Bloomberg op-ed swings and misses on Detroit

March 21, 2012

I was a little shocked to read a recent Bloomberg op-ed that eviscerated Detroit Mayor Dave Bing for his failure to agree to any real reforms, even as he petitioned Lansing for funds to avoid bankruptcy for the city. Written by Detroit resident Shikha Dalmia, a senior policy analyst at Reason Foundation, the op-ed basically implies that Mayor Bing doesn’t have the necessary skills or personality to engineer a soft landing for the city.

As I wrote last week, Detroit’s fiscal problems have been well chronicled in the media, but little attention has been paid to the underlying financial issues at stake. Dalmia fell straight into that trap and went for hyperbole rather than reason-based criticism. Her piece is full of errors and smells of condescension.

While you couldn’t tell it from Dalmia’s lede, which said that Bing and city leaders would rather drown than share fiscal oversight of their city, the mayor and city council have been hard at work trying to negotiate a way to share power with the state in a way that does not exclude local officials. Meanwhile, Michigan Governor Rick Snyder has been working to wrest full fiscal control away from Detroit (as reported in the Detroit News):

Snyder last week proposed an agreement that turns control of the city over to a nine-member financial advisory board. Bing has proposed a plan that allows the city more control over its own finances, with the financial board acting in a mostly advisory capacity. Bing and the City Council are negotiating a joint counterproposal to offer Snyder.

At the same time, Bing, as he said in the opening of his State of the City address earlier this month (video above), has been aggressive in slashing city jobs as well as salaries and benefits to close Detroit’s big budget deficit:

My primary obligation is to bring financial stability to our city. I came into office confronted by a deficit of over $330 million created over decades … You have seen the tentative union agreements that my administration has made, which include structural changes for work requirements, benefit concessions and paycuts.

The mayor announced 1,000 layoffs of city employees last November out of a workforce of approximately 11,400 as of January 2011. It’s important to note that Detroit’s payroll was already much lower than the 13,400 city employees who were there when he began his term. Bing has said that there will be additional layoffs as the city continues to bring its budget into balance. Detroit had 713,777 residents according to the 2010 census, so a workforce of 10,400 doesn’t seem excessive or make the mayor appear soft on unions, as Dalmia implies. Actually, the more powerful part of the story comes from Bing’s efforts to improve the efficiency of government in areas like processing city permits and collecting taxes. This will allow for more layoffs while simultaneously providing city services at lower cost.

Now, on to the financial errors in Dalmia’s piece. First, she claims that the city pays more in debt service than it collects in general taxes. This is so silly I’m surprised it made it past the copy editor. The $600 million of debt service she cites is allocated among the General Fund, Water Fund, Sewerage Fund and pension obligation certificates. Debt service paid from the General Fund for fiscal year 2012 was $137 million across General Fund revenues of $1.2 billion. Unfortunately she seems to be picking up her financial data from the media rather than the official accounting statements of the city.

For example, she claims that the city has more than $10 billion in debt. The real number is $7.7 billion, according to the 2011 CAFR. Of this, $1 billion is general obligation debt, $4.6 billion is revenue debt, $1.2 billion is for pension obligation certificates, $480 million is for other employment benefits and about $375 million is for other payables. She also notes with derision that over half the budget is spent on personnel costs, which is actually about average for any local government. Detroit, once a city of 2 million, has substantial legacy personnel costs that the mayor has to balance with current spending.

Is there any reason to assume that Governor Synder can accomplish more by appointing nine financial professionals with no community or democratic ties to the people? Bing’s latest request to Snyder is for $137 million of immediate financial assistance for the city. The state could easily cover this by forgoing its contribution to Michigan’s rainy-day fund.

The state’s budget is about $42 billion when federal pass-through funds are included. A request for short-term assistance from Detroit is not a huge drain on state resources. It could also be thought of as an investment in the future of the state. The pensions for city workers are well-funded at 86 percent and 97 percent, for the general retirement system and the police and fire retirement system, respectively. The city has an immediate cash-flow problem as it has no more borrowing capacity and a BB/B credit rating. The important question is whether Mayor Bing has a plan to get to solvency. He seems to have a very good plan and is well on his way to executing it.

Buried in her op-ed is Dalmia’s real intent for slamming the mayor and insisting that fiscal control be given to an autonomous board:

The panel would have sweeping powers to sell assets, outsource city services, and rewrite or void union contracts to put the city’s long-term fiscal health on a sound footing.

She’s a privatization junkie, that brand of public commentator who believes that you can solve all fiscal problems by selling off the water and sewer systems and other public assets. That road provides a short-term budget fix while saddling residents with decades of increasing payments to private companies that bought their public assets at fire-sale prices.

The mayor has been doing an excellent job with very scarce resources and should not be pushed out of the recovery process. After managing the city through a $400 million margin call from UBS on interest rate swaps just as he came into office, I’m sure he can steer the city through this restructuring.

Detroit is working toward its rebirth as a city. This requires its residents to embrace their community and work hard for its success. A state-imposed fiscal panel of outsiders would have no power to bring life back to a broken city.

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