Detroit Goes Under

The Washington Examiner is reporting today that the city of Detroit is filing for Chapter 9 bankruptcy.

The article reports:

According to the bankruptcy filing, Detroit now has more than $18 billion in unfunded liabilities. The city’s population has dwindled from 1.85 million in 1950 to under 700,000 today, and its tax revenues have shrunk accordingly even as the average tax burden has risen to the highest level of any town in the state. A deficit estimated at $237 million in June was too much for the once-mighty industrial town to handle.

A website called Pensions & Investments posted the following on July 11:

Mr. Orr (Kevyn Orr, the city’s emergency fiscal manager) has proposed that city employees with less than 10 years of vested service be taken out of the defined benefit plan and be moved to 401(k)-style savings plans.

There’s no way employees or unions will bargain away pension benefits, said Michael VanOverbeke, a lawyer for the general employees retirement system, after the meeting. Michigan‘s constitution prohibits changes in accrued pension benefits, Mr. VanOverbeke said. Mr. Orr has said that a bankruptcy filing would negate the state protection.

This is a problem a lot of cities, states, and municipalities are going to be faced with in the very near future. For years unions have negotiated contracts that included retirement plans that were totally funded by taxpayer money. As private companies have converted to 401k plans where employees contribute to their retirement, public employee unions have not followed suit. The bankruptcy of Detroit is not really a surprise to anyone. You can’t continue to spend more than you take in without running out of money at some point. As the jobs left Detroit, the city had no way to make up the lost income. It attempted to raise taxes to generate income, but that simply drove people out of the city.  It’s just a shame that the leadership of the city couldn’t have done more to avoid the problem.

 

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