With its court filings last week, Detroit immediately became the nation’s largest municipal bankruptcy. But its problems didn’t spring up overnight. It took more than half a century for things to get this bad.
The auto industry declined, and the city’s population dropped from nearly 2 million to 700,000. City taxes are Michigan’s highest, but city revenues shrank as middle-class residents moved to suburbs looking for safer streets and better schools. Municipal services withered. Health care and pension costs kept rising. And growing debt brought more borrowing.
Ignoring rather than solving problems, failing to attract new businesses and new residents, shrugging off the need to balance budgets and being generous with public employee benefits all played a part, not to mention bad decisions and corruption at city hall.
Today, nearly 80,000 buildings are abandoned, fewer than 1 in 10 violent crimes are solved, half the streetlights are dark and the city owes up to $18 billion to 100,000 creditors. Detroit residents worry that the city’s museum will have to sell off its collection, and city retirees wonder whether their pensions will continue.
Detroit’s problems are so much larger than any other municipal bankruptcy that it’s hard to make direct comparisons to the situations facing other cities. But others are watching this case.
As Detroit News columnist Daniel Howes wrote: “Detroit’s bankruptcy carries broad national implications for the nation’s $3.7 trillion municipal finance market, public-sector pension funds and promises of retiree health care for tens of thousands of public employees nationwide — all of whom could be impacted by prospective rulings in a Detroit bankruptcy case.”
Detroit has about 10,000 active public workers and 18,000 retired ones who are owed pension and health care benefits. Funds that cover retiree health care are underfunded by about $5.7 billion, while those covering pension obligations are underfunded by about $3.5 billion.
Detroit is not alone. Underfunded public pensions are problems in many places. Illinois has a $96.8 billion public pension shortfall. Philadelphia, the Wall Street Journal reports, puts about 20 percent of its budget toward city pensions “to make up for years of shortchanging the system.”
Some of the problems have a familiar ring to Omahans — pension spiking in employees’ final year of work, counting on a stock market boom to keep pension funds solvent, allowing retirements at a younger age than in the private sector.
The Economist magazine recently reported, “Few fiscal problems are as grave, or as little understood, as underfunded state and municipal pensions. The funding gap for all state schemes is estimated at $4 trillion.”
Michigan Gov. Rick Snyder says a federal bailout isn’t an option, and it shouldn’t be. Detroit’s debts are the result of decisions made in Detroit. What kind of precedent would bailing out Detroit set for other cities and states that have been overly generous in promising benefits to public workers but are not adequately funding them?
Generations of Detroit officials and the voters who elected them failed to face facts. Now the city’s future is in the hands of a judge.
The sooner other states and cities take a hard look at their own books, the better.