The struggles of Detroit, of course, are extreme. The report by the arbitrator, Thomas W. Brookover, noted that although the city’s unemployment rate was officially 28 percent, there was evidence that less than 37 percent of the city’s residents were actually working. The population had crashed. Property tax revenues were dwindling. Detroit had drained its rainy day fund, reduced overtime, offered property-tax amnesty, sold public assets, borrowed money, allowed casinos to set up shop — and still its deficits kept growing.
The average pension for retired police officers in Detroit is not especially rich: it is $28,501 a year. But with more than twice as many retirees as active workers, Mr. Brookover wrote, the costs of paying for the pensions “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.”
Detroit’s efforts to cover those costs through aggressive investing have not helped. In
a 2010 report, an auditor warned that $103 million of alternative investments were unaccounted for. The city’s bets have included Tradewinds Airlines, which went bankrupt for the third time in 2008, and a luxury hotel in Detroit. The
Securities and Exchange Commission is investigating.
The city initially sought to freeze its pension fund immediately, which is almost unheard of in the public sector. The arbitrator rejected that proposal, but agreed that the city could reduce the rate at which lieutenants and sergeants earn pension benefits from 2.5 percent of their salary per year to 2.1 percent. Although rare, the reduction is not particularly large, given the magnitude of Detroit’s problems. The arbitrator did not try to find a solution to the fund’s imbalance.
Michigan’s new Republican governor, Rick Snyder, has taken a
carrot-and-stick approach to the state’s troubled cities. The carrot: He scrapped the old way of distributing state aid, and wants to make aid contingent on having cities adopt “best practices,” which he says should include reducing the rate at which workers earn pension benefits. The stick: A new law allowing the state to appoint fiscal managers with broad powers over distressed local governments.
Mayor
Dave Bing of Detroit referred to both carrot and stick in
his budget address this month, when he spoke of the need to reduce pensions for current workers, and to move away from traditional pension plans to those more like
401[[k)’s for “at a minimum all new hires.”
“If we are unable or unwilling to make these changes, an emergency financial manager will be appointed by the state to make them for us,” he said. “It’s that simple.”
