The abandoned Packard Automobile Factory is a reminder of Detroit's better days. © Albert Duce
Detroit, the once-gleaming metropolis whose roaring engines and sonic genius shaped the modern landscape, is about to add another entry to its legacy, summed up in the soul-crushing word: bankruptcy. Almost all the car plants of the 1950s have closed or moved away and the population reduced by more than half. In July 2013, the city filed for bankruptcy, its debts estimated at $18-20bn.
The largest American city ever to go bust has passed into a stage of naked dread: stripped bare of the trust on which democracy depends. Confidence in social institutions, money managers, elected officials, and fellow citizens is fading fast. A deep disquiet is spreading over the rest of the country as the question of who will pay the price of Detroit’s decline is decided. Today, it’s the city’s pensioners who sing the blues.
Recently, more than 32,000 Detroit city workers and retirees opened their mailbox to find a ballot and a painful choice. They have until 11th July either to accept reductions to retirement benefits they once believed to be guaranteed by state law, or refuse them and risk deeper cuts. A majority must approve the deal if the city is to secure $816m in state and private money pledged to shore up pensions, in part through a “grand bargain” to prevent the sale of city-owned art.
For civilian retirees—the librarians, sanitation workers, engineers, healthcare workers, and other employees (excluding teachers, who are part of a state-administered system)—the deal is a 4.5 per cent cut in annual pensions and the loss of cost-of-living adjustment increases. Police and fire service retirees, who do not receive social security, can keep their full pensions, but cost-of-living increases will drop.
The Michigan constitution forbids this, stating that public pensions are a “contractual obligation” that cannot be “diminished or impaired.” But Judge Steven Rhodes declared that federal bankruptcy law trumps state law. A ruling that many believe is a piece of legal legerdemain which may run afoul of the 10th Amendment of the US Constitution, which protects state sovereignty. There’s a make-it-up-as-you-go quality to the Detroit proceedings, but soon the city will establish precedents that others will follow.
Kevyn Orr, the emergency manager appointed by Rick Snyder, the Republican Governor of Michigan, reckons that Detroit’s pensions are underfunded by $3.5bn, a number that Wallace Turbeville of the think tank Demos calls inflated. Orr’s first proposal was to slash pensions by between 6 and 26 per cent, triggering a public debate about whether or not the people being asked to pay for the city’s problems were the ones who had created them. Americans, like their counterparts elsewhere, had already watched innocent people pay dearly for the 2007-08 financial meltdown, while financial institutions got special protection. Was it going to happen yet again?
Detroit’s pensions are not lavish: police and firefighters get an average of $30,000 per year, while civilian pensioners get about $19,000, plus social security, which averages $15,000 per year. Despite well-funded propaganda that paints a picture of bloated pensions and overcompensated public workers across the US, research compiled by Alicia Munnell, Director of the Center for Retirement Research at Boston College, shows that lower level public workers get about the same wages and benefits as similar private sector employees, while those at the higher levels make less. Cases of overcompensation exist, but they are not a big factor in underfunding.
Many experts conclude that Detroit’s decline was a matter of lost revenue caused by the Great Recession, a disappearing tax base, declining state aid, and the city’s debt to Wall Street when swaps deals went sour. The pensioners had little to do with it.
Robert Johnson of the Roosevelt Institute points out that pension underfunding is not as widespread as media accounts suggest, but confined to a few states, such as Illinois and Kentucky, and cities like Chicago and Detroit, where the norm is poor governance and unreliable public officials who mismanage funding with risky investments and accounting tricks. Thomas Ferguson of the University of Massachusetts, Boston, notes that areas with pension problems tend to have high rates of corruption and that big money politics, increasingly driven by Wall Street, often determine how pensions are managed and allocated.
One possible outcome of Detroit is a public sector brain drain, as workers with higher skills think twice before signing contracts that are worth little when times are tough. Though teachers will not be affected by Detroit’s bankruptcy, the precedent of reneging will likely impact them elsewhere (this is already happening in Chicago). Those who educate America’s children, engineer its increasingly complex public works, administrate sophisticated databases, and perform the legal and healthcare work needed to run cities and states may flee to the private sector. Schoolchildren and businesses that rely on a well-maintained public sector may end up suffering.
Detroit is the canary in the coalmine of America, a case that will change views of the sanctity of contracts and who gets protected by law (AIG executive bonuses—yes; librarian pensions—no). The fault lines of American democracy have been exposed, and trends towards instability and inequality may be worsened by the time Detroit’s fate is decided. Get ready for more, in Chicago and even far beyond America’s borders.
