Detroit Bankruptcy:
Tearing Up the Pension “Contract”

Jul 26, 2013

It was by far the largest municipal bankruptcy in history, and the first time a major city in the United States had gone in to court to declare itself insolvent. Detroit had rolled up 18 billion dollars in debt, according to “Emergency Financial Manager” Kevyn Orr, appointed by the state of Michigan to run the city. Detroit’s debt far outpaced that of the previous two largest municipal bankruptcies: Jefferson County, Alabama, in 2011, with a debt amounting to four billion dollars; and Orange County, California, in 1994, with 1.7 billion dollars in debt. In 1975, New York City had practically defaulted on its debt, and Cleveland did default in 1977, but both managed to reorganize their finances without recourse to bankruptcy.

Clearly the Detroit bankruptcy filing was something extraordinary, treated as such by the media, which filed news reports of the bankruptcy together with stark photographs of a city moldering in ruins.

For decades, the political apparatus in Detroit had awarded a stunning series of tax breaks, multiple tax breaks, to almost every major corporation doing business in the city, amounting over the years to uncollected billions of dollars. In addition, the city paid out many more billions to obtain and clear land for big companies. It built new infrastructure for their projects; it subsidized the cost of electricity supplied to many of the biggest buildings in the downtown area. And it rebuilt the downtown and nearby areas for the interest of some of the wealthiest people in the country: the Ford family, the Ilitchs, the Fishers—and a whole range of real estate speculators, starting with Dan Gilbert and Peter Cummings, Max Fisher’s son-in-law.

The city went seriously into debt to pay for those pet projects of the wealthy, debt to the banks, whose interest and loan-shark fees and penalties compounded the amount of the debt.

But the city also went into debt to its workers, year after year shorting the money it should have been setting aside for their future pensions, handing it over instead to the wealthy class that dominates the city. As for the workers’ promised post-retirement health care, the city set almost nothing aside, less than 1% of its total obligation. It was an empty promise—pure and simple fraud.

According to the emergency financial manager, the city had “underfunded” its pension obligations by 3.5 billion dollars, and its obligation for retiree medical care by 5.7 billion.

The Detroit Free Press explained that the city’s debt on pensions alone amounts to $7,145 per resident in Detroit. Of course, it’s not the residents who created that debt, it’s generations of politicians going back to the 1980s who gave the city away to the wealthy. But the figure is useful as the basis for comparison. Baltimore’s unfunded pension obligation comes to more than Detroit’s, $7,247 per resident; Los Angeles owes still more, $8,437; and Chicago owes nearly double Detroit’s, at $13,355 per resident. And those cities don’t stand alone. According to a survey made by the Pew Research Center, 61 of the nation’s largest cities owed a total of 217 billion dollars in unfunded pension and other retiree obligations. That was in 2011, with all indications being that pension funds fell further in arrears in 2012. Moreover, the estimate of 217 billion was based on an accounting system that allowed cities to overestimate what their pension trust would earn, and underestimate what their payments would be. Under a new system, introduced this year and required for cities as of June 2014, the actual amount underfunded would likely reach about 650 billion dollars. The unfunded pension costs of the states are even bigger, amounting to 1.4 trillion dollars—or almost four trillion with the new accounting standards.

The amount of debt owed to public sector workers is staggering. Whatever is unusual about Detroit’s situation, the city shares something critical with most other cities and states in the country: pensions and retiree health care are grossly underfunded.

That is why what happens in the Detroit bankruptcy has implications far beyond Detroit. The political class that has for decades underfunded pensions of public sector workers around the country is watching to see how the emergency financial manager contrives to dump Detroit’s obligations to its retirees.

Using Detroit’s Emergency to Tear Up the Pension “Contract”

According to the report issued by the emergency financial manager, Detroit’s 18 billion dollars in debt includes nearly 6.5 billion which is “secured,” either because bonds and notes are guaranteed to be paid out of the proceeds coming from particular departments that have their own revenue—such as the water or public lighting departments—or because they are tied explicitly and directly to taxes collected by the city and have first claim on those taxes. “Secured debt” means that it will be paid off 100% in the event of a bankruptcy. In fact, the law on municipal bankruptcy, so-called Chapter 9, reinforces that obligation, to the benefit of the banks and large investors.

Six and a half billion dollars “secured” leaves 11.5 billion “unsecured.” In a bankruptcy, whoever holds this debt may get only “pennies on the dollar”—to use the formulation that Emergency Financial Manager Orr has been bandying around. In the report prepared in advance of the bankruptcy filing, Orr proposed to write off the 11.5 billion “unsecured” debt for two billion dollars—which he proposes to borrow, adding to the city’s debt!

Lest anyone jump to the conclusion that Orr is proposing to stiff the banks, forget it! The banks are holding almost none of the 11.5 billion in “unsecured debt” that Orr intends to write off. No, Orr listed as “unsecured claims” primarily only the 9.2 billion that the city owes to the pension trust and post-retirement benefits. Hundreds of millions more in “unsecured claims” are in the Detroit bonds the pension trust itself holds, having got them as part of the city’s pension contributions in previous years.

This bankruptcy is little more than a scheme to divest the city of any further obligation to retirees, current and future. The federal code under which this bankruptcy was filed, Chapter 9, couldn’t be more clear. It puts unfunded pension obligations almost at the bottom of the priorities for who has what claim on the city’s assets.

There certainly are other changes the emergency financial manager is preparing to implement through the bankruptcy. Clearly implied in his report is the intent to privatize in some form the city’s revenue-producing departments like the water department and public lighting, and to rewrite union contracts. In fact, those things were already in the works before the bankruptcy. Bankruptcy undoubtedly may allow the city to push through privatization more rapidly. But the essential and primary aim of this bankruptcy is to free up the city from much of its future obligations to its retirees.

The pensions of public sector workers are not guaranteed by the Pension Benefit Guarantee Board, which covers only pensions of private sector workers. The supposed rationale behind leaving public sector workers out was that cities and states do not go out of business even if they hit a bad stretch, and that they have the means to raise revenue to maintain payments to retirees. That is also the rationale for letting cities and states fund their pension trusts at a much lower level than can the private sector. In fact, there is no oversight on public sector pension funds. There is only a promise: “Your pension is guaranteed by the fact the city will always be here.” It was supposed to be an “implicit contract” that the city had entered into with its workers.

This bankruptcy is the means to allow the city of Detroit to tear up the “implicit contract.” That “contract” may have the weight of tradition behind it. There might be a union contract which defines how much the pension trust will be funded—but only for the two or three years of that contract. There might be legislative or even constitutional statements defining public policy toward pensions. But the hollowness of those statements has already been demonstrated in Detroit’s case. Almost as soon as the unions filed a brief with the courts claiming the Michigan Constitution protected workers’ pensions, the Court of Appeals let it be known indirectly that it was ready to disallow their claim. It is a clear demonstration: the workers cannot depend on all those supposed guarantees to protect their rights.

No one should believe that it is only Detroit—just because Detroit’s situation seems so catastrophic. The catastrophic situation may let them tear up the “implicit contract” more easily. But what happens in this Detroit bankruptcy will set the precedent for what happens in other cities, including those without a bankruptcy.

There Is Money in Detroit—Use It for the Workers and the Population

The tack of the unions representing Detroit city workers and police and firefighters has been to debate with Orr over how much the pension trusts are underfunded, filing papers with the court seeking to prove that the pension trusts have enough money to go on paying out on pensions for years. Apparently, they are hoping to convince the courts by this argument that Detroit is not insolvent and that therefore there is no basis for a bankruptcy.

In what world do these union apparatuses live, to believe that the courts will side with them and protect the workers’ interests? To ask the workers to pin their hopes on courts that have systematically ruled against the workers’ interests—what kind of asininity is that? And to debate whether there is enough money to pay for their pensions in the midst of severe cutbacks in public services—that’s the height of stupidity, if not arrogant indifference to what is happening to the population.

There IS a financial emergency, the city IS out of money—at least when it comes to the population. There has been a complete collapse of services—not only the streetlights, over half of which don’t work; or the emergency services, which often don’t come out at all; or the garbage that doesn’t get picked up; or the parks, libraries and recreation centers that have been boarded up. In the lives of the ordinary population, the city is bankrupt, and has been for a long time.

That’s exactly why so many people living in the city today have pinned their hopes on the financial manager or even on the bankruptcy—if for no other reason than they believe the situation cannot be made worse.

Their hopes are going to be cruelly deceived.

In this situation, the unions could play a role. But that would involve them organizing their members to fight—and to fight not just for their own narrow interests, which can seem to counterpose them to the population—but to fight so that the real resources and assets of the city be used for its workforce and its population.

The very first thing is to demonstrate where the money has gone. Certainly city workers have the means to do it. Put together all their knowledge of the city and its workings, they could detail where those billions have gone. They could show how much of the value embodied in the holdings of GM, Chrysler, the big banks, the stadiums, the Detroit Medical Center in reality should belong to the city, that is to its workers, its retirees and the population. They could detail the monstrous suppression of taxes for almost every business in the city, for every developer—they could demonstrate to the population that there is money there, money that could be used to solve the problems the city creates for the population today.

The Renaissance Center, which houses GM headquarters, effectively was paid for by the city. If GM and Blue Cross and all the other businesses installed in its glass towers want to go on occupying it, let them pay rent to the city, rent the city could use to remedy the filth and the decay of the city’s neighborhoods. All those fine, “art-deco” buildings downtown—their refurbishment and development paid for by city tax breaks—they could be occupied, held hostage just like the city holds the population hostage today.

It’s obvious people are angry, it’s obvious workers feel betrayed—that’s what can be relied on. Give them the means to realize that there is something that can be done about Detroit—and that they are the ones who have the means to do it.