A Bankrupt Narrative

The refrain on repeat across news outlets includes some combination of the following: decades of mismanagement, a shrinking tax base, the decline of industry, and corruption. All of these factors doubtlessly contributed to Detroit's financial distress, but as an explanation for it they are woefully incomplete.
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A consistent and easy narrative has quickly emerged around the Detroit bankruptcy filing -- but it's wrong. The refrain on repeat across news outlets and social media includes some combination of the following: decades of mismanagement, a shrinking tax base, the decline of industry, and corruption. All of these factors doubtlessly contributed to Detroit's financial distress, but as an explanation for it they are woefully incomplete.

It's critical that we examine not only the internal failures of the largest U.S. city to ever declare bankruptcy, but also the context in which those failures occurred. And when we do examine the context, it's clear that cities in general -- in Michigan and across the nation -- face many of the same challenges that pushed Detroit off the fiscal cliff.

Two factors are noticeably absent from the dialogue around the bankruptcy: external mismanagement and our broken municipal finance system.

By external mismanagement, we mean decades of federal and state disinvestment in older, established communities -- not only core cities like Detroit but also built-out, inner-ring suburbs. Instead, funding priority was given to new communities, encouraging sprawl and the continued dispersal of metropolitan populations without a framework to support regional success. We are now seeing a shift in funding priorities, at least at the federal level, to support urban cores, but it's important that we consider metropolitan approaches rather than a constantly swinging pendulum between established and new communities.

Our broken municipal finance system -- that is, the way we fund cities so they can perform the functions of local government -- has received much less attention than the dire state of our core cities. To be sure, it's a less glossy topic, but it's also the problem we must fix to ensure cities have a chance to thrive in the future rather than languish between rotating consent agreements, emergency managers, and bankruptcies.

Many of Michigan's municipal finance failures are rooted in the interaction of the Headlee Amendment and Proposition A. Headlee and Prop A (enacted almost two decades apart) limit property tax increases to the rate of inflation or 5 percent, whichever is less. If property values increase faster than inflation, the rate of taxation has to be lowered to comply with regulations.

This is problematic in a few ways. First of all, if a city reduces tax rates in a good year and then faces a dramatic downturn in property values like we saw in 2008, their property tax revenues will also drop dramatically. Secondly, this system disadvantages older, built-out communities because, lacking a ton of new development, their tax base is relatively stagnant.

Another systemic handicap imposed on cities is the failed bargain of revenue sharing. When local and regional taxation options were seen as producing inequity, they were taken off the table in exchange for the distribution of sales tax. The agreement between the state and Detroit, in which the city would cut its tax rates in exchange for a big check, is essentially the same deal all cities made with the state. Over time and largely to balance the state's budget, revenue sharing has been cut. Now, cities have neither the promised shared revenue nor the tools they could use to generate revenue themselves.

You don't even have to look at Detroit to see how this system cripples Michigan's cities. Cities like Hazel Park and Ypsilanti, which no one is accusing of corruption or mismanagement, face similarly dire prospects with no solution in sight. Hazel Park residents voted to tax themselves at the highest level allowed by the state. Then they got a special exemption so they could tax themselves more -- then they hit their new limit. They've become leaner and more efficient, finding ways to do more with less. Still, the city is on the brink of financial emergency.

While Detroit certainly presents a unique scenario because of its scale and history, it's operating under the exact same handicap as other cities. It's easy to dismiss those who are still expecting a check for a couple of hundred million dollars from the state, because they will probably never get that check. But that doesn't mean it's right. The state should either reform revenue sharing or give communities the tools to generate revenue on their own.

It's difficult in the current economic and political climate to even suggest that more taxes are the answer, but it's irresponsible to talk about the financial struggles of cities without acknowledging that they're being starved. Ignoring this problem leads to the popular opinion that bad governance alone is responsible for Detroit's bankruptcy, and it feeds the troubling movement that says the best way to reform government is to disassemble it. If you believe in America's basic social contract and the idea that government is the people getting together to do that which we can not do (or do as well) alone, you should take issue with this type of rhetoric.

More critically, by totally ignoring the cracked foundation upon which we're trying to rebuild, we're missing the opportunity to fix that foundation. Until we examine how we fund cities, at what level services are provided, and how best to reverse decline in a sustainable way, communities across the state and the country will continue to fall into financial distress. When we shake our heads sadly at the vague notion that Detroit brought this on itself, we buy into the cycle of disinvestment and slashing that is leading to a less livable and equitable Michigan.

This post originally appeared on Michigan Suburbs Alliance.

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