A state bailout for Detroit? Been there, done that.
While the prospect for a federal bailout for Detroit remains dim, calls for Michigan state government to provide more help, and accusations that the state is somehow responsible for the city’s plight, haven’t let up. But those making the case for a state bailout are either unaware of the long-standing history between the City of Detroit and the State of Michigan, or have chosen to deliberately ignore it. Michigan has rewritten its laws multiple times to give the city more fiscal assistance. In other words, the bailout option has been tried and found wanting.
Back in 1996, as Detroit faced a declining revenue base, the state rewrote its gambling law to allow for casinos in the City, with wagering taxes going directly into local coffers. This tax now accounts for 15 percent of city revenue. Detroit is the only city in Michigan allowed to levy this tax.
Detroit is also the only city that assesses an excise tax on utility use, authorized by state law in 1990. This tacked onto the regular utility bills paid for by residents and businesses.
The state has written special laws for Detroit’s income taxes. Every other city can enact a maximum 1 percent income tax on residents and 0.5 percent on nonresident earnings. Detroit taxes at more than twice those rates — 2.4 percent for residents and 1.2 percent for nonresidents.
Michigan shares the revenue from some of its taxes with local governments. Part of this is mandated by the state constitution, to be distributed by population. Part is determined by state statute that legislators can alter as they see fit. Detroit gets the majority of state revenue sharing — 58 percent of the pot, while containing less than 10 percent of the state’s total population.
Yes, Detroit’s revenue decline is a problem. But as a report from the Citizens Research Council of Michigan shows, no matter how you slice it, Detroit gets more revenue than every other municipality in the state, and the city’s still a fiscal basket case.
The reason that revenue has not been the answer to Detroit’s problems is mismanagement. That’s why city services have been atrocious regardless of revenue.
The state is helping with that. It first mandated some solutions, benchmarking and improved management practices through a consent agreement with the city. When the city failed to make adequate progress, the state put an Emergency Manager in charge.
Additional state assistance has been provided in the area of borrowing. Michigan rewrote its local government emergency bonding laws in 2010 to allow Detroit to float more stabilization bonds, secured by state revenue sharing payments. Limits were increased from $125 million to $250 million. The city borrowed the maximum. According to Moody’s, the city is continuing to make payments on these bonds so far, though this may change as bankruptcy proceedings continue. In addition to the $250 million in bonds, the state helped the city borrow an additional $310 million in the five years prior to direct state intervention.
The state could, technically, do more. Michigan runs an emergency lending program for smaller governments, although the $35 million max will not provide Detroit with much breathing room. Moreover, considering that state-authorized borrowing didn’t resolve the city’s financial conflicts in the past, there might not be much desire to keep on lending.
In sum, Michigan has done nearly everything in its power to return Detroit to solvency, and repeatedly changed the law to help Motown out of its numerous jams. It hasn’t worked and bankruptcy coupled with emergency management is now the city’s best shot at solvency.