The Corner

Your Taxpayer Dollars at Work: Detroit Bailout Edition

This morning the Hill reports that the Obama administration will send $320 million to the bankrupt city of Detroit. My colleague at the Mercatus Center Eileen Norcross sums up the mini-bailout:

The dollars come from existing federal money that is being re-purposed. It includes $24 million to rehabilitate buses and install safety cameras, $1.35 million for a community policing program, and the underwriting of 150 new firefighters. There are also funds for streets lights, police bike patrol, $3 million to hire new police, dollars for urban revitalization, and $25.4 million for demolition. A few months ago the administration said Detroit would have to work with creditors to resolve its bankruptcy issues. The city owes its creditors $18.5 billion.

The Washington Examiner’s Conn Carroll has a good piece explaining where the money comes from.

Is this really the best use of our taxpayers’ money? After all, the city is responsible for most of its fiscal problems. Among other bad decisions made by city officials over the years, mismanagement of their pension system probably takes the price. Norcross reminds us:

Another example of how Detroit ended up in this awful position is highlighted in yesterday’s New York Times report of how Detroit City Council members skimmed $2 billion off of the pension system’ “excess earnings” to give employees “extra payments” that had nothing to do with their pension benefits. This practice which spanned a 23 year period was justified as follows, quoting the NYT:

“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.

Of all the nonpension payments, she said, 54 percent went to active workers, 14 percent went to retirees and 32 percent went to the city, which used its share to lower its annual contributions to the fund. The excess payments were often made near the end of the year, when recipients needed money for the holidays, or to heat their homes.

Of course the practice sounds wrong. Except it’s really another example of what happens when pensions value their liabilities based on asset returns. Detroit gave workers these “excess earnings.”

She adds: “How much damage has this accounting assumption and all the behaviors that flow from it caused? For Detroit — a significant amount. The city reports its pensions are underfunded by $634 million. It’s actually $9 billion underfunded on a market basis.”

It gets worse. While the city officials aren’t providing many of the services that they are supposed to provide, while many parts of the city are falling apart, while city officials have neglected streetlights and security, the city still has time to pass a new regulation to crack down on code violation by businesses. That’s right, in a city where businesses have already a hard time surviving and where people are moving out to start a business elsewhere, busybody lawmakers are implementing a crackdown that, according to its own projections, is expecting to shut down some 20 new businesses a week. As this ReasonTV video called “Operation Compliance: Detroit’s War on Small Businesses” shows, this is as outragous as it sounds.

You can also check out this four-part series called “Anarchy in Detroit.” It documents what Detroit residents are doing to make their city a better place and provide many services in the place of the city government. I think this should go a long way to show that many of the functions that state and local governments have highjacked over the years could/should be provided by the private sector.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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