How To Make Detroit An Economic Tiger Again Jul 22nd 2013, 18:45
The Detroit Tigers may well win the World Series, after having one of the worst records in MLB history ten years ago. Detroit itself can do the economic equivalent. Credit: Elsa/Getty Images
This story appears in the August 12, 2013 issue of Forbes.
Who knows how long the Detroit bankruptcy drama will last, but those who want this city to recover as a vibrant center of commerce must focus on a few key areas.
• Taxes. A postbankrupt Motor City must have a low-tax regime, especially regarding commercial, industrial and residential property levies. Forget the spreadsheets and the bondholders' and unions' demands for blood; both are going to have to take hits. But low property tax rates, sales taxes and fees will attract opportunity-seeking entrepreneurs and gentrifiers by the multitude. Their energy, capital and sweat equity will again make Detroit an attractive and livable city. Only with such an economy will creditors be able to recover much of what they're going to lose.
Speaking of taxes, the state of Michigan should help itself and its biggest city by immediately repealing (instead of a ten-year phase-out) the crushing property tax levied on machinery and equipment.
• Pensions. These will have to be scaled back, as will the formulas for those not yet retired. After the benefits restructuring, plans should be annuitized, and people should have the equivalent of a 401(k) retirement plan going forward. This is critical for confidence in the future fiscal health of the city. That way pols can't make ridiculous future promises regarding benefits. Creative provisions can be made so that, as Detroit's economy grows, some of the givebacks can be restored—but NOT at the price of higher taxes.
• Medical costs. For retirees, set up health savings accounts with high-deductible policies. Putting, say, $3,000 a year in HSAs for regular expenses and having thorough catastrophic coverage for incidents totaling above $5,000 would probably be cheaper for the city than what it currently promises. And older folks would hardly consider something like this a horrific giveback. Similar plans should be given current workers. The specific numbers on these policies will obviously vary, but conceptually they are win-win: The city saves money, and workers become real and better medical-care consumers. After all, whatever they save they get to keep.
• Schools. Do as New Orleans did after Katrina and allow an unlimited number of charter schools to receive per pupil what the public schools get. The resulting good schools will help attract new residents.
• Asset sales. Detroit has plenty of them—from at least a couple of hundred million dollars' worth of fine art (a great opportunity for a philanthropist to buy it all and create a new museum) to garages, parking spaces, vacant buildings and land. Use the proceeds to help satisfy creditors and annuitize existing but scaled-back pensions. If the new tax regime is truly Hong Kong-like, then structures and land will go like hotcakes.
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