I received the owner's permission to post this in full. It comes from the only substack i subscribe to. It is a wonderfully written piece analogizing Detroit with America and our pernicious path. Enjoy.
Detroit.
by Mary Williams Walsh.
JOHN ELLIS
JAN 29
The following was written by Mary Williams Walsh, who recently joined News Items as its managing editor. Prior to joining News Items, Mary worked at The New York Times, The Wall Street Journal and The Los Angeles Times. She covered Detroit during its first adventure through municipal bankruptcy. She’s back with an update.
In bankruptcy ten years ago, Detroit negotiated sweeping reductions of its debt. Every creditor took a hit, even retired city workers, who were, as a group, the city’s biggest unsecured creditor. The retirees had been promised both health insurance and pensions, but their health plan was completely unfunded, and city politicians had been using their pension system as a slush fund for years. It was billions short.
The pensions were not exorbitant, but Detroit’s police and fire fighters could retire in their 50s, sometimes even their 40s. The extra years made the benefits costly—even more so because they compounded at 2.5 percent annually.
The retiree health plan was unceremoniously canceled. Union lawyers said that the pensions could not be reduced, thanks to protections in the State Constitution. But the bankruptcy judge, Steven Rhodes, ruled that in bankruptcy public pensions could be treated as contracts. Contracts are routinely broken in bankruptcy.
Their health care gone, the retirees stood to lose 27 percent of their income, as well. Unions began calling for the city to sell the treasures in the Detroit Institute of Arts, to raise cash for pensions. And that’s when a miracle happened: Civic leaders and philanthropists stepped forward with hundreds of millions of dollars to keep the Picassos and Rembrandts in the galleries—and to give Detroit a ten-year pension-funding holiday, seemingly enough time to focus on recovery.
Judge Rhodes said the resulting agreement “borders on the miraculous.”
Bankruptcy is all about shared sacrifice. Detroit’s general retirees agreed to give up 4.5 percent of their pensions to close the deal. The retired police and fire fighters kept 100 percent of theirs, but gave up most of their annual 2.5 percent cost-of-living increase. There was a sweetener: If their plan ever got to be more than 78 percent funded, the 2.5 percent increases could come back.
It was all laid out in the 611-page agreement that settled the bankruptcy: After the pension-funding holiday, the city would make annual contributions for 30 years. An actuary would calculate the amounts, using prescribed methods—no smoke and mirrors. Expert pension boards would safeguard the money.
The city exited bankruptcy and set about razing blighted neighborhoods and courting new business. (It also reconfigured the Institute of Arts as a bankruptcy-remote entity that can’t be threatened if Detroit ever goes bust again.)
Ten years went by. The philanthropists fulfilled their part of the bargain. And now, in a few more months, Detroit will resume funding the retirees’ pensions for the requisite 30 years. But the retired police and fire fighters have other ideas.
Last year, they asked the plan’s actuary to draw up a new policy to make the city fund their pensions over 20 years. The city objected, but the pension board said it had a fiduciary duty to the retirees, not to the people of Detroit. Twenty years it would be.
With faster funding, the pension fund will clear the 78 percent hurdle, at least on paper, and the retirees will get their 2.5 percent annual increases back. It will cost $26 million in the first year—more later because of compounding—but the actuary said the fund was flush enough, thanks to 20-year funding. Mayor Michael Duggan said the gambit stuck the city with “additional hundreds of millions of dollars of front-loaded payments” and would be “devastating to the city’s ability to fund critical programs.” Not so, said the pension board’s analyst: Detroit had made “a remarkable transformation,” and now the problem was really over-spending by the “central government.” Mayor Duggan said the only time the “central government” had spent too much was a few years back, when the pension actuary, citing “a gross miscalculation,” dumped a bill for $445 million onto his desk—no explanation—right in the middle of Detroit’s purported “pension holiday.”
The mayor, a former prosecutor, said he considered a lawsuit but decided against it. He scraped together the $445 million, taking money away from everything else the city needs, like blight removal, housing initiatives, and raising the pay of the current police, who are easily poached by nearby towns that pay more. And now, more cost-overruns.
The retirees won’t back down. Mayor Duggan has filed a motion with the bankruptcy court, asking it to enforce 30-year funding. Judge Rhodes has retired, so the motion is before another judge, Thomas J. Tucker. He has not yet ruled.
The city’s other retirees are watching closely. If the police and fire restoration succeeds, they’re likely to demand one, too.
Who cares if the city’s finances unravel? Some might ask: who really cares about Detroit? Look at it this way: Treasuries are on track to default this summer. The Highway Trust Fund will need a top-up in 2027. The Medicare hospital fund will be broke by 2028. Social Security is due to go insolvent in 2033. All of these things will need “fixing” in the coming years.
As Judge Rhodes said ten years ago, “fixing” Detroit bordered on the “miraculous.” God only knows what it will take to “fix” America.
© 2023 John Ellis
548 Market Street PMB 72296, San Francisco, CA 94104
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