Kevin Orr has now been sent by the State of Michigan into the City of Detroit as an Emergency manager. He will most definitely slash costs and raise revenues by whatever measures necessary to solve Detroit’s budget crisis. Why is Mr. Orr what some may call a necessary evil? Why were the city’s elected officials unable to balance Detroit’s budget?
Detroit was established in 1701 and later incorporated in 1815. Through incorporation, the town established its own city government to provide the city with services. The city government became in essence a public business, funded by taxes to provide services to the residents and businesses located within the city’s limits.
As the number of residents and businesses grew, the size and complexity of the Detroit city government grew to support them. Detroit was densely populated with auto companies, companies that supplied them, and thousands of laborers who banded together in unions within this compact town.
In the boom years between WWI and the decade after WWII, Detroit grew rapidly, and workers enjoyed union wages that were 33% higher than most parts of the country. Workers claimed boom wages from growing business profits.
Intent on acquiring the financial gains that private union members enjoyed, public workers unionized within dozens of unions and their wages and benefits swelled as well. At the height of Detroit’s population in 1950, the City of Detroit employed 29,004. The ratio of citizen to city employee was 64 to 1.
Faced with boom wages and a highly organized union, the Big three began to move plants outside of Detroit over the next 15 years, and manufacturing jobs decreased by 138,000. As the city’s population shrunk, Feeling the pinch, Mayor Cavanaugh added the city’s first income tax to city funds in 1962.
Shortly after, Detroit’s public workforce began to shrink but the ratio of citizen to public worker continued to condense. By 1980, the ratio was 54 citizens per public worker, and this ratio was maintained until the 2005 crisis of government deficits. Why was this ratio maintained for forty years without causing a city finance deficit until 2005? The ratio actually was a problem well before 2005, but public unions were strong enough that politicians dare not dilute them further.
Detroit had excess public employees compared to other cities but Detroit’s population kept her police busy with the nation’s highest crime rate and her firemen busy with double the average fires due to blight arson. While Detroit had 54 citizens per public employee, the average of comparable sized industrial towns had twice that ratio.
But the excess number of employees wasn’t the only problem. Detroit was growing an excess number of retirees. Public sector employees could retire with significant health and retirement benefits after 25 years, police and fire after 20. By 2010, the city had 20,000 retirees compared to half that of active ones, severely crowding out funds for city services.
To cover increasing imbalances, Detroit added a utility use tax of 5% in 1965. The state began sharing its sales tax with Detroit in 1971. But with a local economy in free fall, the city needed more. By 1970, Detroit’s population had fallen 35%. As critically, Detroit’s housing stock that was its tax base followed the decline in population, dropping 100,000 units.
Detroit chased its falling population and housing stock with additional taxes but was consistently in arrears. Between 1973 and 2006, the city passed 46 obligation bonds to cover basic city services, increasing its outstanding debt load to over $12 billion dollars.
After considerable debate, the city allowed the opening of three casinos in the 2000s that added $180 million in tax revenues. Detroit also increased charges for services and pursued grants and private contributions. Yet, during the 2000s, the value of housing stock plummeted. By 2010, the average home sold for a mere $10,000. A third of housing had been torn down or burned by arsonists. The state reduced it revenue share to Detroit, and incomes of Detroit residents decreased, markedly reducing the city’s income tax collections. With 8 years of continued deficits, the city is now backed against a wall.
Kevin Orr is now faced with “rightsizing” Detroit’s government at a time when murders are rampant, when Detroit fires burn at double the rate of other cities, when 25% of Detroit’s lights don’t work, when emergency services are dangerously slow to react, when the city is plagued with wild dogs and feral cats, and when Detroit’s neighborhoods are blighted.
He must face the city’s unions, not only to reduce their workforce, but also to reduce their pensions. Detroit will most likely suffer through the work disruptions and slow downs that result.
He will also most likely sell some Detroit assets and lease others, while cramming down some of its long-term debt on bondholders. In addition, some of the 47% of residents that currently are not paying their property taxes should expect to pay them or face foreclosure.
This is the ugly point from which Detroit will painfully start. The question is whether Detroit can fix its structural deficits to turn the corner on its way back to a prosperous city, or whether Detroit will further decay. If Detroit’s leaders, union leaders included, choose to take the important steps to restructure Detroit’s future, then Kevin can play a pivotal role in giving Detroit hope.
However, he must not gut the assets that Detroit can use to lever its future. If his true goal is to help the city and not to carve it up for asset vultures, then Detroit will be poised to create a livable city. The future for those that have been left behind is either of creating a violent island of economic oppression from which there is no recovery, or, with Kevin’s crucial choices and sacrifice by all, of setting the path toward a brighter future for all of Detroit’s citizens.