Bankrupt Detroit Receives Less U.S. Aid Than Colombia
President Barack Obama proposed giving Colombia about $323 million in aid next year, mostly to combat drug trafficking and violence. Detroit, with an 81 percent higher homicide rate, will get $108.2 million.
As Michigan’s largest city entered a record $18 billion municipal bankruptcy on July 18, the message from Congress and the White House was that no new money would be forthcoming.
Detroit’s implosion has rekindled debate over how and whether a federal government that managed to provide more than $700 billion in aid to banks and automakers in 2008 and 2009 should help cities with unsustainable retirement debt, hollowed-out tax bases and diminished services that endanger the public. From 1990 to 2010, the percentage of the U.S. population that lives in urban areas grew to 81 percent from 75 percent, according to Census Bureau figures.
“The consequences for the failure of a whole set of great American cities is not limited to the people who live in those places,” said U.S. Representative Dan Kildee, a 54-year-old Democrat from nearby Flint, another former auto-industry center.
The federal government didn’t rescue the predecessors of General Motors Co., Chrysler Group LLC or failing banks until it was apparent their demise could sink the economy. Debt-ridden cities pose a similar threat, Kildee said.
Cities receive a variety of indirect U.S. help: tax breaks on municipal-bond interest, welfare payments, housing programs and federally funded highways. Direct aid is scantier.
In 2011, local governments received 5 percent of their general revenue directly from federal sources, according to a July 24 Census Bureau report. U.S. aid composed 35 percent of state revenue, though some was passed on to cities.
In Detroit, with a fiscal 2014 budget of about $1 billion, the biggest single source of federal aid comes in the form of a $33 million Community Development Block Grant, a program begun in 1974. Other U.S. aid helps fund housing, job training, economic development, health care and mass transit, according to municipal documents. Police, who take an hour on average to answer calls, will receive $2 million.
Detroit’s homicide rate last year was about 58 victims per 100,000 people. Colombia’s was 32 per 100,000 residents, according to its defense ministry.
Of the $323 million in proposed foreign aid for the South American nation, three-fourths would go toward “peace and security,” according to the U.S. State Department.
Some believe the erstwhile center of the U.S. car industry could use similar federal largess. Among them is Steve Rattner, the New York financier who led Obama’s auto industry bailout in 2009, which involved more than $80 billion in U.S. loans. Though initially unpopular, it proved the right thing to do, Rattner said in an article published by the New York Times July 20.
There is little zeal for that approach in Washington. Even Michigan Senator Carl Levin, a Democrat who once served on Detroit’s City Council, said the city should scour existing federal programs for help rather than seek a separate bailout.
U.S. Representative Candice Miller, a Republican from Harrison Township near Detroit, said there’s no room for a federal rescue.
“Detroit has been battling their fiscal problems for many years due to decades of fiscal mismanagement and public corruption,” she said in a statement. “I have confidence that the city will rally through this stage and come out stronger on the other side.”
Federal funding for cities peaked during President Lyndon Johnson’s administration in the late 1960s, and has been falling since the 1970s, said Tracy Gordon, a fellow in economic studies at the Washington-based Brookings Institution.
“I don’t see that changing,” Gordon said. “Just tinkering around with existing grants is not going to make much of a difference.”
Decreased federal aid was cited as a negative influence on their budgets by 51 percent of municipal finance officers in a 2012 survey by the National League of Cities.
Kildee said the U.S. should emulate western European cities that survived hardship with help of national governments. He said Leipzig, an older industrial city like Detroit, lost 20 percent of its population after unification of East and West Germany in 1990.
“Because they had a long-term view of infrastructure development, a more enlightened view of cities in their economies, that city was able to get around the corner and is now rebuilding itself, even though it’s smaller,” Kildee said. Detroit has lost more than half its population since the 1950s.
Helping cities is a state responsibility, said Richard Ravitch, a Democrat and former lieutenant governor of New York who helped steer New York City out of a 1970s financial crisis. States have done a poor job of keeping their own fiscal houses in order, he said.
Ravitch and former Federal Reserve Chairman Paul Volcker led a 2012 study that concluded state pensions and retiree health-care systems are underfunded by as much as $4 trillion. Cuts in state aid threaten basic municipal services while politicians lack courage to make hard decisions, Ravitch said in an interview.
“There’s no way Congress is going to do anything significant,” to help Detroit, Ravitch said. “There should be a discussion about how American federalism should work in the 21st century, and that requires leadership from the White House. There has been no leadership on this subject.”
Kevyn Orr, the emergency manager of Detroit who sought bankruptcy protection for the city, has cited unfunded pension and health-care liabilities as a major cause. He has estimated the pension deficit at about $3.5 billion and $5.7 billion for retiree benefits.
Republican Governor Rick Snyder said in a Bloomberg interview July 26 that there would be no bailout from Michigan. Snyder said there are other ways to foster economic development in Detroit, where state revenue-sharing aid, based on municipal population, has fallen to $181.6 million from a peak of $334 million in 1998, according to the state treasury department.
Federal bankruptcy law provides the city with a benefit in that it lets Detroit shed debt and reorganize, said Nicole Gelinas, senior fellow at the New York-based Manhattan Institute for Policy Research.
Gelinas said Obama, a Democrat who took office in 2009 after Republican President George W. Bush began the bank and auto rescues, knows the peril of paying off creditors who took a risk investing in Detroit.
“People are against bailouts,” Gelinas said, and “2008 was seen as a bailout of sophisticated investors.”
“We need private-sector dollars to come alongside to help us do what we used to do from a national level,” said Emanuel, a Democrat and former White House aide to Obama and President Bill Clinton.
Kildee, the congressman, said it’s time to reverse the shrinkage of federal aid to distressed cities.
“Not out of charity or to create social-equity goals,” he said, “but because those places are the economic engines of our economy, always have been. It’s in our national interest to do this.”
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