Policy: Entitlements

Detroit bailout plan will only dig the pension hole deeper

By |
Opinion,Columnists,Shikha Dalmia,Detroit,Entitlements,Detroit Bankruptcy,Pensions

Had Jennifer Granholm, Michigan's former Democratic governor, tried to bailout Detroit's pension system, Republicans would have accused her of ripping off state taxpayers to appease union backers. So it'll be interesting to see if they go for Republican Governor Rick Snyder's proposal last week to do exactly that.

Should Republicans, who control the state legislature, play along, the Michigan GOP will forfeit its claim to being the party of fiscal responsibility.

The basic outline of Snyder’s proposal is as follows: The state will divert $350 million of its tobacco settlement money over 20 years to match a grant of a roughly equal amount by private philanthropic foundations. The $700 million or so would then be used to pay Detroit’s retirees — whose pension system is unfunded to the tune of $3.5 billion — and keep the Detroit Institute of Arts off the chopping block during bankruptcy.

In return, public unions would presumably have to forego litigation to extract more money, allowing the city to exit bankruptcy ahead of November when Snyder faces re-election. And Democrats would have to agree to some longstanding item on the Republican wish list. (Some ideas rumored to be under discussion include slashing the income tax or converting the school pension system from a defined benefit to a defined contribution plan.)

In short, for about a third of the $50 million that the state lavishes on fat-cat Hollywood producers in film subsidies every year, it’ll buy labor peace, help poor Detroit retirees, save the DIA, expedite bankruptcy and force Democrats to offer policy concessions they otherwise never would.

So what’s not to like?

For starters, the reason that Detroit's pension system is in such deep doo-doo is that it's been managed by folks with the ethics of Bernie Madoff -- but without the math skills. Among their many exotic practices include handing out investment returns generated in good years as a Christmas bonus check to retirees. If they had saved the money, as per Accounting 101, the pension shortfall would have been cut in half.

Asking state taxpayers to compensate Detroit retirees for money they've already enjoyed would be outrageous under any circumstances. But it's especially so given that the state already hands Detroit almost twice as much revenue on a per capita basis as any other city. Motown is also the only city that is allowed to assess a special wagering tax on its casinos. What's more, between 2005 and 2011, the state helped the city borrow $610 million.

Rewarding the city’s profligacy even more won’t just create a moral hazard, encouraging more bad behavior in the expectation of future bailouts — it’ll also prevent the deepest possible restructuring right now.

If Detroit's various stakeholders don't want to auction the DIA's van Goghs and Rembrandts to cover retirees, fine. But what about selling Belle Isle, a beautiful city-owned island that has turned from being a major local tourist attraction into a veritable outhouse due to neglect? Putting it on the chopping block could fetch hundreds of millions. (One local developer has offered $1 billion for it, provided he can turn it into a Hong Kong-style commonwealth.) The city could also generate significant money by selling the water system. (About $2 billion as per a 2000 estimate, although that figure would be lower now.)

But the most troubling aspect of Snyder’s proposed bailout is the precedent it would set. According to James Hohman of the Mackinac Center for Public Policy, no distressed municipality in Michigan has since 1988 received a bailout, even ones under state receivership. The unfunded liabilities of just the third of all the municipalities that belong to the Michigan Municipal Employees' Retirement System consortium is currently close to $3 billion. If Detroit gets bailed out, by what logic would all these municipalities be turned down?

The $350 million that Snyder wants Michigan residents to cough up for a Detroit bailout might, then, be just an initial down payment.

Snyder's scheme to extricate Detroit from a pickle of its own making will put state taxpayers on the hook for many more pickles of Snyder's making. If Republicans go along, Michigan residents will have one less reason to vote for them.

SHIKHA DALMIA, a Washingon Examiner columnist, is a senior policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets.
View article comments Leave a comment

More from washingtonexaminer.com