Detroit Emergency Manager Keyvn Orr ignited a political firestorm when he orchestrated the largest Chapter 9 municipal bankruptcy filing in history. At its flaming core is more than $18 billion in debt and liabilities, including $5.7 billion in unfunded retiree health insurance and $3.5 billion in unfunded pension payouts for some 30,000 retirees and city workers.
What followed is a frenzy of activity: City retirees and workers cried foul. Labor unions and the city’s pension funds filed court actions. Federal bankruptcy Judge Steven Rhodes halted all lawsuits aimed at preventing retirement benefits from becoming part of the bankruptcy proceedings. Michigan Attorney General Bill Schuette intervened to defend the state’s constitutional protection of pension obligations he says cannot be “diminished or impaired.” The City Council called for congressional hearing on whether Detroit is misusing the process to slash retiree pensions.
History, however, shows this looming crisis might have been averted if the employees unions and pensioners had shown more flexibility forty years ago in restructuring city pension benefits. Instead, the intractable opposition demanded the city stay on a dead end course to default.
As far back as 1974, then-Mayor Coleman Young proposed what was considered reasonable changes to Detroit’s pension programs. Because labor and retirees are a potent political force, the City Council shot down the mayor’s changes.
Twice the council overrode Mayor Dennis Archer’s veto of an ordinance to increase pension benefits. Archer ran into similar resistance when he proposed an amendment to the City Charter that would have equitably distributed “excess earnings” on the investment of pension fund assets back to taxpayers. Voters ultimately rejected the amendment after it was improperly stripped from the revised charter and placed on the ballot as a little-understood issue.
Also under the Archer administration, Detroit missed opportunities to reduce pension expenses by giving new employees the option of a “defined contribution,” under which employees would have receive a fixed annual contribution to their pensions rather than the existing “defined benefit.” Pension system trustees, in order to keep the funds solvent, would have consulted an actuary, fixed the declared rate of return on the investments and paid that rate into funds within the system. That modification would have locked the city into providing a fixed retirement payment based on their years of service regardless of how well the pension fund fared in investment earnings. Simply put, the city’s share of retirement benefits would have been more predictable.
Those weren’t the only benefits. Workers had the option of several stock and bond funds for their investments, and could have passed their accumulated investments along to surviving children. Employees would have been vested in the pension system earlier and had more equity than under the “defined benefit” system.
Alas, the City Council deserves no credit for being able to judge the pulse of the unions or the wisdom of pensioners. Persuaded by a campaign of disinformation, and bowing to pressure from the “keep your hands off our pensions” lobby, the council turned a blind eye to the savings potential. The rejected proposals were labeled an assault on the retirement system. Despite credible testimony from industry experts to the contrary, critics wrongfully – now ironically- asserted that adoption of such alterations would destroy the current system.
Labor too was determined to stay the unpopular course. The anti-change hostility ignored evidence that “portable” pension plans (401k) were being adopted by a growing number of municipalities. “Portability” was also seen as the biggest factor in attracting and keeping employees outside of government.
The bottom line is this: City government is now unable to fully fund the system. The refusal of the council and city workers to get out of the way of Detroit’s entry into the modern pension era comes with dire consequences that could have been avoided. Bankruptcy may now be the best equalizer for their imprudence and collective bad judgment.