What Detroit’s bankruptcy portends for America
12/07/2013 5:58 PM
12/07/2013 5:58 PM
The latest news out of Detroit isn't good. To get its fresh start, this once great but now bankrupt city is going to stick it to municipal employees and retirees.
City retirees there haven't enjoyed exactly lavish pensions, but what they had was thought to be secure, protected under the state's constitution. That was until this week, when a federal judge ruled that guarantee void.
This has bad implications for Detroit, and for public employees everywhere.
Federal Judge Steven W. Rhodes ruled that federal law trumps Michigan's constitutional protection for public pensions. That means that pensions that were promised to more than 21,000 Detroit workers -- fire and police, trash haulers, water and street crews -- can now be considered as part of the unsecured debt of the city.
To put it in human terms, the public librarian who worked 30 years checking out books, helping countless youngsters learn to read, might see her pension slashed. That might mean this fixed income retiree won't be able to pay her mortgage or heating bill each month.
According to Detroit Free Press, general city retirees receive about $19,000 in average pension benefits. Police and fire former employees get about $32,000, but they are also not eligible for Social Security benefits as part of their pension agreements.
Those are not astronomical payouts. Raise your hand if you think that's too much to live on in your retirement.
The danger is that this approach will be presented as inevitable when cities and states finally have to clean up the messes of past poor governance. If the decision is upheld, the way has been greased for other cities to follow suit.
And because it's Detroit, too few people will heed the alarm. After all, Detroiters are used to doing with less, right? Only a third of the city's ambulances are operating, and 40 percent of its streetlights. It takes police an hour to respond to "priority one" 911 calls, and large sections of Detroit, with its 78,000 blighted and abandoned properties, resemble a sparsely inhabited war zone.
Detroit is everybody's favorite byword for urban malaise, but don't think this is limited to the Motor City. Other municipalities and states have anxiously awaited Rhodes' ruling on Detroit's pensions because they have similar or even worse pension shortfalls. There's even an ominous shorthand term pundits and editorialists now use: The Pension Crisis.
However, there's something about the way these very serious people discuss The Pension Crisis that promotes the stick-it-to-the-retirees approach. They like to throw around large, scary numbers without any context, such as expressing pension shortfalls as a percentage of expected revenues or income. They blame unions (or, if they're particularly hostile, "union bosses") for hanging on to something that private-sector employees once had but lost.
They sometimes mention that pensions are underfunded because elected officials chose not to fund them, as they were supposed to. However, they almost never ponder the fact that employees -- whose benefits we must cut -- made all their pension contributions, on time.
Also unmentioned: Many of the deficit scolds now crying for blood (bond rating agencies, pundits, editorialists) were somehow OK with shorting the pension funds back when it seemed like a good idea (back when the stock market and "AAA-rated" mortgage-backed securities were everybody's friend).
Now, we are told, the only alternatives for dealing with the mess are hiking taxes, cutting services and getting out of pension obligations.
That brings us back to the significance of Judge Rhodes' decision. It's "the canary in a coal mine for protected pension benefits across the country. They're gone." That's how a spokesman for the Detroit Police and Fire Retirement System put it to the New York Times.
We're in the middle of a wrenching national process in which wage earners will have to part with any hope for secure employment and secure retirement. Middle-class workers in the private sector are getting worried, too. They've already been shunted into 401(k) plans, a pathetic alternative to the defined benefit pension. Add in all the mendacious schemes to "fix" Social Security, and you might see a pattern.
Do we have a pension crisis? Yes, but it's really a crisis of government. We need a federal law that regulates state and municipal pensions, just like we have in the private sector. And Americans need to understand that if they want to keep what they've already earned, they're going to have to fight.