A Better Way to Protect Detroit Pensioners

A Better Way to Protect Detroit Pensioners
April 2, 2014

Press accounts yesterday described the potential for steeper pension cuts for Detroit retirees if they reject a bankruptcy work-out proposal made in February, and instead accept a new plan that, among other things, would insulate works in the city’s art museum from potentially being sold off to satisfy both pensioners and creditors. The amended plan would also require a partial state bailout of the city.

Pensioners and residents would do better were the city to take a more aggressive approach to selling assets, contracting out some services and eliminating others that are “nice to haves” rather than “need to haves.” The best outcome for retirees would probably come if Detroit dramatically downsizes city government, in effect converting itself into a “contract city” along the lines of Sandy Springs, Georgia or Pontiac, Michigan.

The Mackinac Center has argued it is unfair to use state dollars to once again bail out the Motor City rather than address other critical statewide needs. Moreover, the state’s bailout-for-art deal doesn’t actually solve Detroit’s financial or infrastructure problems. And by inflicting greater losses on lenders, it may also risk increasing borrowing costs for other communities in the state.

High Bailout Price

Gov. Rick Snyder (R) and the leaders of some large foundations want the state to commit $350 million to Detroit over 20 years. That would be enough to annually fill more than 875,000 potholes around the state for the next two decades.

That’s one measure of the price a state bailout would inflict on residents in other communities who were not responsible for the well-known fiscal and managerial malpractice committed for decades by politicians Detroit voters chose.

For years Michigan taxpayers have already been forced to help fund Detroit’s mismanagement through generous financial favors. For example, a 2013 Citizens Research Council report showed that in 2010 alone Detroit received $335 per person in state support, compared to the second-most generously supported city that year, Pontiac, which got $176 per person. Mackinac Center researchers James Hohman and Jarret Skorup have detailed many other ways in which Lansing politicians have previously bailed out Detroit.

Warnings and Suggestions

The Center has warned that a pension reckoning was inevitable without reform. We have offered many constructive proposals for this, such as a special issue of the Center’s Michigan Privatization Report back in 2000 that focused on Detroit. There was simply no excuse for dismissing the warning signs years ago, when the city may have been able tocity ser prevent the cuts in their long-term obligations that are being discussed now.

This should not be rewarded with yet another special deal. Indeed, doing so creates the likelihood that other municipalities will also demand bailouts.

Pensioners and creditors both stand the best chance of being kept whole by the city fundamentally rethinking how it delivers services to residents, dramatically downsizing its bureaucracy, selling off more assets, aggressively contracting out many services, and ending certain others altogether. These steps also increase Detroit's potential to become a vibrant regional center that attracts residents and employers rather than driving them away.