During the 1980s, Detroit experienced an inflation and population-adjusted $236 million loss in federal funds. Increases in state and local funds only made up $178 million, or $0.75 per federal dollar lost. Unless unexpected assistance from the state or federal governments materializes, continued limitations on funding will force further reductions in the size of city government.
While the Mayor has undertaken a number of positive steps to improve the city's fiscal situation, much remains to be done. In the short run, there are really only four conceivable approaches to balancing the next city budget: raising taxes, improving the collection of existing taxes, cutting services, or improving efficiency.
Previous administrations tried to increase revenues by raising taxes. This resulted in Detroit's tax burden being nearly seven times higher than the average of all Michigan municipalities. In a 1992 survey of the largest city in every state and Washington, D.C., Detroit's residential property tax rates were the highest in the country. The city's effective tax rate of 4.53% was more than twice that of Houston. In addition, the estimated state and local taxes paid by a family of four in the city was approximately 19%, double that of the median of all 51 cities in the survey.
As a result of the stiffing tax burden, city property values declined in real terms by two-thirds between 1970 and 1990. Increasing taxes now is not a viable option, since it will only continue to exacerbate the downward economic spiral by driving out business. City tax rates need to be reduced, not increased, to make Detroit more attractive to businesses that create jobs, and to people who would consider living in the city. Mayor Archer correctly understands this fact.
Another proposed solution to reducing the city's chronic budget shortages is more aggressive collection of unpaid taxes. For example, it is estimated that the city failed to collect a tenth of the property taxes it was owed in 1991. In addition despite the highest tax rates in the country, city tax revenues per capita were only $568 for Detroit in 1992. By comparison, city tax revenues per capita were $935 in Philadelphia and $1,117 in Boston for the same year.
While improvements in the efficiency of tax collection may produce some incremental revenues, it is unlikely to yield as much money as people think. As noted by outgoing Budget Director Ed Rago, "Much of what appears to be unpaid taxes is really due to clerical errors, and in other cases the taxpayer is dead, cannot be easily found, or owes too little to make it worth pursuing" Likewise, cutting services is not a viable option for a depressed municipality like Detroit that has experienced years of service reductions.
Therefore, the only realistic option in the short run is to increase efficiency in city government. One method of doing this is to embrace the competitive model of government (described above) that has been successfully employed in other large municipalities. Better use of and cooperation from city employees is critical. About half of the city's operating budget is personnel costs.
The Mayor needs to eliminate unnecessary management positions. Better labor-management relationships will pay off in other tangible ways. For example, obtaining the cooperation of city employee unions in reducing health insurance costs could save another $38 million annually.
Employees need to be involved in evaluating and improving services. Management must also do its part by ensuring that city employees have the training and tools necessary to effectively perform on their jobs. The creation of turn-around teams, the utilization of outside business experts, such as Jay Alix, and the employment of total quality management are necessary first steps. However, further re-engineering of city functions, more flexible work rules, and the combination of departments will be required.
Although the Mayor promised not to privatize city services, he needs to reconsider this. During his campaign, Mayor Archer stated, "I would guess our morale is such that the productivity level in our city is probably somewhere between 35 and 40 percent, rather than the 65 to 85 percent one might expect to find in the public sector."
This can be dramatically improved through competitive contracting. Government services tend to be inefficient because they aren't subject to the discipline of competition. Without outside competition, how can municipal workers know what constitutes fair costs for the services they provide? Competition should spur public employees to improve their work, restructure their organization, and reduce their costs.
We have seen how other large cities have saved large sums when they have turned their services over to private industry. The Mercer Group, a management consulting firm in Atlanta, said in a 1990 survey of some 120 municipalities that one in four cities had privatized solid waste collection, janitorial services, landfilling, food and medical services, wastewater treatment, building maintenance, towing services, grounds maintenance or parking facilities. All of the respondents said they saved money; 80% of them said they had saved between 10 and 40%. About 45% also said the quality of services improved significantly.
Opening up services to competition does not always entail privatization. In the city of Indianapolis, a transportation department crew streamlined its services and won the bid, saving the city 25% from its previous costs. In Philadelphia, after being targeted for privatization, the city's sludge processing treatment plant pledged to reduce their operating budget by one-third.
Indeed, Mayor Archer need look no further than the city of Flint, about fifty miles to the north, for proof that just thinking about privatization can save real dollars. For months, Flint Mayor Woodrow Stanley made it plain that garbage collection was costing the city too much money-$6.2 million per year. He solicited bids from five private companies, eventually narrowing the list to the country's two largest, Browning Ferris Industries and Waste Management. When the numbers came back, it was apparent that a combination of either one of the private firms handling garbage, compost, bulk items, and trash bins and the city taking care of leaf pickup and special clean-ups would cut the city's total cost by $2 million.
Flint's city unions scrambled to be competitive and offered to shave almost $1.5 million from the total city bill. They proposed increasing the number of stops on each route from 665 to 775, reducing the number of shifts from two to one, cutting sanitation staff from 47 workers to 35, picking up bulk items along with regular garbage instead of doing that on overtime, and requiring collectors to work full eight-hour days instead of the previous practice of going home whenever they finished their routes early. The concessions were sufficient to convince the mayor and city council, at least for the time being, to keep garbage collection in-house. Mayor Stanley told the Flint Journal: "If I were just some weak-kneed kind of namby-pamby politician, I wouldn't have touched this privatization issue with a 10-foot pole. Political leaders now who aren't willing to take risks don't deserve to be in office."
Despite such evidence, Mayor Archer is resistant to the concept of competitive contracting, perhaps because it is perceived as anti-union. However, given the finite resources that the city is working with, it is important to recognize that even if one doesn't accept this idea philosophically, one may be compelled to use it by necessity. Therefore, Detroit should consider hiring private contractors to handle garbage collection, street repair, public lighting, and data processing and engineering.
The future budgetary process must also involve a critical analysis of how much government Detroit residents really need. The question should be, "What do people in the city need to make their lives most comfortable?" Although other services may be nice, if the city can't afford them, it should opt for creative alternatives.
In a 1992 study, the Heartland Institute provided a number of specific recommendations for sale of assets and competitive contracting of city services in Detroit. We have reviewed these suggestions in light of subsequent developments, and wish to re-propose the following:
Sell Cobo Hall to a private developer. Estimated annual savings $8-10 million.
Sell City Airport to industrial park developers. Estimated annual savings of $1.5 million.
Sell municipal parking garages to private interests. Estimated annual savings of $4-5 million.
Sell the zoo in Royal Oak to private interests or a non-profit organization. Estimated annual savings of 3.2 million.
Transfer public lighting to private interests. Estimated annual savings of $14 million.
Competitively contract water and sewer operations. Estimated annual savings of $150-170 million.
Competitively contract waste management operations. Estimated annual savings of $30-40 million.
Competitively contract data processing function, Estimated annual savings of $5 million.
Cost-savings through privatization can assist Detroit in another important way: financing any near-term revenue shortfall that may accrue from some necessary tax rate reductions. The extraordinarily high tax burden is a major reason for Detroit's economic decline. A study from the Washington, D.C.-based Cato Institute confirmed that essential point, revealing that among the 76 largest American cities, Detroit experienced the poorest economic growth from 1965 to 1990.
The municipal income tax rates of 3% on residents, 2% on corporations, and 1.5% on non-residents who work in the city, plus the 5% utility users excise tax and high property tax rates are working to erode the city's tax base. Reducing these rates, though perhaps producing a revenue reduction in the short-run, would be in the city's long-term best interests. A lighter tax burden, and one that is not so inordinately out-of-line with that of nearby competing communities, would undoubtedly foster both economic and city revenue growth.
We endorse the recommendations in this regard first made by the Central Business District Association in early 1993. The CBDA urged the city to eliminate the corporate income tax and reduce the individual income tax rates to the levels that existed prior to the 1981 tax hike¾from 3 to 2% on residents and from 1.5 to 1% percent on non-residents.
Like Milwaukee, Detroit should employ performance based budgeting. Future budgets should contain each department's goals, expenditures and desired outcomes, and the activities suggested to achieve these outcomes. It is important to control budget allocations and hold managers accountable for achieving proposed outcomes.
Where possible, the Mayor should continue his attempts to make use of volunteers and non-profit groups. For example, several neighborhood groups in Detroit have successfully adopted parks, transforming them from weedy, dope-dealer hangouts into urban gardens. Members of the Brightmoor Concerned Citizens, for instance, took on the responsibility of caring for Eliza Howell Park in northwest Detroit.
The Mayor acknowledged that he made a mistake in being ill-prepared for the annual Devil's night fires due to the administration's failure to solicit enough volunteer support. It is important to take advantage of the good-will of Detroit's citizens, and therefore not repeat this mistake in the future.
The Mayor recognizes that in the long-run the city must increase its economic base. He has proposed that the city "make a deal" on 43,000 parcels of vacant city land to get it developed and back on the tax rolls. Through the investment funds created by Detroit Renaissance and Acquest Realty and National Bank of Detroit, some economic development projects in the city will be financed.
The city must improve the administration of its economic development efforts. Amid reports of a rift with other economic development officials, Marge Byington, the city economic development czar, resigned in December 1994. Business interests have criticized the department for its lack of authority in saying "yes" or "no" to specific development proposals. Accordingly, the city needs an experienced individual who can close development deals. In addition, the city needs to improve the permitting and regulatory approval process to create a one-stop shop for approvals.
Mayor Archer has tried to forge alliances with Detroit neighborhood groups, religious leaders, businesses, the City Council, and the suburbs as well. We applaud the Mayor's attempts to include these groups in decision making. But the mayor still needs to be more responsive to the needs and concerns of small businesses and investors. This involves cutting red tape and bureaucratic overlap in providing city permits, inspections, and billing. In addition, the city also must curtail onerous building and zoning codes and licensing restrictions.
In Detroit, investors run into a wall of fear over industrial pollution when they attempt to expand business and jobs. As is the unfortunate case in other major cities too, environmental cleanup is so costly and lawsuits are so common that many banks refuse to lend to developers. Kathy Milberg, a former "militant environmentalist" who now works to facilitate voluntary cleanups, said, "There is this mind-set that cleanup has to be all or nothing. Well, I've not seen anyone die of a less-than-pristine cleanup, but I do see kids in the city of Detroit dying from lack of economic opportunity."
We propose that cleanups should be suited to the land's future use. Every project should not have to meet a single, prohibitively expensive standard of cleanliness. The city administration should work with state and federal governments to remove the harsh standards on developers when contamination poses no danger to people or to the environment.
This approach, known as risk-based cleanup, requires developers to remove anything lying on the ground or poking through the ground. Buried toxins, however, would be left in place provided that 1) they do not contaminate the groundwater used for drinking and 2) they are kept away from people.
In addition, the city should take advantage of the state's Site Reclamation Fund, which can be used to pay for investigation costs on municipal land. Covenants not to sue should also be used whenever possible to remove a developer's fear of cleanup liability. These covenants are state guarantees that a buyer or developer will not be sued and forced to pay the cleanup cost of previous pollution.
The empowerment zone application spurred unprecedented cooperation among Detroit businesses and community organizations¾a necessary step toward rebuilding the city's economic base. However, the Mayor should recognize that it is unlikely that business executives will continue making commitments to place millions of dollars at risk in Detroit unless they see that the city has put its own fiscal house in order. The $100 million empowerment zone windfall should not work as a narcotic that prevents the city from making the tough decisions necessary for survival; if city officials allow that scenario to develop, there will be little net benefit in the long run from all those federal dollars.
Therefore, the Mayor should review and consider the strategies employed by other major municipalities (summarized herein) and work to reduce the city's tax burden. Only through these deliberate, pro-growth policies will the city create the conditions conducive to business attraction and expansion. Thereby, Detroit can once again be a world class city.