Legislature Lacks Credibility in Detroit Bailout

As I noted in a previous blog post, Detroit Emergency Manager Kevyn Orr has suggested that Detroit's lenders in effect deserve to lose their shirts because they should have known the city was "openly and notoriously" driving itself into bankruptcy.

Gov. Rick Snyder took a similar shot at lenders last year on the national "Face the Nation" TV program:

And realistically if you step back, if you were lending to the city of Detroit in the last few years, didn't you understand there were major issues and problems? And look at the yields they were paying compared to other bonds. They were getting a premium.

Neither man seems to recognize that the same criticism could be leveled against city and state officials, who for years knew or should have known that Detroit was rushing toward a fiscal cliff. Not only did they ignore countless warnings, but state officials actively played enabler to Motown's fiscal malpractice.

Specifically, the borrowing Gov. Snyder criticized would not have occurred if not for a 2010 vote by the Legislature to grant Detroit special permission to go $250 million deeper in debt just to pay its routine day-to-day operating expenses. Many of the politicians who approved that "second-mortgage-to-pay-the-light-bill" debt are still in office today — debating a Detroit bailout to fix a problem they helped create!

This is one of many good reasons for the Legislature to say "NO!" to a $195 million Detroit bailout, which shifts to taxpayers the burden of those same politicians' past folly. Another is that while it may seem like good fun now for them to rhetorically slam and financially inflict disproportionate losses on past purchasers of Detroit bonds, a likely consequence is that other Michigan municipalities will be forced to pay higher rates to fund legitimate infrastructure needs.

A bailout is unfair to Michigan taxpayers, will encourage other cities to seek bailouts (Flint is also facing bankruptcy), and imprudently diverts money that could be better used elsewhere in the state — like filling nearly 10 million potholes. The fact that the same amount the Legislature wants to give to Detroit could be raised by selling just one painting from the city's art museum adds insult to taxpayer injury.

Lansing politicians neither have the economic nor moral high ground in the Detroit bailout debate. They were party to its fiscal malpractice and now want to drag Michigan taxpayers into the mire to cover up their own failed oversight. They should not.