Signs of the Times

The editors of the Wall Street Journal wonder what city or town will be the next to be compelled to seek municipal bankruptcy?

While few municipalities are as economically depressed or dilapidated as Detroit, many have borrowed heavily, raised taxes and hollowed out services to pay retirement and debt obligations. Some like Detroit may soon decide that clipping bondholders and pensioners is a better option than to keep whacking taxpayers.

Take Oakland, which is Detroit’s doppelganger on the West Coast. The run-down Bay Area city, which has the highest crime rate in California, recently laid off more than 100 police to fund retirement benefits and pension-obligation bonds. Murders and robberies shot up by nearly 25% last year. To avert steeper cuts, the city borrowed an additional $210 million to finance pensions.

Philadelphia and Chicago have been less scrupulous about financing pensions and are now having to make balloon payments to prevent their retirement funds from going broke. Philadelphia is spending about 20% of its budget on pensions to make up for years of short-changing the system. In 1999, it issued $1.3 billion in bonds to invest in the pension fund, but it has paid more in interest than it has earned on its pension investments.

The city has recently raised sales, property and business taxes. The city council is now discussing using revenues from a one-percentage-point sales tax hike in 2009 intended for schools to finance pensions. Its sale tax rate is now 8%, the limit under state law.

Chicago is also fast approaching a day of reckoning. Chicago Public Schools last week announced 2,100 layoffs, which Mayor Rahm Emanuel blamed on a $400 million spike in pension payments. “The pension crisis is no longer around the corner,” he said. “It has arrived at our schools.”

If you can reconcile Chicago’s settling the teachers’ strike last year by offering the Chicago Teachers Union a whopping pay increase with the city’s weak fiscal condition on a strictly policy basis, I would welcome your explanation. Try as I might I can’t figure it out. At least not on the basis of sound policy.

Detroit has almost three times as many public employees per capita as Chicago. Not only Detroit’s system of government and taxation but the whole state of Michigan’s system has a dominant, prosperous auto industry baked into the cake. At least that’s how I explain Michigan’s high tax on capital investment.

I think those are the factors behind Detroit’s problem as well as Oakland’s and Chicago’s. City government is an instrument for providing service rather than providing public sector jobs. A strong public sector is predicated on a strong private sector. An effective and efficient public sector can facilitate the growth of the private sector and may even be necessary for a strong private sector but it can’t substitute for it.

And cities, like individuals, must change with the times. The prevailing winds of today are not blowing in Detroit’s direction. The recovery plan that appears to be in place for Michigan’s largest city appears to my outsider’s eye to be more in keeping with producing a Motown theme park, restoring a semblance of life to an otherwise dead city than it is to facilitating a viable core.

Like pruning a tree, Detroit needs pruning back to a vital and viable core. Unlike a tree, a city is composed of people and the pruning process must be done with an eye to reducing the suffering of the people affected as much as is practicable.

Chicago’s problems are somewhat different than Detroit’s. There’s much more viable here. We’re not as dependent on a single industry as Detroit has been. But Chicago must change with the times, too. And just as some of Detroit’s change must necessarily be executed in Lansing much of Chicago’s change must be executed in Springfield. Springfield’s one-party gridlock doesn’t give me a great deal of hope.