Detroit News: Bankruptcy a cautionary tale
The following editorial appeared Monday in The Detroit News:
Detroit's fall into bankruptcy is being pitched as a cautionary tale for governments at every level. And while there are extraordinary circumstances unique to the Motor City, there are general lessons in what's happened here that could benefit others.
Foremost is that debt does matter. Detroit borrowed against both its structural assets and its anticipated future revenues to sustain a budget that was hopelessly out of balance. Even over the past year, when it was obvious it could never conquer its mountain of debt, they city spent more than $80 million of borrowed funds to maintain operations.
Emergency Manager Kevyn Orr is fond of noting that even if Detroit committed every discretionary dollar for the next 50 years, it wouldn't be enough to pay off the $18 billion it owes. Servicing that debt consumes 25 percent or more of the general fund, an amount projected to grow to 70 percent in five years if left unchecked. At the federal level, no one even talks about paying off the $17 trillion national debt. The ostensible goal is to reach a point where we're no longer adding to it. The prevailing view has been that as long as the country can meet the debt payments, the size of the debt doesn't matter.
But last year, the government spent nearly $360 billion on debt service, roughly 10 percent of the budget. If interest rates rise and they will and borrowing continues and it will that percentage could easily double. And just like in Detroit, money that should be spent on services to taxpayers will have to be diverted to debt service. Detroit's experience also teaches the value of confronting problems early instead of deferring them to the crisis point. Detroit has known for at least 25 years that it was headed toward a meltdown of its pension system.
An increasing number of pensioners and a decreasing number of active workers made it inevitable that the funds would be at risk. But instead of adjusting benefits and increasing payments into the system, the city kept borrowing money from the funds and refused to make rational benefits reforms. As long as Detroit could write its pension checks each month, it ignored the looming disaster.
Sounds a lot like Social Security and Medicare, doesn't it?
Detroit also lost focus on its core mission, which should have been providing essential services to its residents. The city saw itself as a jobs provider, bloating its payroll and providing services in-house that could have been easily outsourced. It allowed the services residents deem most important public safety, education, transportation to deteriorate. And so residents left for other places where they could get those services. They took their tax dollars with them, compounding the city's fiscal troubles.
A government that focuses on serving its taxpayers first is less likely to lose its tax base. Detroit learned that the hard way. The key lessons Detroit's situation can teach other governments is to borrow with extreme care and don't make promises you can't keep.
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