What Happened?
Detroit continues to struggle financially, and is facing yet another bailout scenario. City officials are considering the privatization of its Department of Transportation and other public agencies and services to relieve costly obligations and help Detroit regain a financial foothold.
The Goal
To avoid digging itself further into debt, Detroit is drafting a restructuring plan that calls upon the state of Michigan to provide $350 million over the next 20 years to support development projects. The annual $17.5 million in bailout funds may help with meeting immediate needs of the city, but does not guarantee any long-term sustainability to avoid another bankruptcy in the future.
Alternative Strategy
Rather than accepting the bailout money as is, many experts suggest Detroit consider selling assets and outsourcing vital public services to private companies so as to maintain city operations while eliminating some of the financial responsibility. Some experts argue that converting Detroit into a kind of contract city could save more than the $17.5 million in annual state funding and could be used for larger, statewide projects.
The Mackinac Center for Public Policy explains that in the private sector, loaning money out to an individual or organization with poor credit and a history of bankruptcy would make you an unsecured creditor. Thus, the state of Michigan should not hand over $350 million to Detroit until significant reforms have been passed to prevent history from repeating itself and ensuring the money will support sustainable growth. One reform, in particular, could be the outsourcing of Detroit’s Department of Transportation.
The Mackinac Center for Public Policy suggests that privatizing the city’s DOT could generate $78 million in annual savings as the agency currently offers bad service on top of inflated costs. Detroit’s DOT spends about $200 million per year for an average operating loss of $175 million annually.
The city provides the department with $78 million in subsidies each year, with the state of Michigan and federal government making up the remaining $100 million difference. From 2002 to 2012, the DDOT reported a total of $1.93 billion in operating losses. Because the number of riders on the DDOT is about 77,000, the subsidies come to $1,000 per person. This is an unsustainable model. If the city were to open itself up to privatization deals, entrepreneurs and successful companies could take control of the transit industry and reverse operating losses while improving overall service. Companies will have access to capital and resources that Detroit does not, and will have a better chance of turning a profit in the long term.
Privatize for Budgetary Concerns
Many Michigan communities are opting to outsource public services when faced with a financial crunch. In Oakland County, many school districts have elected to privatize transportation departments to save around $4.2 million over the next three years.
After realizing the long-term benefits of privatization, the number of school districts contracting for transportation services increased by 33.1 percent between 2011 and 2012. According to the Mackinac Center for Public Policy, 16.2 percent of Michigan school districts use a private company for transportation, while 61 percent have outsourced one or more public agencies including custodial and food services.
Contracting that Pays
Gov1 has reported on instances of outsourced transportation services generating millions in savings as well as other programs that contract with private companies.