Lessons From A Bankrupt City

Detroit's bankruptcy filing spotlights the power of public sector unions to bully elected officials into voting for lavish retiree pension plans that saddle cities with crushing financial debt.  While Detroit has been the center of media attention, the city's problems are hardly unique.

In a recent report, economists from Rochester University and Stanford estimated that unfunded pension liabilities of cities and state governments are approaching $3 trillion nationwide.  With the economic downturn, more cities and states are hiking taxes in a desperate attempt to play catch-up.

In what has become an all too familiar scenario, public sector unions in the country have browbeat and threatened strikes unless city leaders rubber-stamp retiree pension and health benefit plans that no private business could afford.  Elected officials are often beholden to the unions because they supply bushels of cash and thousands of foot soldiers for their political campaigns.  

That certainly was the case in Detroit, a city dogged by a corrupt political culture controlled by Democrat Party chieftains and greedy unions, most notoriously the American Federation of State, County and Municipal Employees (SFSCME).

Even before the recession, money problems stalked Detroit. The city was unable to dig itself out of its financial hole as thousands fled the inner city to escape soaring crime and spiraling taxes.  The tax base eroded as the population dwindled from 1.8 million in 1950 to its current 701,475.

City tax revenues shriveled, shrinking 30 percent in the last decade. Property taxes have dipped 20 percent since 2008.  As a result, 99,000 housing units stand vacant in the city.  About 40 percent of the streetlights don't work.  Two-thirds of city parks are closed.  Detroit was forced to shutter half of its 142 schools two years ago to ease a $327 million deficit.

Last year, Detroit had the highest rate of violent crime of any city with a population of 200,000 or more, according to statistics contained in the FBI's Uniform Crime Reports.  There were 411 homicides, the most in nearly two decades. Unemployment languished at 16.3 percent.

As decay worsened, the city went on a borrowing binge.  Unable to service the debt, Detroit leaders finally threw up their hands in surrender when they realized they could not pay $18 billion to more than 100,000 creditors.  The lion's share of that money is owed to the city's retired union workers.

The cash needed to fund the pensions and health benefits for 30,000 retired Detroit workers amounts to $9.2 billion.  City employees were guaranteed lifetime pensions and health benefits by elected officials.  Workers have now discovered those are nothing but empty promises.

Michigan's state constitution protects public sector pensions, a concession wrangled by power-hungry union bosses who bulldozed voters into approving the change.  However, federal bankruptcy rules allow pension changes, setting up a court battle over the issue of state's rights versus federal law.

The case will have far reaching impact on cities teetering on the brink of bankruptcy.  Chicago recently was slapped with a downgrade in its credit rating because the city has a $19 billion unfunded pension liability.  Los Angeles may be facing a pension liability of $30 billion, according to some estimates.

While Detroit is the largest city to file for bankruptcy, it is not the first.  Seven other municipalities have been forced to seek court protection from creditors since 2010.  Not surprisingly, three are California cities (San Bernardino, Mammoth Lakes and Stockton). State and city governments in California have unfunded pension liabilities totaling $329 billion.

Unless elected officials stand up to public sector unions, the problem will worsen.

Don't expect the unions to come to their senses.  In Detroit, the head of the big public sector union (AFSCME) refused to concede an inch. He balked at pension concessions and accused officials of wanting city employees "to have to work until they die."

That kind of union intransigence led to the current state of affairs. The answer is to reduce city and state governments by shaving the public workforce.  It will save not only pensions costs, but trim the city governments bills for health benefits and wages.

Meanwhile, the Obama Administration continues to "monitor" the situation in Detroit.  The bet here is that the president will step into the bankruptcy breech to bail out the union.  It would not be far fetched for the president to provide federal loan guarantees or some other scheme to fund the union pensions.

As you recall, Obama did the same thing when he allowed Detroit-headquartered General Motors to bellyflop into bankruptcy, but he confiscated taxpayer dollars to rescue union pensions and benefits. And look how well that turned out for Detroit.