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December 7, 2013
Viewpoints: Bankruptcy and public pensions

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(Dec. 7 - by Scott Martelle, Special to The Bee)

A federal bankruptcy judge's decision last week that public pensions are fair game in the city of Detroit's massive bankruptcy filing jolted countless public employees and retirees in Detroit, as well as in California cities facing their own budget crises. But the decision should also shake up public administrators and political leaders who seek to solve contemporary fiscal problems with delays, accounting tricks and, now, broken promises.

The bills come due eventually.

Detroit's bankruptcy is a convoluted mess, simultaneously unique to the place while standing as an example of what can go wrong when political leaders push off tough decisions in hopes of a future fiscal turnaround. Because sometimes the turnaround doesn't happen.

In many ways, Detroit's fate was cast in the 1950s when its economic anchor, the auto industry, began decentralizing and building new plants in exurban areas (cheaper land) and in other states (to be closer to markets and to erode the power of the Detroit-based United Auto Workers). At the same time, the U.S. Supreme Court's 1948 decision in Shelley v. Kraemer stripped legal enforcement of deed restrictions that barred sales of homes to black families. As Detroit jobs began moving and the freeways made commuting easier, whites fled their new black neighbors for suburbia.

That little rip in the fabric of Detroit has, over time, grown into a seemingly unbridgeable divide. Other cities have endured similar racial and socioeconomic fragmentation, but none to the extent that Detroit has.

The city government's budget problems are a symptom of the failure of Detroit as a modern city and provide a clear message for political leaders about the risks in pursuing policies that erode community cohesion.

Detroit's population in 1950 was about 1.84 million people; now it is fewer than 700,000, spread over the same 140 square miles. As former Mayor Coleman Young once said, when all those people left, they didn't take their houses with them. But they did take their income and property tax dollars.

A mayor and a city council don't have a lot of control over who decides to move out of their city, but they do have control over their budget, and this is where Detroit stands as an object lesson. My book, "Detroit: A Biography" (Chicago Review Press, 2012), explores the broad arc of the city's rise and fall, but I didn't delve into the city government's financial issues because I see those - as well as the failed schools - as a result of the community's underlying illnesses of racism, disinvestment and class fragmentation.

In the wake of the city government's bankruptcy filing in July - under a highly controversial state-appointed emergency finance manager - the Detroit Free Press dove into more than a half-century of city budgets and pension financial records to chart the course of the city government's economic crisis. In a nutshell, while the events I wrote about were destroying the body politic, the public administrators were ignoring the reality around them. Unlike the captain of the Titanic, they saw the iceberg coming, but they seemed to think it would melt.

It didn't.

Among the key problems has been a failure to adjust the size of the city government as the shrinking population gutted revenue streams, and as health care costs for workers escalated. Detroit's answer for years was to borrow to cover those costs or to ignore pension fund contributions, even as city leaders were approving contracts that increased pension fund payouts. Had they made the right payments at the right times and had they been pragmatic in the payouts, Detroit would be on much more solid footing.

But city officials didn't. In 2005, Mayor Kwame Kilpatrick led the city into a complicated deal to again borrow money to make up pension underpayments, a plan that blew up when interest rates dropped. That proved to be the final nail in the budget coffin (Kilpatrick is now serving 28 years in federal prison on unrelated corruption charges).

A common reaction from the anti-union right is to blame the public employee unions for the fate of beleaguered municipal budgets, which is like blaming an attorney for mounting a vigorous case or an agent seeking the best deal for a client. That's their role. And it's the role of elected officials and administrators to make decisions that are best for the government and the community, even if it means drawing a hard line with their employees.

But that's not the same thing as breaking promises, which is what cutting existing pensions would mean.

That's the big take-away lesson from Detroit for other municipal leaders. Make the right fiscal decisions in the moment - including properly maintaining pension funds - and don't put them off in the quixotic belief that things will get better. That just invites crises.

At the same time, don't make decisions that will make things worse. In Detroit's bankruptcy, the judge's ruling puts retirees in the same line as bondholders, which may be legally defensible, but not morally. Bondholders are investors, and they bought those city bonds knowing that the investment carried some risk - thus the interest rates, higher than most, because of Detroit's fiscal issues.

The city workers did not buy risk; they worked careers under the promise that the pension funds into which they and the city paid would sustain them in retirement. These days, the average is about $19,000 a year - essentially poverty wages.

Breaking that promise carries consequences. In Detroit's case many retirees still live in the city, and to slash their income would have a significant ripple effect in the local economy, as well, which then affects city government revenue. And the cycle continues.

These are the lessons for California cities. Understand the budget problems over the course of time, then find ways to meet obligations in sustainable ways. And borrowing against a dream of a better future, as Detroit discovered, often is not sustainable.

Scott Martelle, author of "Detroit: A Biography," among other books, is a former staff writer for The Detroit News and the Los Angeles Times. He lives in Irvine.