Emily Washington is a policy research manager for the Mercatus Center at George Mason University. She blogs at Neighborhood Effects.
Michigan Gov. Rick Snyder recently announced that he would assign an emergency financial manager to Detroit, stating that the city cannot feasibly pay back its $14 billion in debt and long-term liabilities. The governor asserted that local policymakers have failed to provide basic services that Michigan municipalities are required to provide their residents.
As the city struggles to maintain its current obligations, The Detroit News reports that nearly half of Detroit's residents have stopped paying their property taxes, to the tune of nearly $250 million in uncollected revenues. The newspaper's investigation revealed that many property owners choose to have their properties go through foreclosure—allowing them to legally erase their property tax debts in the process and repurchase the properties from the bank. Home values have plummeted in the city, but the assessments used to levy property taxes do not reflect market values, so tax bills are levied on values much greater than what residents could hope to receive from selling their homes. Some residents have said that they've stopped paying the tax because the city has failed to provide the expected level of services, perhaps indicating that they feel the social contract between the government and taxpayers has fallen apart in Detroit.
An emergency financial manager will have a greater incentive than elected city officials to improve Detroit's financial standing. For any Michigan politician, Detroit's municipal employees make up an important group of voters. However, their political influence is more concentrated at the city level, and as an interest group they have diminished power at the state level. Because the emergency financial manager will be responsible to the governor and state legislature, he or she will not face the pressures to appease city employees that local policymakers confront.
In Michigan, municipalities facing financial distress are permitted to file for Chapter 9 bankruptcy protection, but none have utilized that option previously. The emergency financial manager has the authority not only to sell municipal assets but also renegotiate union contracts that it finds the city is unable to pay. The ability to renegotiate pension benefits appears to be a key step toward fiscal stability. In Vallejo, Calif., city council members voted unanimously to file for bankruptcy in 2008, but they elected not to cut pension benefits during the process. Now, five years later, Vallejo remains on Moody's list of distressed municipalities, in part because pension benefits take such a large share of the city's budget that other key services are compromised.
Detroit has to dig out of its current mountain of debt. It also faces the challenge of reestablishing a willingness in its residents to pay taxes for the services that the city provides. This requires restoring basic municipal services to acceptable levels, and reassessing properties to more closely reflect their market values. A path back toward rule of law in which residents willingly pay their taxes in exchange for basic services is not yet in sight. But an emergency financial manager may be able to bypass the seemingly insurmountable political challenges that constrained local officials from implementing policies to return Detroit to fiscal normalcy.