Detroit’s Bankruptcy Postmortem: The Worms Keep Slithering Out

Submitted by F.F. Wiley of Cyniconomics blog,


You may have seen recent revelations that Detroit routinely raided its pension funds to award extra cash – including bonuses dubbed “the 13th check” – to both retirees and active employees. These payments were far in excess of the city’s negotiated obligations and hidden from both the public and Detroit’s bond investors.


Here are a few justifications for the payments from an article in the Detroit Free Press:









“Things were always bad for employees,” [former pension board member Sandra Studzinki] said. “It was a way to make up for lots of the years that there were no pension increases.”


 


...


 


“Many retirees relied on that check to pay their increased utility bills during the winter,” [General Retirement System Vice Chairman John Riehl] wrote in a trustees report Dec. 4, 2011. “Also remember that the money would go directly into the local economy.”



And more from The New York Times:









[Pension board spokeswoman Tina Bassett] said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.


 


“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.



Also from the New York Times, estimates of the staggering amounts:









The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost Detroit nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. It appears that Mr. Esuchanko could not get data for years before 1985.


 


His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments. Mr. Esuchanko could not get the data he needed to calculate those, either.



And how they pulled it off:









Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments.



And here’s an opinion from the Detroit Free Press’s editorial board:









It’s a startling sum of money, and it’s directly connected to the fund’s instability, as well as the fiscal health of the city and the threat that bankruptcy might keep Detroit from being able to honor its pension obligations.



There may be no cleaner account of the repercussions of handing power to those who show their compassion with the public purse. However well meaning the union reps controlling Detroit’s pension board may have been, their politics clearly compromised the city’s long-term health.


Don’t get me wrong, I’m not posting this to support today’s mainstream Republican Party. Bush 43 helped ensure that long-term thinking is a thing of the past for those who control the federal government, whether red or blue.


But at the local level, stories like this reinforce an opinion I shared in this post. I showed a strong correlation between political bias and unemployment rates for 218 American cities, and argued that there’s probably some causation in both directions.


Causation #1: High unemployment and related factors are likely to favor political candidates from the left.


Causation #2: Left wing politics encourage the unsustainable spending that eventually leads to what we see today in Detroit.

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