Detroit

Detroit Retirees Get a Bailout; Detroit Residents the Shaft

Last week's bankruptcy deal was a missed opportunity to restructure the city's insane pension system

|

Labor.Union
Neil. Moralee / Foter / Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

In Detroit's unfolding saga, the only innocent victims are city residents. So if there is any case for a Motown bailout, it is to make the city more livable for them.

However, that seems to be the main goal of neither the Democratic White House nor the state's Republican governor—both of whom have come up with nifty new schemes to shovel taxpayer largesse to city retirees.

Just two weeks ago, Emergency Manager Kevyn Orr had been threatening to put a buzzsaw to the city's $3.5 billion unfunded pension liabilities to lop off savings to "invest" in city services.

Detroit is facing such a huge hole because, thanks to union opposition, it  adopted none of the sound pension management practices that the rest of the civilized world embraced—while inventing many unsound ones of its own.

For example, most private companies and municipalities—including Detroit's neighbors such as Macomb and Oakland counties—long ago moved their employees from defined benefit to defined contribution plans. Not Detroit.

More hilariously, in good years, instead of putting away money for the bad ones, it handed out an extra month's holiday bonus check to retirees. If it hadn't done so, its pension fund would have now been worth $2 billion.

As if that's not crazy enough, it also consented to union demands to create additional 401(k) style retirement savings plans for workers. But unlike normal 401 (k) plans, these investments did not go up and down with the stock market. Rather, the city guaranteed a 7.9 percent annual return, even when the stock market collapsed.

To offset some of this madness, two weeks ago Orr was demanding that the city's general retirees accept a 26 percent cut and police and firefighters a 4 percent cut in their pension benefits. If they resisted, he was threatening to up the cuts to 34 percent and 14 percent respectively. And he wanted to scrap their annual Cost of Living Adjustments.

That turned out to be empty bluster. The plan he negotiated this week involves a mere 4.5 percent cut for general retirees. Firefighters and policemen will receive no cuts—and will continue to receive part of their annual COLA increases.

Also gone out the window are plans to move the city's active employees to defined contribution plans, a huge missed opportunity. What's more, should investment returns—whose projections remain rosier than in private sector pension plans—beat expectations, even the modest 4.5 percent cut will be restored.

Orr is attempting to "claw back" some of the 401(k) annuity money that the city illicitly handed out—but not all of it, which, admittedly, would be hard to do.

But the question is how will a broke city pay even for these "restructured" retiree obligations?

Part of the answer is by squeezing Detroit's private creditors. That's fine. After all, they should have known better than to loan money to a city that had maxed out its credit card and was taxing its residents to the hilt. (For example, Orr is offering general obligation bondholders, traditionally regarded as secured and therefore entitled to full payment, 74 cents on the dollar. This will allow him to save $56 million over 10 years to ensure the most vulnerable retirees remain above the poverty line.)

But what's not fine is the scheme hatched by Governor Snyder, who is facing re-election in November and is eager to wrap up the bankruptcy before that. To get retirees on board, he has proposed to divert $350 million of tobacco settlement money over 20 years to them via the Detroit Institute of Arts—in complete disregard for what the money was originally meant for.

Even less fine is the Obama administration's bailout plan. It wants to hand Detroit $100 million from the federal Hardest Hit Fund to city retirees. This fund was created for homeowners wiped out during the housing meltdown. So simply forking over the money to retirees would run afoul of Congressional intent. Hence, it'll hand it over to Orr for blight removal—who will hand over his blight removal funds to city pensioners. Got it?

Had Orr, Snyder, and Obama combined their prodigious legal creativity to marshal big bucks to improve Detroit's notoriously bad services, they might have positioned the city for a strong comeback. But by trying to appease city unions, they have signaled that they care about themselves more than Motown's recovery.

This is an updated version of a column that appeared in the Washington Examiner.

 

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

38 responses to “Detroit Retirees Get a Bailout; Detroit Residents the Shaft

  1. OT: American Middle Class no Longer World’s Richest

    Complete with roving NY Times lunatics like this:

    So until the rich are forcibly divested of their ill-gotten gains, and that wealth is redistributed among society in general, maybe just by shifts in taxation, the middle class will continue to do worse until they are the equivalent of the impoverished in Japan or Britain. We might even need a bloody revolution to reclaim the resources the nation needs from the parasitic millionaires, I think it could work out quite well really.

    1. Let’s not forget why people like Ryan are in office and why the GOP must cater to the Tea Party: People vote for them. These are people who’ve been tricked to thinking that anything to the left of Reaganomics is “socialism” and therefore unacceptable, even when it produces better results. Even many liberals are accustomed to thinking of the Swedish and Canadian economic models as “socialist,” when all they really are is capitalism that addresses the inequities that inevitably result from unfettered free markets, despite the empty promises of libertarian and free-market economists that free markets lead to some imaginary equilibrium.

      Why aren’t people like this called “deniers” and told the debate is over? The outright rejection of the principles of Economics 101 is an order of magnitude more anti-science than any critique of global warming.

      1. Of course, if you point out to them that Wealth of Nations is descriptive of an emergent phenomena or that Marx so firmly agreed with Adam Smith’s description that he had to posit a “new man” for his post-market, Utopian economy, they look at you like a dog watching a card trick. I am sick unto death with people who both know less and think less than me telling me how wrong I am about subjects they read a couple of articles on in the right publication.

        1. I think my dog gets the relationship between behavior and scarcity better than the idiots you just described.

          1. It’s not necessarily that they’re idiots (although you can’t rule that out, either), but that they simply have been so sheltered from reality that they haven’t internalized some of life’s natural laws. Simple stuff like “you have to do hard work to make food” and “getting hit hurts” and “sometimes luck is better than skill” and “people respond to incentives” are all missing from their subconscience because they have been hidden from the consequences that teach those natural laws.

            It’s like a rat in a cage that has access to food and water at all times. When they’re put in a cage with a bunch of half-starved rats, it doesn’t know what to do!

    2. So what they’re saying, judging by the infographic, is that the US needs more unified right-wing government like Canada?

    3. So until the rich are forcibly divested of their ill-gotten gains,

      I love how statements like that are accepted as gospel, as though it is impossible to consider that rich people might have earned their money.

    4. That is the same conclusion this person draws from every single article he reads skims over and claims to support his position regardless of its actual content.

      1. sounds like you are describing tony

    5. So until the rich are forcibly divested of their ill-gotten gains…

      Agreed. Let’s start here.

      1. Can we go down the list until everyone who supports wealth redistribution is shorn?

      2. That doesn’t count because hes not a fat white conservative.

      3. “Rob the Rich. Feed the Poor. Till there are no Rich no more.”

        Then … {never mind}

    6. The poor in much of Europe earn more than poor Americans.

      Earn?

      I don’t think that word means what they think that word means.

      1. Pff. “Meaning” is so bourgouise.

  2. Detroit, the Progressive Paradise.

    1. Detroit, Where the weak are killed and eaten*

      *Actual shirt a friend had in HS

    2. San Francico! We’re Not as Bad as Detroit Yet!

      1. Hey, San Francisco might soon have the only non-socialist NBA team in the country. Lay off for a minute.

  3. What could go wrong? And why only jump from a projected 6.25% return to a 6.75% return? Wouldn’t it be better to just pretend you can get a 40% return and solve all the problems?

  4. Detroit Retirees Get a Bailout; Detroit Residents the Shaft

    Well, the reason Detroit went bankrupt is because there was too much Capitalism.

    No, really! And there was our resident Proggie sockpuppet (Tony) spewing the exact same talking points from Think Progress on the reasons for the failure of the city: Capitalism.

    1. NYC is doing reasonably well – I guess capitalism isn’t practiced there, nor did any blacks move there and get oppressed.

  5. Globalization killed Detroit and it will probably render American Labor Obsolete at some point as well.

    1. Shut down the borders! Carve out niches for favored industries! Our overpriced, outmoded labor practices just can’t compete.

      You can always count on American consumers to shell out the difference.

        1. What? Foreign automakers actually employ American workers to make cars?

          1. It’s almost like shipping 2 ton hunks of metal across the world might be more expensive than using a workforce that isnt staffed entirely by self-entitled fat union fucks taking a 2 hour break every 20 minutes.

          2. Amazing what you can accomplish without unions.

    2. Alice Bowie:

      Globalization killed Detroit and it will probably render American Labor Obsolete at some point as well.

      Do we capitalize American Labor Obsolete? Like, it’s some sort of deity, combined with a verb?

      You do realize that utilizing labor overseas does not imply that labor, itself, is actually obsolete? As if labor is so 20th century?

      1. Alice Bowie is now and always incoherent. Don’t waste your time with it.

    3. More than half of GM’s sales take place overseas. 58% in 2007, in fact. But yeah, it’s international trade that crippled the big American auto makers, not a gluttonous UAW in bed with politicians.

      1. The mind numbing stupidity of the UAW knows ho bounds, Bob King is their current lead negotiator and said “Having that rate of pay has brought tens of thousands of jobs that were outsourced back into GM, Ford and Chrysler,”

        King then said. “It’s been an important factor in the success of the companies and in keeping manufacturing in the U.S. If the companies don’t succeed, all those entry-level jobs go away.”
        http://www.autonews.com/articl…..uaw-agenda

        But then declares that the two tier system must go.

        *Stabbing myself in the eye to get my mind off the pain.*

    4. Re: Alice Bowie,

      Globalization killed Detroit

      And video killed the radio star. In my mind and in my heart.

      and it will probably render American Labor [o]bsolete at some point as well.

      UAW =/= American Labor

  6. Hey, what have they done to the real Shikha Dalmia? There’s nothing in here about the glories of endless illegal immigration, so this piece can’t really be by her.

  7. More taxpayers will quietly leave Detroit. More entrepreneurs will decline to invest money there. The city will continue to decline. By 2030, all that will be left of Detroit is 200,000 people on welfare, and a bare minimum of city workers who have to maintain Detroit addresses or risk losing their jobs. Detroit will be mainly a bailed out pension plan.

    Snyder faces a tough reelection. Orr has no reason to fight a heavy battle with angry retirees. Obama wants to strengthen his popularity among poor AAs and in the Rust Belt generally. Hence this cave-in was to be expected.

  8. Can Tony, or other Pro-UAW folks answer this question?

    If the UAW is unhappy with the way they are getting treated by the big car manufacturers, why don’t they they start their own? They’ve got all those skilled workers. Why not start their own care company, pay their employees $200 an hour and give them super-duper retirement packages and show those money grabbing “suits” how it’s done?

    Seems logical to me.

    1. Add me to the list of folks demanding an “edit” button.

      … why don’t they start… (only one they is needed).

      … start their own CAR company…

      1. I’d also like a way to keep track of my previous comments.

Please to post comments

Comments are closed.