“No,” answered Republican Gov. Rick Snyder of Michigan when asked by Bob Scheiffer whether or not the state would ask for federal bailout funds for Detroit. “I’ve said before, ‘the state cannot bailout the city of Detroit.’ It’s not just about putting more money in the situation. It’s about better services to citizens…It’s about accountable government.”
Had Detroit been held accountable by the state in the early 2000s, the situation may not have become so dire. State law says municipalities may not run deficits, and if they do, they must report to the state Treasury Department on how the city intends to reconcile differences in revenues and expenses. The law was not enforced.
Snyder deserves credit. He has been the first state leader to do more than talk about Detroit’s problems. But Snyder has not done much to ensure there are not encore performances of Detroit’s bankruptcy tales in other localities. Unelected officials with dictatorial powers do little to prevent fiscal imbalance.
The problem with local governments is a problem that exists for all levels of government. Officials spend a lot in good times, and slash and burn budgets in bad times.
This is not only counterintuitive to how Economics 101 dictates governments should conduct fiscal policy, but it creates wild fluctuations of expenses and revenues. From the good times flow promises the government will later have to renege on as soon as tax collections fall.
Andres Velasco, the former Chilean minister of finance, made this point in a lecture before the Blavatnik School of Government at the University of Oxford.
Chile implemented a set of fiscal rules before the worldwide recession from 2008-2012. For example, Chile implemented strict limits on how much it would spend year to year, limits that stayed in place even if revenues exceeded expectations. The country aimed for structural surpluses, or in other words, surpluses that reoccur each year, sans a catastrophe.
Cities are not actually capable of what is called countercyclical policy, the kind that Chile employed, because they cannot spend into deficits in downturns. What they can do, though, is expend rainy day funds hopefully accrued over the course of an economic boom in order to fend off the harmful effects of recessions.
The state could restrict access to rainy day funds to either when deep imbalances occur or when the National Bureau of Economic Research declares there is a recession, as is the entity’s official duty.
Snyder and the state Legislature should also authorize the state treasurer’s office to conduct random audits of municipalities.
Lastly, the Headlee amendment to the state constitution should be repealed. The ill-conceived Headlee amendment, meant to protect taxpayers, puts direct limits on the revenues that can be derived from property taxes. Any jurisdiction with revenues which exceed the limits put into place must cut taxes. The results have been terrible losses of revenue to municipalities.
Functions known as circuit breakers could easily replace the Headlee amendment. Circuit breakers, like the electrical unit, cause an automatic refund for taxpayers when property taxes take up a certain amount of their income. The rules protect taxpayers from burdensome tax bills, but do not cause fiscal imbalances.
Fiscally conservative rules such as these are preferable to state takeovers of cities, and they should be part of Snyder’s quest to rescue the Motor City and the state.
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