system, the federal government could insist that the city downsize to a land area more manageable for a population of 700.000. It should also make the federal aid conditional upon matching aid from the state.

2)    Restoration of previous levels of state revenue sharing—The state of Michigan now has a revenue surplus. It should immediately restore state revenue sharing to its level of ten years ago.

3)    Cancel the Debt—Criminal fraud perpetrated by large banks in marketing subprime loans to Detroit residents is the basis for canceling the city’s debt to the banks. This strategy recently worked in Jefferson County, Alabama where JP Morgan Chase repudiated 70% of the debt owed to it by the county due to the bank’s criminal activity.

4)    Regionalize Crucial Services—While the city of Detroit has suffered profound population loss, the population of the Detroit metropolitan area has actually grown to approximately three million. Crucial services such as public transportation, police, and fire protection should be organized on a regional basis and should be paid for by a modest progressive income tax on all of the residents of the three counties comprising the Detroit metropolitan area. This would require enabling legislation from the state as well as approval of the voters in Wayne, Macomb, and Oakland counties. The focus should be on regionalizing, rather than privatizing, public services.

5)    Homesteading—In an op-ed piece in the LA Times in March, Scott Martelle suggested that Detroit should offer land it holds for back taxes to homesteaders who would receive the property for free in return for a commitment to stay in the property for five to seven years, pay property taxes, and improve the property. This would hold the dual advantage of attracting population to the city and generating tax revenue from properties which presently provide no revenue to the city. The city could apply a similar strategy to abandoned industrial sites.

These suggestions offer a way out of Detroit’s financial crisis without resorting to the failed strategy of austerity. Detroit’s residents and municipal workers are not the cause of its financial crisis. They should not be asked to shoulder the burden of recovery by themselves.

David Green is Chair of Detroit DSA.

Individually signed posts do not necessarily reflect the views of DSA as an organization or its leadership.