Policy: Entitlements

Detroit bailout plans just paper over the problem with more money

By |
Opinion,Columnists,Shikha Dalmia,Detroit,Entitlements,Michigan,Budgets and Deficits,Detroit Bankruptcy,Pensions,Magazine

In Detroit's unfolding saga, the only innocent victims are city residents. So if there is any case for a Motown bailout, it is to make the city more livable for them.

However, that seems to be the main goal of neither the Democratic White House nor the state's Republican governor -- both of whom have come up with nifty new schemes to shovel taxpayer largesse to city retirees.

Just two weeks ago, Emergency Manager Kevyn Orr had been threatening to put a buzzsaw to the city's $3.5 billion unfunded pension liabilities to lop off savings to “invest” in city services.

Detroit is facing such a huge hole because, thanks to union opposition, it adopted none of the sound pension management practices that the rest of the civilized world embraced --while inventing many unsound ones of its own.

For example, most private companies and municipalities – including Detroit’s neighbors such as Macomb and Oakland counties – long ago moved their employees from defined benefit to defined contribution plans. Not Detroit.

More hilariously, in good years, instead of putting away money for the bad ones, it handed out an extra month's holiday bonus check to retirees. If it hadn't done so, its pension fund would have now been worth $2 billion.

As if that's not crazy enough, it also consented to union demands to create additional 401(k)-style retirement savings plans for workers. But unlike normal 401 (k) plans, these investments did not go up and down with the stock market. Rather, the city guaranteed a 7.9 percent annual return, even when the stock market collapsed.

Just two weeks ago, to offset some of this madness, Orr was demanding that the city's general retirees accept a 26 percent cut and police and firefighters a 4 percent cut in their pension benefits. If they resisted, he was threatening to up the cuts to 34 percent and 14 percent respectively. And he wanted to scrap their annual cost of living adjustments.

That turned out to be empty bluster. The plan he negotiated this week involves a mere 4.5 percent cut for general retirees. Firefighters and policemen will receive no cuts – and will continue to receive part of their annual COLA increases.

Also gone out the window are plans to move the city’s active employees to defined contribution plans. Nor is it clear if Orr stuck to his guns to “claw back” some of the annuity money that the city handed out.

But the question is how will a broke city pay even for these “restructured” retiree obligations?

Part of the answer is by squeezing Detroit’s private creditors. That’s fine. After all, they should have known better than to loan money to a city that had maxed out its credit card and was taxing its residents to the hilt. (For example, Orr is offering general obligation bondholders, traditionally regarded as secured and therefore entitled to full payment, 74 cents on the dollar. This will allow him to save $56 million over 10 years to ensure the most vulnerable retirees remain above the poverty line.)

But what's not fine is the scheme hatched by Gov. Rick Snyder, who is facing re-election in November and is eager to wrap up the bankruptcy before that. To get retirees on board, he has proposed to divert $350 million of tobacco settlement money over 20 years to them via the Detroit Institute of Arts - in complete disregard for what the money was originally meant for.

Even less fine is the Obama administration's bailout plan. It wants to hand Detroit $100 million from the federal Hardest Hit Fund to city retirees. This fund was created for homeowners wiped out during the housing meltdown. So simply forking over the money to retirees would run afoul of congressional intent. Hence, it'll hand it over to Orr for blight removal -- who will hand over his blight removal funds to city pensioners. Got it?

Had Orr, Snyder and Obama combined their prodigious legal creativity to marshal big bucks to improve Detroit's notoriously bad services, they might have positioned the city for a strong comeback. But by trying to appease city unions, they have signaled that they don't care about Motown, only themselves.

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