Panic in Detroit
By Casey Pifer
WasterWatcher August 2013
On July 18, 2013, Detroit filed a voluntary petition for bankruptcy, becoming the largest American city to do so. According to CBS News, the city is more than $18 billion in debt with a current budget deficit of $380 million.
The Motor City has been declining financially for years and finally declared a state of financial emergency on March 1, 2013. The city then hired an emergency financial manager in an attempt to straighten out its finances and avoid bankruptcy. Public services have suffered dramatically during the economic downturn. Nearly half of the city’s streetlights are broken, first responders often take up to an hour to arrive, the violent crime rate is higher than in any major American city, and 78,000 buildings are abandoned or blighted, of which 38,000 have been deemed dangerous.
Two of the biggest reasons for Detroit’s problems are generous public pensions and skyrocketing healthcare costs. A July 24, 2013 Cato Institute article reported that retiree healthcare costs, 99.6 percent of which are unfunded, account for $5.7 billion of the city’s debt. Unfunded pensions made up about $3.5 billion of Detroit’s debt. The pensions are not individually extravagant, as each worker averages $18,000, but with nearly 1 in 15 residents working for the city, they quickly add up. Detroit has dug a deep hole by making commitments that it cannot possibly keep.
According to Bill Nojay’s July 29, 2013 article in the Wall Street Journal, inefficient management is also to blame for Detroit’s spiral into insolvency. Nojay spent eight months as chief operating officer at the Detroit Department of Transportation in 2012. He noted that organizations that are short on cash prioritize payments to vendors to cover the most essential items. However, the transportation department had no control over who got paid. Instead, “[a] bureaucrat working miles away in City Hall, not responsible to the transportation department (and, frankly, not responsible to anyone we could identify), decided who got paid and who didn't. That meant vendors supplying noncritical items were often paid even as public buses were sidelined.” In addition, he found that many worker’s compensation and disability claims were paid without any evidence to support the claims.
Many of these issues were exacerbated by the deep seated union and civil service rules regulating the city. Nojay argued that these rules made it almost impossible to fire individuals performing badly or displaying bad behavior. Management did not have the authority over personnel needed to create efficiency, especially when “anyone with a pulse” was provided job protection despite their job performance. These policies made municipal departments unable to respond to needs and changes in an efficient way.
Nojay suggested that throwing out the city rules and regulations that protect employees, eliminating obsolete union contracts, and revising civil service rules would be the only way to fix the city’s problems. A bailout would only perpetuate the dysfunction.
Of course, Detroit is not the only city experiencing a budget crunch brought on by excessive benefit costs. A number of cities have filed for bankruptcy in the past five years, many of which have also overcommitted to doling out profligate pensions and healthcare payments. Before Detroit’s declaration, San Bernardino, California was the largest city to declare bankruptcy. Other cities to file bankruptcy since 2010 include Stockton and Mammoth Lakes, California; Harrisburg, Pennsylvania; and Central Falls, Rhode Island.
The Pew Charitable Trusts released a study in January 2013 detailing pension and healthcare shortfalls. It found that other than Detroit, the largest shortfalls were in Boston, New York City, Philadelphia, Portland, and San Francisco. The largest gaps occurred in healthcare obligations. This is also true in the case of Detroit, whose $5.7 billion in unfunded healthcare commitments is 62.9 percent greater than its $3.5 billion in unfunded pensions. Pew found that only two cities in its study were able to fund more than 50 percent of retiree healthcare costs, and 37 cities had less than 80 percent of pensions funded.
It is apparent that retirees are likely to receive only pennies on the dollar of the health care benefits they were promised by Detroit. Following its bankruptcy declaration the city has proposed shifting its retiree healthcare costs to the Obamacare exchanges. However, restructuring pensions may be more difficult. Union leaders are claiming that cuts to pensions are not permissible by the state constitution. Others have disagreed, saying that national law supersedes state laws in order to provide for the restructuring of a city’s obligations in times of financial crisis.
There have been calls from the public and some elected officials for state and federal bailouts of the city. Detroit Mayor Dave Bing (D) in particular is not ruling out federal assistance. However, Michigan Governor Rick Snyder (R) has publicly opposed a federal or state bailout. Instead of fixing problems, bailouts encourage risky behavior. A federal bailout of Detroit would set a terrible precedent for other cities across the country. It would encourage states and municipalities to spend lavishly knowing that the federal government will be there to help. This process punishes more prudent local governments while rewarding those who are irresponsible.
Local governments should learn from Detroit’s insolvency. While the city will be forced to make cuts and reform its benefit programs through the painful process of bankruptcy, there is no reason for other cities to panic like Detroit.