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Detroit: A city out of gas

Adam Newman | Tuesday, October 8, 2013

It was sad, but certainly not unexpected, when Detroit filed for bankruptcy in late July. Once the Mecca of auto manufacturing, Detroit symbolized the nostalgic manufacturing hub every American holds dear. Unfortunately, globalization and technological advancement hit Detroit especially hard. Today, Detroit symbolizes urban decay: public services are horrendous (two in five street lights do not work), it has one of the highest murder rates in the country and one in two adults either does not have a job or has stopped looking. To say the least, Detroit has major issues.
However, the issues that most drove Detroit towards bankruptcy were unfunded pensions and health care liabilities. When Detroit declared bankruptcy, $10 billion of its $18 billion in debt obligations were due to the retirement plans of city employees. Over past decades, state and city politicians have made promises to public sector employees in exchange for political support. Raising salaries is somewhat difficult, because politicians have to undergo the unpopular act of either raising taxes or cutting spending. However, by offering generous pension benefits, politicians could promise city employees high payments in the future. This was a perfect situation for politicians, because they could still please public sector employees through compensation raises without cutting spending or raising taxes. Someone else would have to do that when the employees retired.  
The biggest question is how the bankruptcy will affect pensions. When in bankruptcy, organizations are able to shed debt by paying less for obligations. Many believe it is illegal for the city to cut benefits as a result of provisions in the Michigan constitution. But it is important to remember borrowing costs are directly tied to one’s likelihood of paying back loans (the more likely you are to pay back, the lower your interest costs). Thus, Detroit’s future ability to borrow (and hence pay for city services) will depend on how much its creditors are paid back during bankruptcy. Simply giving the retirees everything and giving the creditors nothing will hurt Detroit’s ability to raise money in the future.
Even still, anger towards public sector employees in Detroit is somewhat misguided. Contrary to popular opinion, public employees in Detroit do not have especially high pensions. The average pension is $19,000 for an employee, and the average pension for a firefighter is $30,000. Similar to any group, they are advocating against cuts that affect them. However, as hard as it may be, this group must understand lowering the age at which people start receiving benefits to the mid-50s and promising overly-generous rates of growth has destroyed the finances of both the local and state government. Tough choices will have to be made as these promises are fulfilled. Services and investments will be cut and taxes will rise. It is not a question of “if,” but “by how much.” While it may be difficult to understand, it would not be right for current employees and retirees to not have any sacrifice. Public employee unions should come forward and offer cuts to share the pain with taxpayers. If they do not, the political retribution will most likely lead to greater cuts down the road. As the political saying goes, “If you do not come to the table, you will only lead yourself to get placed on the menu.”
Unfortunately, there is relatively little Detroit can do at this point to solve its mess. Perhaps the only good that can come from this situation is providing an example to cities with similar issues, such as Chicago and Philadelphia, and states such as Illinois and California. The message these cities and states should take away is even “shining cities on a hill” can go bankrupt.

Adam Newman is a senior studying political science. He can be reached at [email protected]
The views expressed in this column are those of the author and not
necessarily those of The Observer.