The MC: The Mackinac Center Blog

More State Favors for Detroit

Deferment through borrowing

The city of Detroit gets more revenue than every other Michigan city because of special treatment in state revenue sharing, casino taxes and utility taxes.

This extra money has not been enough to prevent its bankruptcy, nor were these the only favors extended to Detroit. The state also helped the city fight off insolvency by changing the rules for municipal borrowing.

Given this history, bailing out the city again to the tune of $350 million would be unfair to other Michigan residents and communities, and is unlikely to prevent future problems in Detroit governance.

All cities are creatures of state policy. The state determines how they operate, what they can do and what they have to do. These rules govern how cities can raise revenue and whether they can borrow money.

Among these rules is a law that allows for emergency borrowing through "fiscal stabilization bonds" that cover spending in excess of current revenue, and are secured by state revenue sharing payments. Note that this debt is not intended to finance long-lived infrastructure projects but simply to pay current bills while the underlying causes of the fiscal imbalance are fixed. Cities used to be limited to $125 million in borrowing with these bonds. The Legislature increased these limits in 2010 to allow Detroit to borrow up to $250 million. The city proceeded to borrow the maximum amounts.

The state’s review panel found that the city had been covering cash flow shortfalls with $610 million in borrowing. This allowed the city to pay its bills as they come due, but it also trades current solvency for future payments that drain the ability to provide services to residents. The city did not fix its basic problems and this further contributed to the debt that it is seeking to mitigate in bankruptcy.

In addition to providing extra revenue to the city, the state also helped it borrow more.

Bailing out the city is unfair to Michigan taxpayers. They have in effect already done so courtesy of greater revenue sharing and special state treatment. Despite this, Detroit slipped into bankruptcy. In other words, the state has already bailed out Detroit and should not do so again.

There is a better way: more aggressive use of asset sales — including part of its artistic holdings — contracting and ending unnecessary services. 

Several Michigan Capitol Confidential reporters won awards from the Detroit chapter of the Society of Professional Journalists at its annual “Excellence in Journalism” dinner Wednesday night.

Jarrett Skorup won second place in the “Consumer/Watchdog” category for his stories on corporate welfare, asset forfeiture laws and government waste, while Jack Spencer took third place in the same category for his coverage of legislators attempting to define the term “journalist.”

Tom Gantert took third place in “Feature Reporting” for his coverage of unions. Judges’ comments on Gantert’s work called it “Strong, persistent reporting. Great series of stories on an issue that the reporter makes clear deserves the spotlight. Tough, dogged work.”

Anne Schieber received honorable mention in the “General News Reporting” category for her series on townships threatening to raise people’s taxes if they were not allowed into certain homes. Judges said the story was “Well-told in both print and video.”

The full list of award winners is available here.

Michigan Capitol Confidential staff last year won two awards from the Michigan Press Association.

Minimum Wage Hike About Politics, not People

Jarrett Skorup Op-Ed in Detroit News

Research Associate Jarrett Skorup writes in a Detroit News Op-Ed today about why support for a minimum wage hike is more about politics than people.

Center Experts in Detroit News

City should privatize transportation department

Mackinac Center analysts Michael LaFaive and Michael Farren write in a Detroit News Op-Ed today that Detroit could save millions of dollars by privatizing its transportation department.

The News yesterday cited LaFaive, director of the Center’s Morey Fiscal Policy Initiative, about other privatization efforts Detroit Emergency Manager Kevyn Orr is considering, including several that Center experts have suggested for years.

Detroit EM Considering Center Proposals

Privatization could help stabilize struggling city

Detroit Emergency Manager Kevyn Orr is considering several outsourcing options that Mackinac Center analysts suggested the city should pursue as long as 14 years ago, according to The Detroit News.

Among options being considered for privatization are Detroit City Airport, the water and sewer department and garbage collection.

Fiscal Policy Director Michael LaFaive said Detroit should also consider selling Belle Isle.

Detroit’s Special Favors Add Up

Only city in Michigan allowed to tax utility bills

Gov. Rick Snyder has proposed a partial bailout of the city of Detroit with a $350 million gift. The state has been providing special favors to Detroit for years and it hasn't prevented the Motor City from slipping into bankruptcy.

Detroit gets special rules from state policies that don't apply to any other city in Michigan. Many of these rules expand the city's ability to collect revenue. For instance, Detroit is the only city in the state that assesses a tax on residents' utility bills.

State law allows the city to assess up to a 5 percent tax on their residents’ utility bills — electricity, telephone, natural gas and steam bills. (Yes, downtown Detroit has a steam utility.) Detroit charges the maximum rate.

The act only allows a "city having a population of 600,000 or more" to assess this tax, meaning Detroit is the only city that gets to charge this tax. The population threshold used to be higher and the state has rewritten these rules so that Detroit can continue to impose utility taxes.

The revenue is general fund money, meaning that the city gets to spend it however it deems fit. Currently, the city dedicates some of the revenue to pay off bonds in its Public Lighting Authority, which is repairing and replacing the city's street lights.

In 2012, the tax raised $40 million. It's not a huge piece of their revenue — it represents 5 percent of the city's total tax revenue in 2012 — but it is an extra bump to finances that no other city receives.

It amounts to another way that the state has already bailed out Detroit.

Government Subsidies Run Amok

The private sector almost always outperforms bureaucrats investing with the public's money

Anita Folsom

(Editor’s note: The following is an edited version of commentary that was originally posted at the website of Burton Folsom Jr., a history professor at Hillsdale College and a member of the Mackinac Center for Public Policy's Board of Scholars. It was written by Anita Folsom.)

Failed government subsidies have existed in U.S. history from George Washington to Barack Obama.

But what's especially remarkable about the stream of government aid — subsidies to the fur trade, steamships, railroads, airplanes, and even ethanol today — is that private citizens, with no federal funds, almost always outperform the men whom the government endows with large chunks of cash.

In the first years of the American Republic, John Jacob Astor owned a fur company that defeated a government-funded rival — supported by George Washington himself. Astor actively traded with Indians instead of trying to tell them what they wanted and how to live.

With steamships and transcontinental railroads, the government subsidized companies that either went broke or were so politically corrupt that the public demanded reform. On the other hand, the most successful companies in steamships and transcontinental railroads were both privately owned and made regular profits in spite of the vast amounts of federal aid given to their competitors.

Another example is the Wright Brothers. Wilbur and Orville Wright used $2,000 of their own money to design and build their airplane and successfully flew the first manned flight. At the same time the government threw money at a government bureaucrat, Samuel Langley, whose two failed attempts at flight both crashed in the Potomac River.

After the Wright brothers succeeded, Wilbur Wright said, "We have not thought of asking financial assistance from the government. We propose to sell the results of experiments finished at our own expense." Reporting on the Langley fiasco, the San Francisco Chronicle, said, "The destruction of Langley's machine should put an end to Congressional appropriations of any kind in every field of experiments which properly belongs to private enterprise."

But it didn't. In fact, government subsidies for corporations have increased dramatically in the last 100 years.

Currently, one corporate giant in the race for government money is General Electric. GE's chairman and CEO, Jeffrey Immelt, has led the charge to secure more federal funds for any project connected to green energy. As we reported in our new book, Uncle Sam Can't Count, "GE is the leading American producer of wind turbines, and Immelt has actively supported President Obama, serving in his administration as the jobs czar. GE has the biggest lobbying budget of any corporation in America, and the company gave more to Obama in 2008 than any presidential candidate in its history."

From 2000-2012, the U.S. spent $3,000 a second every second of that 12-year period on government subsidies — most of which, like Solyndra, were a huge waste.

Why does federal aid seem to have a reverse Midas touch? Simply put, federal officials don't have the same abilities or incentives as entrepreneurs. In addition, federal control always produces political control of some kind. What is best for politicians is not often what works in the marketplace. Politicians want to win votes, and they can do so by giving targeted CEOs benefits while dispersing costs to others.

The fact that government subsidies have failed from the start, and that they continue to fail, should alarm us when we consider the astonishing increases in federal aid given to most of the largest corporations in America today. 

The Constitution, in Article One, Section Eight, limits the power of government in economic development. If we want to preserve our nation's financial integrity for the 21st century, we need to end government subsidies and encourage the private sector to provide the goods and services that will keep our country prosperous.

Burton W. Folsom Jr. and Anita Folsom are the authors of, Uncle Sam Can't Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy, (HarperCollins, 2014).

More Higher Ed Spending Questionable

Legislators, taxpayers need answers

As state politicians are primed to deliver $82 million more this year to state higher education institutions, it is appropriate to ask what taxpayers will get for this spending.

Unfortunately, there will not likely be much to show for it.

The only direct reward for state taxpayers is a promise that tuition will not increase on Michigan residents as much as it might otherwise. That's not to say that tuition will decrease because of the extra 5.7 percent in state spending. Institutions will just be limited to increases at double the rate of inflation if they want to be eligible for extra "performance funding."

Even so, a small number of Michigan residents will be directly affected by this because only a small number of Michigan residents go to state universities. There are 255,657 Michigan residents in its state universities, or 2.3 percent of the state population. This is a large payment for a limited constituency. And that constituency tends to be well-off already. Only 28.2 percent of Michigan university students receive the federal needs-based Pell grants.

Nor are there guarantees that university appropriations will lead to more college graduates. This is especially important when only 60.7 percent of Michigan public university students graduate within six years. Some funding is now based on graduation rates among other variables, but such encouragement may not deliver on their intentions.

Nor are obtaining college graduates the key to economic growth. There is no apparent relationship between the states that are successful in increasing their college graduate populations and those growing their economies.

Spending more on higher education might be appropriate if there were large spillover effects from the increase. The benefits are not seen in the data, however. A 2006 study by Richard Vedder found a negative association between state appropriations for higher education and state growth.

Some of the reasons for the pressure to increase state university funding are understandable. Universities are scattered around the state and are a large presence where they are located. During Michigan's decade-long recession, state appropriations to universities were cut. Now that the economy is recovering, legislators are letting state universities share in the gains.

But this does not justify spending additional taxpayer money, especially at a time when legislators are struggling to perform some core functions. Unless legislators can get a clear idea about what state university appropriations will actually do, they can get a bigger bang for the public buck elsewhere. 


Vernuccio Cited on President's Ann Arbor Visit

Most Americans can't afford a $14 sandwich for lunch

Labor Policy Director F. Vincent Vernuccio is cited in The Detroit News today regarding President Obama’s recent visit to Michigan in his quest for a higher mandated minimum wage.

Vernuccio wrote in Michigan Capitol Confidential Wednesday that some 500 economists have signed an open letter opposing President Obama’s call for raising the federal minimum wage to $10.10 an hour, and the Congressional Budget Office predicts such a move would result in the loss of 500,000 jobs.

While in Michigan, the president ate lunch at Zingerman’s Deli in Ann Arbor. Its owner, who pays entry level workers $9 an hour and wants to raise that to $11, is a proponent of a higher minimum wage. As Vernuccio wrote, Zingerman’s caters to a high-end clientele and can afford to pay its workers more than its competitors. According to media reports, President Obama ordered a small Reuben for $13.99, a salad for $6.50 and tea for $2.50.

“Paying $13.99 for a small sandwich for lunch is considered a luxury for most Americans,” Vernuccio noted. 

Amtrak Subsidy Takes Money from Roads

Riders should pay their own way

Mackinac Center contributing author Michael Farren told WWMT-TV3 in Kalamazoo that the state should stop using tax dollars to subsidize Amtrak passengers. Farren pointed out that the subsidy comes from the gas tax, which means fewer dollars are available for road maintenance.

Farren has written about the issue here and here.