A major cause of the Motor City malady

Steven Malanga explores for City Journal key factors in the financial problems plaguing Detroit.

A federal judge’s ruling yesterday that Detroit worker pensions can be cut as part of the city’s bankruptcy case has angered city workers and shocked some of their supporters. Workers carrying signs outside the federal bankruptcy court yesterday blamed big banks for Detroit’s fiscal woes and demanded, “No cuts to our pensions.” They carried photos of Michigan governor Rick Snyder, painted to make him look like the devil. But if workers seek a culprit, they might look at the city’s pension-system trustees and the unions that were supposed to have influence over them. For years, the trustees granted annual bonuses to retirees and fattened worker-savings accounts with high guaranteed rates of return, siphoning crucial assets out of the retirement system, even as Detroit’s finances deteriorated. By one estimate, reported in the Detroit Free Press in September, the bonuses and guaranteed-interest programs cost the pension funds nearly $2 billion in contributions and foregone investment returns—money that might have made the pension system well-funded today and allowed retirement benefits to remain untouched.

Most press accounts note that city-worker pensions in Detroit are modest. They rarely mention that, for two decades, the city supplemented those pensions with annual, so-called “13th checks” for retirees—an additional monthly pension payment. Pension-fund trustees—themselves city workers, retirees, city residents, and elected officials—handed out nearly $1 billion in these annual payments to retirees in the city’s general pension fund. The trustees defended the payments as rewards to workers in years when the pension system’s investment returns exceeded projections. In lean years, they justified them as social policy. “Many retirees relied on that check to pay their increased utility bills during the winter,” wrote an attorney for the city’s pension system in 2011. “Also remember that the money would go directly into the local economy.”

Some reform-minded Detroit officials tried to halt the payments, understanding that they undermined the pension system’s finances. When he succeeded Coleman Young as mayor in 1994, Dennis Archer grew alarmed at the extra payments. He was rightfully concerned—as the Free Press noted, the pension system “was largely controlled by union officials acting as trustees.” Archer placed a voter initiative on the ballot in 1996 to cease the extra payments, but ferocious union opposition helped defeat it. “That’s a whole lot of money that if it was in the pension fund today, that may have made a difference in terms of where the pension fund stands,” Archer recently said.

Astoundingly, the 13th checks continued even after the city borrowed $1.44 billion in 2005 to plug a funding hole. Even today, the city’s unions are pursuing legal action to restore the bonus checks.

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