Monday, July 22, 2013

Detroit Debt and Pension Funding – First in a Series of Domino’s to Fall

From the website: Slums in the USA at

The City of Detroit declaring bankruptcy should not come as a shock to the nation nor the people who live in Motor City – the signs of a problem that was out of control were there for all to see. As recently as May of last year, the City of Detroit cut the street lights to the highest crime areas in an effort to cut some of the budget(Degrees). In that case, the argument was that the City was unable to attract private businesses – in essence depending upon what was left of the tax base to bolster up the massive public employees pensions, and the mismanagement that had taken place for decades.

Now, as the City tries to get out from under, by eliminating payments to pensioners, it appears that the media has finally gotten wind of the fact that there may be a problem – by looking at the human interest side of the “story”.

The Washington Post headlines: “After Detroit bankruptcy filing, city retirees on edge as they face pension cuts”. There are 20,000 retirees about to lose their pensions, with no other recourses available. The reason:” Of Detroit’s overall debt, about half — $9.2 billion — represents pension and health benefits that the city has promised retirees but that it now says it does not have enough money to fully pay.”

The Washington Post, somewhat erroneously blames fear and prejudice for the fiscal nightmare facing Detroit – In an op-ed “White Flight and Detroit’s Decline”, the premise of race riots in the 1960’s, and the resultant flight of “white” residents either due to fear or prejudice is partly to blame. However, one might want to take a look at the fact that the City has been bleeding jobs and businesses for decades, one of the chief elements in maintaining some sort of balancing act. One might look to Massachusetts, where the unemployment rate is rising again; taxes are on the docket, again, and those residents that are packing up for more tax friendly, employment friendly environments. Texas being the first destination, as well as border states such as New Hampshire, where personal taxes are lower and there is more opportunity. It makes sense that when opportunities are not available, regardless of race or ethnicity, individuals move.

What might have helped Detroit? What might help the other cities across the U.S. that are headed in the same direction? The answer: reasonable pensions and possibly a state appointed budget overseer for cities that show the first sign of decline. The Detroit Free Press names a few in its article: ”Detroit not alone under mountain of long-term debt” in which the following cities are discussed as being in the “same situation” as the Motor City: Cincinnati and Baltimore, along with LA and Chicago: “Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.”.

The years of public officials promising hefty pensions in return for votes has finally come home to roost – and unfortunately, so many of those who rely solely on public pension funds, are now facing severe hardships. Each city that is faced with public employee pensions that are not in line with the public sector, regardless of size, should look towards renegotiating union contracts going forward, in order to stop the bleeding – and insure that their employees are offered a 401K or similar vehicle, not only as an addition to their “promised pension” but as a safeguard in the event that the City goes “bust” and can no longer fund the pension.

It is the same story as that being played over in Europe, Greece in particular, where public pensions destroyed the economy. The fact of the matter is that without private enterprises, and seven years of skyrocketing unemployment, one might think that the Federal Government, and those legislators and Senators which the people have sent to DC, would be looking closely at any programs that overly burden the private sector –either now, or in the near future (see: disaster that is Obamacare).

One might also suggest seeking advice from the management of cities, perhaps not that large, where there is a business friendly environment (See Texas), where there are jobs, as well as fiscal responsibility of the part of the City government.

In the case of Detroit, the writing was on the wall, yet, the proverbial can kept on being kicked down the long road to bankruptcy. Playing Monday morning quarterback, had the City government offered the alternative of a 401K to those union members, (and regardless of the brouhaha it would have caused), cut local business taxes, and sought the advice of solvent Cities, this would not have occurred. One wonders where, as those who are facing a loss in pension, would have recourse, given a bankrupt City – without the income from private enterprise, they simply don’t have the tax base to break even, let alone fund pensions.

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