WASHINGTON, May 26, 2014 — Detroit is the largest American city ever to file for bankruptcy. Its long-term debts are estimated at $18.2 billion. Of this, about $9.2 billion is in unfunded retirement benefits.
Nearly half of Detroit’s liabilities stem from promises of pensions and health care to its workers when they retire.
The causes of Detroit’s financial collapse are largely the result of its own unfortunate history of corruption and financial excess, and only partly caused by global economic trends and their impact upon the auto industry.
Detroit has been a one-party city for many years, never a good thing. The last Republican mayor, Louis Miriani, was elected in 1957. Since 1970, only one Republican, Keith Butler, has been elected to the city council. When one political party, whether Democratic or Republican, keeps an iron grip on political power for decades, we have a recipe for disaster.
Racial politics has also played a part in Detroit’s decline. In 1974, the city’s newly elected black mayor, Coleman Young, declared of the local police: “It is time to leave Detroit. Hit Eight Mile Road. And I don’t give a damn if they are black or white, if they wear Superfly suits or blue uniforms with silver badges. Hit the road.”
Thus, the first African-American mayor of Detroit equated the police with criminals. White flight, which began after the rioting of the late 1960s, accelerated. In 1970, Detroit’s population was 1.5 million. Forty-four per cent was black, 54 per cent was white. By 1990, the city’s population had fallen to slightly more than 1 million with African-Americans accounting for 78 per cent and whites only 20 per cent.
Mayor Young rewarded his base. The police force became 50 per cent minority and efforts to steer city business to black-owned companies resulted in two federal corruption probes in the early 1980s. While Young himself was never charged, his police chief, William Hart, was convicted of embezzling $2.4 million in police funds in 1992.
Young’s successor, Kwame Kilpatrick, resigned in the midst of a “pay-to-play” and sex scandal in 2008. He was later convicted on 23 counts, including racketeering and bribery. The city rapidly deteriorated. Its homicide rate doubled from about 30 per 100,000 residents in 1970 to 60 per 100,000 residents by 1990. Today, according to FBI statistics, Detroit is the most dangerous big city in America, with a crime rate five times the national average.
Editorially, The Detroit Free Press laments, “Decades of mismanagement and bad practices, coupled with catastrophic market declines, have altered the pensions from a reliable way to assure retirees’ futures into a massive financial burden.”
Clearly, Detroit is in a state of collapse. Charlie LeDuff, a reporter at the TV station WHBK, and author of “Detroit: An American Autopsy,” reports, “I know of an 11-year-old boy who was shot, the bullet going clear through his arm. The cops stuffed him in the back of a squad car and rushed him to the hospital. That’s how we do it. There was no ambulance available. About two-thirds of the city’s fleet is broken on an average day.
“I know a cop who drives around in a squad car with holes in the floorboards. There is no computer, no air-conditioning, the odometer reading 147,000 miles. His bulletproof vest has expired. His pay has been cut 10 per cent. I knew a firefighter who died in a fire, but not from the fire. He died when the roof of an abandoned house collapsed on him and his brethren could not find him because his homing alarm was broken and did not sound. He suffocated.”
Recently, Detroit’s 911 dispatch system went down for 15 hours, and no one seemed to care. When the system is running, the average wait for assistance is 58 minutes. Firefighters cannot use hydraulic ladders on the fire trucks to do their jobs unless there is an “immediate threat to life.”
Charles LeDuff urges his fellow Americans to “come visit Detroit … Come take a look at your future. Come give the tires a kick. And if you want your money back, come strip copper pipes and wiring from the abandoned buildings, if you can find any copper. Chances are, someone beat you to it.”
Year after year, politicians worked closely, not only in Detroit but in cities across the country, with powerful labor unions, especially public sector unions, that give money to elect the politicians who negotiated their contracts with unsustainable health and pension benefits. The Economist writes that,
“Detroit’s bankruptcy … is a flashing warning light on America’s fiscal dashboard. Though some of its woes are unique, a critical one is not. Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care. Detroit shows what can happen when leaders put off reforming the public sector for too long.”
According to The Economist:
“American states and cities typically offer their employees defined benefit pensions based on years of service and final salary. These are supposed to be covered by funds set aside for the purpose. By the states’ own estimates, their pension pots are only 73 percent funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are. If a more sober one is applied, the true ratio is a terrifying 48 per cent. And many states are much worse. The hole in Illinois’s pension pot is equivalent to 241 percent of its annual tax revenues; for Kentucky, 141 percent; for New Jersey, 137 percent.”
By one recent estimate, the total pension gap for the states is $2.7 trillion, or 17 percent of GDP. This underestimates the problem because it omits both the unfunded pension figure for cities and the health-care promises made to government workers. Governors and mayors have long offered generous pensions to public employees, buying votes today and sending the bill to future taxpayers. Beyond this, some public employees are promoted just before retirement or allowed to pick up many hours of overtime, raising their final-salary pensions for the rest of their lives.
Some unions win cost-of-living adjustments far above inflation. A watchdog group in Rhode Island calculated that a retired local fire chief would be given $800,000 a year if he lived to 100. More than 20,000 public employees in California receive pensions of over $100,000.
The Center for Retirement Research (CRR) at Boston College reports that states’ pensions are 27 percent unfunded. That adds up to a shortfall of $1 trillion. At the same time, they are paying only about four-fifths of their required annual contribution. On a more realistic discount rate of 5 percent, the CRR estimates the shortfall may be $2.7 trillion. A similar calculation by Moody’s, a ratings agency, says that pension plans are 52 percent underfunded.
Banking analyst Meredith Whitney, who predicted the financial crisis of 2007, predicts a chain reaction of dozens of cities becoming insolvent. Even less pessimistic experts forecast further credit downgrades, which will raise borrowing costs for cities and drive them deeper into debt. Chicago was just downgraded and Fitch, a major ratings agency, is considering a broader re-evaluation of local government debt on the basis of the situation in Detroit.
The problems of Detroit’s politicians have for some time outgrown the economy on which it rests. Since 2011, other cities, such as Stockton and San Bernardino, California, and Jefferson County, Alabama, have declared bankruptcy. Others are now waiting in the wings.
Opportunistic politicians and greedy unions are responsible for Detroit’s total collapse, and the dire straits of other cities and states. Surely, those who brought about this economic collapse are hardly the ones to guide us in the future. Where the leaders we need to reverse course are to be found is difficult to imagine in our increasingly dysfunctional politics.
Unless something changes, and quickly, the economic stability of our society does not appear to be promising. Today, the chickens of past policy excesses are coming home to roost, as they always do. What were these politicians and union leaders thinking?