Detroit, MI (Newscom)

The Treasury Department’s release of $100 million from the Hardest Hit Fund last week amounts to a federal bailout of five Michigan cities without congressional oversight or approval.

The Hardest Hit Fund, part of the 2008 Troubled Asset Relief Program, was intended to provide assistance to homeowners in states particularly hard hit by the economic recession and housing market downturn. Treasury released the $100 million in the name of fighting blight, but local officials will actually use the funds to demolish homes and buildings.

Never mind the irony of using funds designated to prevent foreclosures and keep people in their homes to instead tear down homes. If lawmakers truly want to fight blight, they should be focused on preventing more people from leaving their homes rather than leveling the remnants of those already abandoned.

Across the country, cities and states that have long pursued poor economic and fiscal policies—including high taxes, big government, irresponsible borrowing, overcompensated employees, and underfunded pensions—are now nearing the end of their financial lifelines. Their last easy recourse is a federal bailout, whatever form that may take.

Just as with any bailout, this $100 million infusion will serve to prop up these cities’ finances without forcing them to address the root causes of their financial and economic problems. This is a mistake.

Detroit mayor Dave Bing pointed out that the city is already engaged in and on track to accomplish its specified demolition goal. If that is the case, then these funds should not be necessary. And money is fungible, so funds that would have been used for demolition can now be used in other ways.

A better use of this added cash flow would arguably be to shore up the city’s insolvent pension fund, but even then, the federal government should not bail out fiscally reckless municipalities. More likely, however, the demolition funds will free up resources for state and local lawmakers to increase spending elsewhere in their budgets.

It is crucial that Congress prevent backdoor bailouts of state and local governments. This particular $100 million bailout is relatively small, but it could lead to much larger bailouts, such as Federal Reserve purchases of state and local government bonds.

To prevent further de facto bailouts, the federal bailout boulevard should be demolished.