Will Feds Bail Out Detroit Pensions?

Bail Out Detroit PensionsHere’s an economic free-association test. Read the following sentence:

The Federal government should bail out Detroit city worker’s pensions so that retirees can be paid in full.

Some people will approve of the idea. But others will be shocked or angry. They’ll conjure up images of prosperous retirees making a fortune at everyone else’s expense. If you were one of them, you’ve been exposed to some infectious myths being spread in the media and by politicians.

Think again: Does $1,500 a month after hauling garbage cans your whole adult life really sound like a fortune?

Detroit’s pension plans may not need a Federal bailout. The city may have better options, especially if the politically-motivated machinations of its unelected leaders can be set aside. But morally and practically, there’s no reason why a rescue of this kind – or a Federal guarantee behind the city’s pension plan – shouldn’t be on the table.  Here’s why.

“Detroit” isn’t declaring bankruptcy.

“Detroit” isn’t trying to file for bankruptcy (a process currently being challenged in court).  An unelected official who was given the power to overrule Detroit’s elected government through a right-wing state law is filing for bankruptcy. That’s not a democratic process, and it doesn’t represent the people of Detroit.

The law which ended Detroit’s self-governance was promoted heavily by groups like ALEC and funders like the Koch Brothers. Its purpose is to reconfigure our democracy and our economy so that they serve the wealthy and powerful even more efficiently.

The city’s corporate overseer is focusing undue attention on pensions for very political reasons. A nationwide agenda has targeted the retirement security of working Americans – especially pensions, Social Security, and Medicare. The bankruptcy filing in Detroit, which targets that city’s union pensions, is part of this broader agenda.

Pensions aren’t the problem.

Unelected city overseer Kevyn Orr quickly zeroed in on pensions, which have also been the focus of much of the press coverage and political debate. But Orr’s own numbers put the lie to the idea that pensions are a major problem.

Orr claims that Detroit’s ultimate debt obligations will amount to between $18 and $22 million. But his own fiscal report says right up front on page 3 that the total unfunded portion of Detroit’s pension obligation comes to only $600 million. That’s less than 3 percent of Orr’s higher figure. Even the most aggressive recalculation can’t turn it into a significant portion of Detroit’s obligations.

Behind all the talk about unfunded obligations lies the real goal: They want to cut the funded obligations.  But even that figure only comes to about one-sixth of Detroit’s total obligations. So why all the focus on pensions?

They want to set a precedent.

Because Detroit’s being used by the austerity economics crowd.  We’ve already seen the needless public spectacle being enacted by Orr and his team as they publicly contemplate selling off the city’s property, large and small. (See “The Looting of Detroit.“)

Bail Out Detroit PensionsGutting the city’s employee pension plan would be a similar kind of ritual sacrifice, designed to break the public’s belief in the social contract – and to set a national precedent.  Detroit’s unusually severe financial circumstances make that seem more necessary than it is.

Deep cuts to of Detroit’s employee pensions, together with the public sale of its property and the privatization of its lucrative franchises, would serve an anti-government political agenda. Once we’ve this process has been imposed on the first major American city, the next one will be much easier.

The fiftieth city to be gutted will be a cakewalk.

Banks, not city workers, have misbehaved. 

Retired Detroit employees didn’t cause the financial crisis of 2008, which hit the pension plan’s investment fund hard.  Yet they’re being handled as if they were morally equivalent to the Wall Street creditors who did.  As the New York Times reports, the unelected city manager’s plan would “treat bondholders the same as retirees” and ask them both to sacrifice.

Many of those bondholders are banks and other investment groups. And many of their investments are insured, which could largely protect them from the impact of a default. But most retirees need their pensions to live on.

Bankers are the city’s least deserving creditors. They deceived and bilked Detroit every time the city invested money or conducted a municipal bond offering.   In fact, bankers deceived every city, through the LIBOR scandal.

There’s also extensive evidence that bankers manipulating many bond offerings to benefit themselves at the benefits of the cities and states that were their erstwhile clients. Banks like JPMorgan Chase are hurting our communities by manipulating energy prices, while others like Goldman Sachs are hurting them by manipulating the cost of aluminum.

City employees did none of those things. And, as Dean Baker points out, Goldman’s profits are on track to exceed Detroit’s entire pension liability in less than a year. And yet our nation’s fiscal debate is focused on employee pensions, not the excessive profits of lawbreaking institutions.

City employees kept their part of the bargain.

Detroit’s employees kept their part of the bargain. In return for their promised pensions some worked at very dangerous jobs, including jobs as police officers and firefighters. Again and again in contract negotiations, city workers agreed to accept lower wages in return for these pensions.  And they put in their years on the job, often at backbreaking jobs.

There is no moral justification for treating retired employees the same way that Detroit’s Wall Street creditors are being treated. None.

These pensions are good for Detroit’s economy.

The average Detroit city pension is slightly less than $19,000 per year. For police and firefighters, pensions are their only source of retirement income. (They don’t have Social Security.)

Seniors typically depend on their retirement income for living expenses. That means most of this money is immediately recirculated back into the Detroit economy. It has an immediate and very real stimulus effect for Detroit. And we agree with Rob Wile: Detroit, like other troubled cities, can come back, if we’re willing to believe in it and invest in it.

Pension cuts could trigger a death spiral.

Paul Krugman is worried that Detroit will become the next Greece, an exceptional case used ad nauseum to make dire and unfounded predictions about bankruptcies to come – unless, of course, Americans are willing to submit to the harsh austerity measures advocated by the people making those predictions.

It’s a legitimate fear, but here’s another one: Cuts to city pensions could start a death spiral which removes much-needed consumer spending from an already beaten-up economy. Detroit could become “the new Greece” in another way: Victimized by austerity cuts, its economy could sink quickly – and outcome which would then be used to justify additional austerity cuts.

Cities deserve a plan.

Detroit has unique problems. It also shares many of the challenges of other American cities. Those challenges include:  poorly planned residential and commercial real estate development; tight concentrations of impoverished minority populations, which hurts children’s health and limits their chance for economic advancement; inadequate public services; and a lack of working infrastructure.

(Richard Wolff has some interesting thoughts about the long-term implications of our failure to address these problems.)

As for public pension funds: Yes, they need more revenue, although experts differ on exactly how underfunded they are. One thing’s for sure: This Wall Street-heavy “blue ribbon panel” (a term that is used much too loosely nowadays) is not the crowd to turn to for advice.

But whatever the shortfalls may be, they should be manageable, and might best be addressed as part of a comprehensive plan for America’s cities.

If they get these pensions, Social Security is next.

This has all the markings of a larger game.  The heavy doses of symbolism in the sell-offs and pension cuts serve a number of purposes, and one of the biggest is to reinforce the idea that the United States can no longer afford the financial security of its middle class.

Next stop, Social Security. The same myths used to push pension fear – changing demographics and worker-to-retiree ratios, “greedy geezers” – will have been subliminally “verified” by these pension cuts.  That opens a door that should remain closed, for sound economic reasons as well as ones of basic fairness.

The case for a bailout.

As we said earlier, Detroit may not need help with its pensions. This is, more than anything else, a thought experiment. But Federal support would be morally defensible. It could provide a down payment on Detroit’s economy, and those of other struggling cities. It could serve the same purpose that the architects of the bank bailout intended for their plan (without the lack of accountability in that plan): It could tell our nation, and the world, that the US stands behind these institutions – in this case, the institutions of local government.

If Detroit fails it will hurt our nation as a whole. It will send a message to minority and urban youth that their futures are as hopeless as they seem and the country doesn’t care. It will add to a national atmosphere of hopelessness and decay. And we will have missed an opportunity to turn the tide for America’s cities.

rj eskowOur cities were once engines of growth and prosperity. They’re still rich with potential resources, both human and material.  But restoring them will require faith – in the future, in our people, and in our ability to meet and overcome challenges.

And that could be the start of a great comeback – for urban America, for the middle class, and for our national economy.

It wouldn’t be a bailout. It would be an investment.

Richard “RJ” Eskow

Republished from Huffington Post with the author’s permission.

Tuesday, 23 July 2013

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