07/26/2013 11:18 am ET Updated Sep 25, 2013

Bankruptcy Won't Fix Detroit


Detroit did not have to go bankrupt. And there is little reason to believe the bankruptcy process will result in the rebirth of the city in a form necessary for Michigan to prosper.

The Detroit bankruptcy could have been prevented with more urban friendly policies from the state. However, the last governor to really understand the importance of Detroit to the state, and to be fully committed to helping our cities, was Governor William G. Milliken. His successors, democrat and republican, simply ignored Detroit and, in fact, often pushed policies that encouraged its failure, from limiting mass transit opportunities to pushing through an end to residency requirements for city workers.

It is easy to blame Detroit's problems on corruption, unions and overly generous pension benefits. None of these factors were the primary cause of bankruptcy.

The main factor was the steady erosion of the tax base and the city's need to borrow money to maintain even a minimal level of public services. The last time Detroit had a balanced budget was 2005. Michigan was in the fifth year of what turned out to be a 10 year recession, that no one foresaw. Detroit borrowed money to stay afloat which, in hindsight, may have been unwise. But with declining state support (due in large part to major tax cuts accepted by state policymakers, in a futile effort to resurrect the factory economy) , borrowing appeared to be the only option to maintain even a minimal level of public safety and basic services. Better financial management would have helped but would have only delayed the inevitable.

Detroit had several options to bankruptcy; none are practical, given the current political environment that continues the past hostility to the city that has characterized the state's relationship to its largest city since 1982.

Detroit may have mismanaged finances, but the state's cuts to revenue sharing doomed the city. One option would have been for the state to restore revenue sharing to previous levels, which would have been worth nearly $200 million to Detroit. The state could have afforded to do this if it had not cut business and income taxes in 2000, and then given business another $1.7 billion tax break in 2011.

Detroit's income tax rate used to be 3.5 percent but was reduced to 2.45 percent over a several year period in exchange for a promise from the state that revenue sharing would not be cut -- an agreement the state did not keep. The income tax rate could be returned to 3.5 percent, and to offset the negative effect of a higher rate on the city the state could provide a special credit.(Increasing the income tax rate back to 3.5 percent would raise about $75 million annually.)

Also the state could take over income tax collections for Detroit. According to one estimate, Detroit could potentially collect at least $50 million more annually with an improved collection process.

For a state sitting on a $500 million rainy day fund, these policies are eminently affordable. In fact, candidate Rick Snyder proposed special tax credits to attract, young talent to urban areas, but Gov. Rick Snyder has been noticeably silent about such positive incentives (in fact, revenue sharing today is well under the level when he took office, despite the state's "comeback.")

Another option would have been federal aid, maybe specifically designed to clear abandoned properties and to maintain police and fire services.

A third option would have been for the state to pass legislation setting up regional police and fire districts, supported by property taxes as is done in some states. Public safety makes up more than half of Detroit's budget so his would make a huge difference to the city.

A fourth option would be tax base sharing or regional government. This is done in many other states, and Governor Milliken proposed a tax base sharing program back in the 1970s, that if enacted would probably have prevented bankruptcy. Michigan's archaic annexation laws encourage rent-seeking from those who use the city's services for business or pleasure, but choose to live outside the city and pay lower or no taxes.

The final option would have been for the EFM to be given more time, but given Detroit's nonexistent tax base (property tax base of $12,000 per capita compared with over $30,000 in remainder of Wayne County) this would have probably only delayed the inevitable.

Unfortunately the state's response to Detroit's problems has been to pass legislation such as renaissance zones and other tax abatements which cut taxes for business locating in the city. This has further eroded Detroit's tax base, and has obviously not worked.

I do not believe bankruptcy will solve the problem given Detroit's inadequate tax base. Detroit cannot be a viable city without outside help, which no one is prepared to offer.

Detroit's underlying problems are the result of the downsizing of the auto industry, racial tensions, meaningless jurisdictional boundaries, state neglect and inattention and the Great Recession. Balancing the books in a technical sense will not address any of these fundamental issues.

Candidate Snyder issued a "Revitalizing Michigan's Central Cities" white paper. It says: "In order for Michigan to truly reinvent itself, its cities and communities must become more vibrant. Rick will work to improve the state's city centers and create attractive living and working environments for its citizens."

So far, we've seen no policies emerge from the governor's office or legislature to do just this. Until we do, Detroit's future will be in question -- as will be the future of all our large cities, and the state itself.