Lessons from Detroit

Mayors across nation proposing big changes to pension plans for city workers
Associated Press
Oct 7, 2013

Detroit's bankruptcy is casting a shadow over a long list of cities across the U.S. and giving mayors new urgency in the search for solutions to the greatest challenge to face America's cities in a generation.

While no other city is expected to join Detroit in bankruptcy court anytime soon, similar problems brought on by waning industries, crushing debt and surging pension costs plague city halls from Providence, R.I., to California, and in response mayors are proposing big changes to what was long the biggest perk of a government job: a good and reliable pension.

"It's the lesson of kicking the can down the road. You can put these things off. But at some point the bill comes due," Baltimore Mayor Stephanie Rawlings-Blake said in an interview. "People ask me sometimes what keeps me up at night. The prospect of being one of those cities is what keeps me up at night."

The total unfunded pension liability for all U.S. cities and counties is a whopping $574 billion, according to a 2010 study by economists at Northwestern University. That's a formidable burden to cities already struggling with revenue declines, debt and the ongoing cost of providing services.

Years of financial neglect left Detroit's finances in ruin, prompting its emergency manager to propose sweeping changes to the way the city doles out benefits by eliminating payment increases and creating a new 401(k)-style retirement system.

Rawlings-Blake has also proposed giving new employees a defined contribution plan, one that combines set contributions from workers and their employer, similar to the 401(k) accounts familiar to private-sector workers. The change would be just one part of an ambitious 10-year-financial plan that involves lower property taxes, a smaller city workforce and the goal of attracting 10,000 new families to Maryland's largest city.

New York Mayor Michael Bloomberg said the lesson from Detroit — burdened by $18 billion in debt, declining revenue and huge deficits — is that cities will ultimately pay a steep price for ignoring long-term challenges including diversification of industry, adequate funding of pension systems, population decline and debt.

Bloomberg pointed out that New York itself almost went bankrupt in 1975 — a tumultuous time when many cities were struggling to respond to urban decay, poverty, unemployment and the rise of suburbs.

"We would be foolish to ignore the factors that drove Detroit to bankruptcy," Bloomberg said in July, shortly after the Motor City took its landmark step. "I believe that the Detroit experience holds lessons for every American city."

More and more cities are proposing replacing traditional pensions for new employees with a defined contribution plan or a hybrid that combines a defined contribution plan with a smaller traditional pension. It's been proposed in Philadelphia, and it's already the law in Rhode Island, where the state pension system covers teachers and many local workers.

Efforts to cap existing pensions, however, are often seen as a betrayal to workers who took a city job in part because of a promised pension.

Marcia Ingram spent 33 years working for Detroit's health department before retiring nine years ago. She now receives about $2,000 per month. Her pension would be capped under the proposal in Detroit.

"I feel let down by the city," said Ingram, 60. "I expected to get an increase every year like I did while I was working. Not a big increase, but it still was something."

Other cities including Stockton and San Bernardino in California and Central Falls, R.I., have sought bankruptcy protection in recent years after running out of money. In Central Falls, some retiree pensions were cut by more than 50 percent.

Changing pensions can be politically and legally perilous. Politicians who propose big pension changes risk running afoul of powerful public sector unions — or losing in court if pension overhauls are challenged.

Some cities, like Detroit, are covered by state laws or constitutions guaranteeing pension benefits in full. In many others, mayors must plead with state lawmakers to overhaul pensions covering local teachers. And when cities operate their own pension systems, they're typically negotiated through collective bargaining, making them legally difficult to change.

Providence was on the verge of bankruptcy when Mayor Angel Taveras negotiated concessions from public-sector unions and retirees. It was part of a larger fiscal stability plan that involved raising taxes and negotiating voluntary contributions from tax-exempt institutions like Brown University.

Taveras said Providence shows that cities have an option besides bankruptcy or legal fights with unions.

"We were going to run out of money," Taveras said. "We were on the verge. We would have overcome bankruptcy, but it would have taken a decade. It would have been devastating. So we came together."

The deal suspended pension increases, shaving $178 million off the city's future pension obligations. While workers weren't happy with the deal, they appreciated the mayor's willingness to work together on a solution, according to Paul Doughty, president of the Providence Firefighter's Union.

"They opened up the books and said, 'Look at anything you want,'" he said. "There was no demonizing. When someone is sticking a stick in your eye at the same time, it's almost impossible to work with them."

Chicago Mayor Rahm Emanuel said problems with Illinois' teacher pension system were to blame when 2,100 school workers — including more than 1,000 teachers — were recently laid off.

The city's four pension funds were 36 percent funded as of Dec. 31, 2012, and had an unfunded liability of $19.5 billion. The city estimates that without pension reform, its required contribution to the funds will more than double in the next two years, from $479.5 million in 2013 to $1.087 billion in 2015.

Emanuel urged state lawmakers to adopt an overhaul that would suspend pension increases, raise employee retirement contributions and give workers the option of a 401(k)-like account. The proposal went nowhere.

"The pension crisis is no longer around the corner," Emanuel said in July. "It has arrived at our schools."

George Mason University researchers studied financial problems in Chicago, Detroit, Baltimore, Providence, San Bernardino and Pittsburgh and found that all were facing similar problems with pension costs. Frank Shafroth, the report's principal investigator, said there are no easy solutions.

"We're going through a transition," Shafroth said of America's cities. "We'll get there. But getting from here to there is going to be one of the hardest things you can conceive of."

 

Comments

grumpy

This is what happens when the chickens come home to roost. They can't point to the last administration, nor the one before that, it would be pointing to the last 50-60 years of over promising and kicking the can. This is what happens when you no longer can pay the interest on the debt with the taxes you collect. Don't you love one party rule where you can always get agreement on how to spend money you won't have? This is why one party rule sucks.

Now other citeies, states, and the feds can see what is in the future, when what they have promised to pay in the future comes due... more Detroits.

The present parties both answer the same way, we have a plan, vote for us. Then they keep spending more and kick the can more. Let the next guys figure out the way to pay for what we promise. Hope and change in action. Wait till it hits on a federal level.

The Big Dog's back

So you agree, uncontrolled Corporations wrecked Detroit and now are trying to wrecked the country.

grumpy

Yes unrestrained gov't has screwed the city of Detroit and are on the way to do the same to other cities and states. They have promised bread and circuses and paid for neither, they have simply kicked the can down the road, as have other gov't in the past... Rome comes to mind.

The Big Dog's back

Also sounds like you want to move to a Parliamentary type Gov.

grumpy

Would rather move away from the dumb and dumber parties that are, and have been in charge for decades. There is little difference anymore. One overspends on 1/2 of the gov't, the other overspends on the other 1/2.

2cents's picture
2cents

It has always been a thorn in my side how all forms of government spend money. It is so easy to spend money you "never had to work for" and they just keep doing it from Washington to the small community.

Like grumpy says, the "chickens have come home" it just irks me and most of the people paying taxes are fed up with all the BS taking place. Our country is dying in front of my eyes because we have such losers in DC giving away the farm, trying to save the world by spending our future hard earned money, my kids future hard earned money like it is Kool-Aid!

The Big Dog's back

Flip to any news channel in the past three years, and you can almost be certain to see any number of Republican governors, blustering about how Washington spends too much money and how they'd never spend that much money if they were President. It's a lot of tough talk, really. But is there any truth to it?
Well, all of this tough budget talk from Republicans got me thinking about the central: who really benefits from government spending? If you listen to Rush Limbaugh, you might think it was those blue states, packed with damn hippie socialist liberals, sipping their lattes and providing free abortions for bored, horny teenagers.

The truth? Not so fast, Michele Bachmann.

As it turns out, it is red states that are overwhelmingly the Welfare Queen States. Yes, that's right. Red States — the ones governed by folks who think government is too big and spending needs to be cut — are a net drain on the economy, taking in more federal spending than they pay out in federal taxes. They talk a good game, but stick Blue States with the bill.

Read more: http://www.businessinsider.com/r...

grumpy

This is what happens when they can't see past the dumb and dumber party. The dumb party overspends on 1/2 the gov't, the dumber party overspends on the other 1/2 of gov't. Neither pays, both kick the can down the road expecting someone else to pay.

See how Piddle Puppy blames the dumber party? He wants to point out that the dumber party doen't pay for their bread and circuses. All the while the dumb party isn't paying for their bread and circuses. His party's turds don't stink while the other party's turds do. He just likes the special tang to the stink of his party's turds better than the stink from the other party's turds.

The Big Dog's back

You can bob and weave, duck and run trying to equate the 2, but history shows different. After this country was brought to it's knees, twice, by Conservative policies, the Dems brought the country back. This time without WWlll.

grumpy

The underemployed, part time workers, and those who have fallen out of the workforce are at an all time high, as both a percentage of the population, and total number. We also have the highest rate, both by percentage of population and total number, on SS disability. It is a jobless recovery. We also have the highest levels of food stamps, and welfare ever. This is what constitutes the Obama "recovery".

grumpy

This is what noted Progressive/liberal/dimocrat and economic expert thinks of the present economy compared to what it was during his administration.

http://hosted.ap.org/dynamic/sto...

Those who lived through his administration might just agree... for the most part... or not. Two peas in a pod.

sorryhog

Most city workers, most, not all, would never make it a day, at another job.

donutshopguy

Government pensions at all levels, federal, state and local, will be the downfall of our present economy and possibly the country. There is not enough money to cover this debt. This upcoming situation will make the present $17 trillion dollar debt look like pocket change.

AJ Oliver

The U.S. retirement system has rested on three pillars - social security, defined benefit plans, and 401K's. These are ALL under attack by the vampire squid ONE PERCENT. If you let them, the Romney's of world will loot SS just like they did DFP's. Be very skeptical of AP's reporting on economics.

2cents's picture
2cents

Just remember they "R&D" are all 1% income people in any major government office. Who else could afford to do it?

And no, R&D is not research and development, if it were then we may have people running the show that thought outside the box and we would never be in this situation!

2cents's picture
2cents

dp

Licorice Schtick

Re: three pillar -
Sort of. SS has been fairly constant since its inception, but the rest of the weight has been shifting from one pillar to another. As 401k's grew, defined benfits declined. And defined benefit plans are not sustainable for businesses in a competive environment and labor surplus; in the long run, employers that offer generous plans can't compete with those that offer none.

We subsidize retirement saving with 401k's, but many workers would be better off if that money was applied to more SS instead. 401K's have the practical effect of privatizing SS. Wall street loves it, though.

AJ Oliver

Kasich, btw, was up to his ears in looting state pension funds.
And there is this . .
http://billmoyers.com/2013/09/30...

Pete

http://www.detroitnews.com/artic...

Very good article on the fall of Detroit.

Perkins2060

How long have the democrats been in charge of Detroit?

grumpy

Don't forget the State gov't. Fine examples of one party rule and the aftermath.

The Big Dog's back

Are you talking about Ohio or Michigan? Both are/were ruled mostly by Repubs the last 20 to 30 years.

grumpy

http://www.toledoblade.com/news/... Mayors in Detroit

Gov. Blanchard 83-91 8 years dim
Engler 91-03 12 years repube
Grandholm 03- 11 8 years dim
Snyder 11- 13 2 years repube
16 years dim govs in the last 30 years
14 years repube govs. in the last 30 years

Do you ever actually tell the truth when you make claims? Or do you really believe the crap you spue?

The Big Dog's back

Where's Ohio's?

grumpy

Since this is a story about Detroit I saw no reason to bother. But if you wish to look it up and post it, be my guest. If you wish to pay me to do it I might just consider it. My rate is $50 an hour with a two hour minimum, in case you wish to pay me for readily found information.

grumpy

Doubled

Cowboy

Here is another lesson from Detroit......Don't do drugs!

Fromthe419

Finally the MSM are starting to pay attention. I've stated many time over the past few years that unfunded liabilities will break the nation. Currently, our nation's unfunded liabilities is 123T, we can tax future generations 100% of their income and it won't cover what are government has promised and has no idea how to pay.

AJ Oliver

Bad math alert !! All future liabilities are unfunded if you project them out to infinity. It's just a scare tactic.

Fromthe419

Are you suggesting spending over 1T per year is going to lead to prosperity?

grumpy

When unfunded liabilities are figured, the actuaries use the current life expectancy of those folks owed the benefits.

bobshumway92

barack HUSSEIN obama will fix it!