Economy
While Detroit’s July 18th bankruptcy filing made history last week, the largest U.S. city so far to do so, its looming battle over retirement benefits may set an even more profound precedent: Are slashing pensions the right way to pull a city out of debt?
Experts say Detroit - with a fleeing population, disintegrating tax base, oversize government and sputtering industry - has been functionally bankrupt for years. But it wasn’t until after a February state review concluded the city had reached an official “financial emergency,” that Michigan Gov. Rick Snyder felt empowered to appoint Kevyn Orr as Emergency Manager, giving the high-powered Washington, D.C., bankruptcy lawyer a broad range of powers to hire and fire workers and sell off public assets.
Orr’s decision to file a Chapter 9 bankruptcy in federal court came after the city’s creditors and retirees rejected his hardline offer to solve the crisis in large part by paying back bondholders pennies on the dollar and cutting monthly pension payments to some 21,000 retirees.
Orr reportedly tried to lay the foundation for an out-of-court agreement with the two sides soon after his controversial March appointment, but those months of talks appear to have yielded little more than acrimony.
“Welcome to war,” George Orzech, the chairman of the Police and Fire Retirement System, said after the bankruptcy was filed.
Pension funds have sued the government in state court to halt the bankruptcy, arguing that cuts to retirement benefits - which Orr estimates at $3.5 billion of Detroit’s roughly $18 billion debt - are unconstitutional.
“It seems like they are going to take money from retirees to repair and tear down houses,” Donald L. Taylor, president of the Retired Detroit Police and Firefighters Association, told the Washington Post. “I don’t know how appropriate that is.”
Orr has an 18-month mandate to turn Detroit around and says he hopes the city can emerge from bankruptcy by September 2014, an ambitious timeline. But he will face numerous legal challenges, the first of which may be the lawsuits over the pension funds.
Ingham County Circuit Court Judge Rosemarie Aquilina, whose court encompasses the state capital and is hearing the retirees’ challenge, ruled on Friday that the planned pension cuts were unconstitutional and that Orr must withdraw the bankruptcy. But Federal Bankruptcy Court Judge Steven Rhodes, who is overseeing Detroit’s Chapter 9 filing, will hear a request this Wednesday to put the retirees’ challenge on hold, and legal experts say he is likely to do so.
The structural problems underlying Detroit’s bankruptcy trace back more than a decade. Its population has declined by a quarter since 2000, unemployment stands at 16.3 percent and income-tax revenues have fallen by a third in the past decade.
Falling income taxes hurt city coffers, but an investigation earlier this year by the Detroit News found something worse: a staggering and ongoing failure to collect property taxes that cost the city nearly $250 million in 2011 alone. The investigation found that 47 percent of the city’s roughly 305,000 taxable properties hadn’t paid their bill that year.
Many homeowners incredulously refused to pay taxes when the city was failing to provide even basic services such as a prompt police force and trash collection, while others pointed to evidence that the city was significantly inflating their taxable property value. While other major American municipalities were relying on property taxes for anywhere from 48 to 77 percent of their general-operating budgets, in Detroit property taxes had fallen to just 13 percent of the city’s general fund, the investigation found.
Rather than pay what sometimes amounted to tens of thousands of dollars in backed-up tax bills, many property owners decided they were better off buying back their own homes at annual Wayne County auctions, where delinquent properties that hadn’t paid taxes in at least three years were going on sale with prices starting as low as $500.
Banks, which had often unwillingly repossessed scores of properties in the wake of the 2008 mortgage crisis, filled the roster of Detroit tax delinquents: they represented half of the 20 largest property owners involved in the 2012 auction, according to data assembled by independent property tracking website Why Don’t We Own This.
As tax revenue fell, Detroit continued to spend. From 2008 to 2012, the February state investigation found expenditures from the city’s general fund exceeded revenues by an average of $100 million every year. In response, Detroit began issuing bonds that it could not pay, except with more bonds.
“By issuing this debt, city officials improvidently converted an annual overspending problem into a long-term liability,” the investigators wrote.
When the state team looked into the city’s organization for possible solutions, they found what they called a wide, bloated and unresponsive bureaucracy where any change required multiple levels of approval - a critical problem during an emergency.
The team concluded that Detroit would need to find a way to come up with $15 million per month from January to March to remain solvent, but they argued that working according to the laws laid out in the city charter would prove fatal to the effort. To prove their point, investigators laid out an exhaustive, seven-point checklist - required under the charter - that they would need to satisfy before privatizing any city services, including a cost-benefit analysis, time for public employees to prepare and present a rival bid, and two-thirds approval from the city council.
The city responded with recommended cost-cutting measures – furloughs, a one-year suspension of pension accruals, reducing healthcare plan payments and eliminating 400 city jobs – but the state team of Treasury Department analysts said the solutions would hardly touch the billions in long-term liabilities.
Al Jazeera and wire services
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