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Detroit Driving Toward Its Own Debt Cliff
Originally published on Sat December 8, 2012 7:38 am
SCOTT SIMON, BYLINE: The city of Detroit is approaching its own fiscal precipice. The city is deeply in debt and could run out of cash by the end of this month. That would mean more layoffs from a city workforce that's already been cut so much that a reported two-thirds of the city's streetlights do not work. The amount of empty, abandoned land in the city, which produces no tax revenue, is estimated to be as large as the entire city of Paris.
Mayor Dave Bing and the city council have clashed over where to cut the budget and restructure city finances to avoid bankruptcy or what would amount to a state takeover of city spending under an emergency manager. Congressman Hansen Clarke joins us now. He's a representative of Michigan's 13th congressional district. That includes parts of Detroit and its suburbs. He's a member of both the Congressional Black Caucus and the Asian-Pacific Caucus.
He joins us from the studios of WDET in Detroit. Thanks so much for being with us.
REPRESENTATIVE HANSEN CLARKE: Well, it's an honor to be on your show. And this crisis has been at least a half a century in the making, during my lifetime.
SIMON: Well, Mr. Clarke, the state treasurer, Andy Dillon, warned this week he might have to step in and appoint a financial manager. Do you see any alternative?
CLARKE: Definitely, there's an alternative. Detroit's financial crisis is a buildup over decades of white flight, of the outsourcing of jobs, of a housing policy that encouraged people to get underwater in their loans. But most importantly, and most tragically, it was the state takeover of the Detroit public schools back in 1999 that destabilized Detroit's schools and closed down decent schools and drove families out of the city.
So the state takeover of the schools and the foreclosure crisis really decimated our tax base, drove residents out and is the primary and immediate cause of this financial crisis, in my opinion.
SIMON: I mean, without stepping in to dispute your history, which I know at least a few people certainly would, this week the Detroit city council approved a payment on a $29 million pension fund shortfall that the council said was caused by an accounting error. Now, do you see why the state and bond rating agencies might be a little skeptical of the city's ability to manage itself?
CLARKE: Well, when it comes to the pension obligation, the real problem there, though, is how the city in the past refinanced that pension obligation. They took out variable rate loans and then they entered into a very risky derivative agreement to actually hedge against that risk, so now the city every year has to pay out over $100 million just on debt that they owed to refinance the pension.
So these were decisions that were made in the past that weren't the best and may have been politically motivated.
SIMON: And when you say politically motivated, can we translate to mean to gain the support of the unions, which were so important in a city like Detroit?
CLARKE: Or to actually gain the support of lawyers and financial advisors who make money on deals and they in turn make campaign contributions back to the elected officials.
SIMON: But I wonder, congressman, to a national audience listening, I mean, they might point out, you have elections in Detroit. I mean, you elect the public officials. Why are you blaming consultants and bankers and outside sources when it seems to me that Detroit has made their own decisions?
CLARKE: I'm not doing that at all, but many times you have politically motivated elected officials who have made decisions that were not in the best interest of the people, but actually advance themselves politically at the cost now of this enormous debt that the taxpayers are bearing. So that's why this week in Congress, I'm moving on some bills to help refinance this debt at a lower rate, free up money that we would then invest in a long term, at least five-year development plan to rebuild the city.
SIMON: But congressman, you in the position of sort of like a taxpayer who tries to argue with the IRS? I mean, at the end of the day, there's no argument. That's what you owe.
CLARKE: No, no, but the...
SIMON: You might say it's unfair, but that's what you owe.
CLARKE: Well, but many other cities have been put in the same situation around the country and I don't believe our system of municipal finance is really a healthy one. It encourages cities and municipalities and their taxpayers to go into enormous debt, unnecessarily so. As a matter of fact, if the city had merely paid the pension obligation, their unfunded liability on an ongoing basis, without borrowing the money, the city would likely not be in this financial situation.
SIMON: But that's not what happened.
CLARKE: It's not what happened, but also, too, it provides us with a way of renegotiating these agreements and lowering the cost. And I've spoken to city officials who've mentioned that to me. I've spoken to Republican House members who also said, look, this may be a way that we can actually help your city stabilize its finances. So that's what I'm working on right now, immediately.
SIMON: Detroit Congressman Hansen Clarke speaking with us from WDET in Detroit. Congressman, thanks so much.
CLARKE: You're very welcome. Transcript provided by NPR, Copyright NPR.