Detroit’s bankruptcy and California’s Proposition 13 have been linked in an odd sort of way. Detroit’s bankruptcy has brought out the possibility of other municipal bankruptcies around the country as well as an examination of California communities in trouble, Stockton and San Bernardino.
As Californians are all too familiar, if there is a financial trouble in California government someone will say, “It’s Proposition 13’s fault.” That has happened with the California cities threatened by bankruptcy. Most recently on the MSNBC Morning Joe program, the show’s economic analyst, Steven Rattner, in commenting about bankruptcies around the country, dismissed the California bankruptcies as a product of Proposition 13.
This ideological analysis ignores the fact that the property tax under Proposition 13 is the most steady revenue stream of all the state’s taxes. Such an analysis misses the point that many other municipalities around the country that are bankrupt or suffering financial woes do not have a Proposition 13. In fact, in the case of Detroit, the city’s taxpayers pay the highest property taxes in the state of Michigan.
While varying reasons for a particular city or county’s fiscal woes are suggested, the common thread running through all the examples is too much debt and excessive pension payments.
The most important benefit of Proposition 13 for taxpayers in communities tested by bankruptcy is that the measure protects taxpayers from unreasonable property tax increases as the path of least resistance when officials attempt to fix the problem.
Want proof? Look to Chicago.
At the same time that Detroit declared bankruptcy, Chicago is teetering on the edge. According to the Wall Street Journal, a third of the city’s operating budget is dedicated to debt and rising retirement costs. Chicago’s mayor, Rahm Emanuel, warned that to meet the bill the city might have to raise property taxes 150%!
Without Prop 13, California taxpayers in Stockton and San Bernardino and other communities with unbalanced books would face a similar threat. Prop 13 prevents taxpayers from having to make up for mismanagement and elaborate perks offered by government officials that put their cities in a financial hole.
As far as Detroit is concerned, services have given way to pay for retirement and debt obligations. As that same Wall Street Journal article reports, “Nearly 70% of parks have been closed since 2008, and four in 10 street lights don’t work. The city has cut its police force by 40% in a decade. … Meanwhile, Detroit residents pay the highest property and income taxes in the state. Last year its business tax doubled. About 40% of revenues go toward retirement benefits and debt, much of which was issued in the last 10 years to finance pension contributions. Payments on $1.6 billion of pension-related certificates of participation consume nearly every dollar of property tax revenue.”
The lack of taxes from the taxpayers who remain in Detroit is not the reason for the city’s decline. Much has been made of the auto industry losing jobs or white flight from the city, but there are other theories. As a columnist in the Canadian paper, Globe and Mail suggested: “It wasn’t white people or black people who killed Detroit – it was corruption, misrule and Democratic-machine politics.”
What is involved in all the bankruptcies around the country is the issue of public employee retirement benefits and debt run up by politicians who followed a buy now to make me look good and someone will pay later plan.
Stanford’s David Crane, one-time economic adviser to Governor Schwarzenegger told TIME Magazine, “Public employees didn’t cause these problems. Politicians making unfunded promises did, yet employees are often the ones who suffer.”
However, public employees have to be part of the solution. Taking a hard line stand against fixes that involve the public sector does not bring a solution to the bankruptcy problem within reach .
While Detroit is hoping for a federal handout, that is unlikely to happen. There would be too many cities lined up behind Detroit if the federal government bails them out.
While California officials try to mend budgets and, in some cases, deal with bankruptcy, at least California taxpayers have Proposition 13 to protect them from even steeper property taxes.