Annie Patnaude Testifies at Detroit Bailout Committee Hearing

June 13, 2014

Chairman Richardville and distinguished members of the Committee:

My name is Annie Patnaude. I am Deputy State Director of Americans for Prosperity-Michigan, a non-partisan grassroots group dedicated to furthering the cause of economic freedom. I am here today on behalf of our 90,000 activists to urge you to oppose provisions contained within the Detroit Settlement and Bankruptcy Grant Package that would distribute state revenue to the city of Detroit in excess of existing levels.

We believe that such a bailout would establish a dangerous precedent for future bailouts of fiscally troubled local governments; potentially drive up borrowing costs for other municipalities across Michigan; and, fail to put Detroit on the path toward fiscal solvency, thus shortchanging all of its creditors, including its pensioners.

Special deals

Detroit has received financial help and special treatment from state lawmakers time and time again. And, if we are to learn any lesson from history, it is that Detroit has a spending, not a revenue, problem.

State taxpayers have shelled out hundreds of millions to cover the cost of building the Tigers’ stadium, Lions’ stadium and now a new Red Wings hockey stadium. Between 2005 and 2010, the state helped the city borrow $610 million. State lawmakers even increased the limit on fiscal stabilization bonds from $125 million to $250 million—Detroit proceeded to borrow the max.

Special deals allow Detroit to collect hundreds of millions in additional tax revenue, according to experts with the Mackinac Center for Public Policy. For example, it is the only city allowed to assess a wagering tax on casinos and a utility tax on utility customers.

Detroit also receives the highest share by far on a per capita basis of both constitutional and statutory revenue sharing payments. A report published last year by the Citizen’s Research Council of Michigan indicated that Detroit’s revenue sharing payments ($353 per capita) were double Pontiac’s and nearly triple the payments received by cities like Lansing or Kalamazoo. Detroit received 58 percent of the total $235.8 million distributed through the economic vitality incentive payments program in last year’s budget.

Encouraging bad behavior

Unfortunately, all this help seems to have perpetuated rather than solved the problem. Instead of embracing fiscal reforms, the city spent its way into bankruptcy, borrowing more and more and making promises it clearly couldn’t keep.

Rather than investing pension gains, between 1985 and 2008 , Detroit’s pension fund trustees handed out those gains in the form of around $1 billion in annual “bonuses” to retirees, city employees, and the City of Detroit. According to some experts, had those “bonuses” been invested properly, they could have offset the current pension shortfall by around $2 billion. Additionally, a recent Detroit News investigation discovered that even as the Detroit Institute of the Arts sought more funding through a tax hike, it gave its executives pay hikes averaging 17 percent and gave its executive director an $155,000 interest-free loan.

Criminal corruption, on top of fiscal mismanagement, has deepened Detroit’s crisis. Over the past 80 years, five Detroit mayors and four county executives have either been sent to prison, were the subjects of federal probes, or were removed from office.

Detroit should leverage its assets

Detroit holds assets that include its water and sewage department, airport, parking garages, vacant property, and the Detroit Institute of Arts collection. These assets ought to be leveraged for the benefit of all of Detroit’s creditors.

Rather than shirking responsibility and accepting yet another state bailout, Detroit can and should explore opportunities for privatization as the city of Pontiac has done. Pontiac Emergency Manager Lou Schimmel sold off and monetized assets to reduce debt. According to the Mackinac Center for Public Policy, those sales included its unused water and sewer capacity, a city-owned theater, a golf course, old public works equipment and vacant lots. Pontiac also competitively contracted out core city services such as police, fire, 911-dispatch, and ambulance services.

While Detroit may not be able to pursue all the same reforms as Pontiac, city leaders can certainly work to develop a similar path toward fiscal solvency.

Conclusion

If Detroit’s political class is not serious about taking responsibility for reforms, it seems doubtful that the city’s current trajectory can be altered by yet another state bailout. City and union leaders already balked at one of the most transformative reforms suggested by state lawmakers—to convert Detroit’s defined benefit pension system to a defined contribution retirement plan. (Unfortunately, House lawmakers watered down the provision in response to this pressure.) This ought to raise questions as to whether Detroit’s leaders are truly committed to reforming past bad behavior.

Some of the institutional changes contained within this package are laudable; however, they do not justify yet another bailout for Detroit. Giving such a bailout would be rewarding bad behavior—ultimately doing a disservice to Detroit by preventing meaningful restructuring in the here and now.

Detroit’s leaders must commit themselves to real change and difficult but necessary reforms that can put the city on firm fiscal footing. Americans for Prosperity-Michigan will continue to educate our members around the state on the many taxpayer concerns surrounding a Detroit bankruptcy deal that involves state funds.

Sincerely,

Annie Patnaude
Deputy State Director
Americans for Prosperity-Michigan

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