NCPA - National Center for Policy Analysis

MOTOWN LOSES ITS MOJO

December 9, 2005

With an accumulated deficit of $300 million, union opposition to reform and a bond rating rapidly approaching junk status, Detroit is in crisis. As Joseph Harris, the city's auditor general until he was term-limited out of office last week, flatly declared, "Insolvency is certain. The only question is the timing of the inevitable."

Consider:

  • Detroit has a projected deficit of about 10 percent of the city's $1.4 billion general fund, but the near-collapse of General Motors, Ford and their major suppliers is posing a big drag on city finances.
  • This comes atop a long-running failure to adjust to Detroit's decline to less than 900,000 residents from a peak of more than 1.8 million after World War II.

So why not declare the city bankrupt? It's just not that easy, even if Detroit were to meet the qualifications for bankruptcy, says Tom Bray, a Detroit News columnist.

  • Under the Constitution, only a federal judge can abrogate the labor contracts sinking Detroit and other cities, but out of respect for federalism, courts have ruled that municipalities can enter bankruptcy only if the affected state agrees.
  • And to get to that point, many states require troubled municipalities to undergo time-consuming and ineffectual insolvency procedures of their own; in Michigan, this is conducted by an "emergency financial manager" appointed by the governor.

But Detroit has little choice. In the past, it could always hope for a bailout. But this time around, it can't expect much help from the state, which is running a large structural deficit of its own, or the federal government, which long ago dropped out of the "Model City" business. Economic forces are beginning to undermine the welfare state wherever it is found -- and most painfully in the places like Detroit where the welfare state was once deemed a shining model, says Bray.

Source: Tom Bray, "Motown Loses Its Mojo," Wall Street Journal, December 8, 2005.

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