This past Tuesday, a Bankruptcy Judge in Federal Court gave the City Of Detroit the approval to proceed ahead in Chapter 9 Bankruptcy. Chapter 9 is a specific section of the IRS Code that applies to State and Local Governments. Surely there will be an Appeal by various Creditors, especially the attorneys representing Current Employees and Retirees of the City. But, the Bankruptcy Proceedings will move forward anyway. A key point here is that the person who is currently managing the Detroit is not an elected official, and he was appointed by the Governor.
At one time, Detroit was a very vibrant City, and the fourth largest in the U. S. But, it had fallen on hard times sometime back. Part of it was White Flight and part was Politics. This particular situation is not particular to just Detroit: Chicago is struggling financially. Also, there have been a number of medium-sized cities, plus Jefferson County, Alabama (Birmingham) that have entered into Bankruptcy. Let’s not forget Philadelphia closing a number of its Public Schools. So, what’s happening in your City?
Several decades back, there were more Statehouses and Legislatures that were controlled by Republicans. So, Re-Districting guaranteed that various Legislators could have long Careers, in protected Districts, rather than actually represent anyone but their own Ideologies–and Political Base. Just look at the maps from the 2012 Presidential Election: the large cities tended to vote for President Barack Obama and the rest of the states, for Governor Mitt Romney. So, we have the situation where the major cities became political islands.
That bi-polar situation leads to the wealthier people, many of whom may work in the large cities; but, they live in the wealthier suburbs. So, the cities incur the expense of the large public school systems (for the low-level workers children), road repair, utility operations, police and fire, etc. But, while the big money has moved to the suburbs, the operational, social and safety net functions are left for the city, with only the poorer residents to pay taxes to support all of those considerable needs.
Michigan has a Republican Governor and the GOP controls the Legislature. The City of Detroit had requested financial assistance–as the economic locomotive of the State. The Governor and Legislature turned the City down. The State has proposed, however, to provide $250 Million to help fund a new Arena for the Redwings, Detroit’s NHL hockey team. To me, it sounds a little like fiddling (withholding support) while Rome burns. Remember that the bulk of Detroit residents cannot afford tickets to any of the sports teams. So, the State is providing corporate welfare to the owners of the teams that just happen to carry the Detroit name.
Perhaps the most excruciating potential fall-out of the City’s Bankruptcy would be the plight of the Retirees, who will very likely lose some pension benefits. Part of the Legal maneuvering has been whether the Bankruptcy should have been held in State or Federal Court. Under State Law, Pensions are protected; but, they are not under Federal Law. The Federal Pension Benefit Protection Corporation (PBGC) doesn’t cover State and Local Pensions.
Politicians, around the Country, can be very extravagant when it comes to Pensions; because, they will generally be out of office before the budget problems hit the fan. I am aware of a number of local governments that committed to place as much as 25% of employee compensation in their respective pensions. Top flight corporations, such as IBM, however, limit the contributions to five percent, or perhaps a little more. But, that’s where the political mindset sets in. Remember that employees and their families vote for whoever provided their jobs.
Detroit, for instance, didn’t fund pensions at all in recent years; however, it did collect the employees contributions. Besides under-funding pensions, local governments can assume investment returns that are totally unrealistic over the long term. Hey, we’re talking about retirees collecting for potentially 25 or 30 years. In other words, local governments can make the numbers lie.
So, the problems with Detroit are probably underfunding of pensions, way too-high salaries for key employees, and just exorbitant spending of other people’s money. So now, Retirees who worked for the City of Detroit at the low-end of the pay scale may very well see their pension benefits cut. And, the situation just gets worse as more and more Upper Middle-Class people move out of the City, and roads just get worse, and response time for Police and Fire Departments gets worse. Just think of a sinking ship.
You might want to find out if your City, County or State are cooking the books, as well.