Business Ethos Blog

Detroit: A Bailout or a Settlement?

Dr. David Mielke is the Retired Dean of the School of Business at Eastern Michigan University

Last week Governor Snyder announced a plan to help the City of Detroit.  The state would contribute $350 million to help save the Detroit Institute of Art and to help pay the pensions of city workers.  There is no question that the state needs a healthy Detroit, but was the pledge of state dollars the “Right Thing to do?”  Let’s look at some issues:

1. There has been an ongoing concern that Detroit might have to sell the artwork it owns in the DIA as part of the bankruptcy proceedings.  Christie’s has done an appraisal to determine how much money the sale might provide to satisfy creditors.  In fact, the sale has been pushed by unions.

2. Preliminary estimates suggest that the city’s unsecured creditors may receive less than 10 cents on the dollar for their outstanding debt.

3. Judge Rhodes, in charge of the bankruptcy turned down a deal for a second time last week to settle Detroit’s swap deals.  He stated that the court will not participate or perpetuate hasty and imprudent financial decision making.

4. There has been considerable concern that as part of the bankruptcy agreement that the pension plan liabilities, estimated at $3.5 billion, might be reduced by reducing pensions for existing and future retirees.  In fact, there have already been court challenges stating that the pensions of state workers are protected by the state constitution and cannot be reduced.

5. An individual pledged $5 million to help save the artwork and to help pay the pension costs of retirees.

6. Next, there was an announcement by nine foundations to pledge $330 million to save the artwork and help with the pensions.

7. Last week  Governor Snyder announced a plan to have the state contribute $350 million to save the artwork and help pay the pensions.  As he stated, this is not a bailout for the pensions, but a settlement.  The state legislature would have to approve the deal.

8. The money from the state would not come from the general fund, but from the tobacco settlement money.  I thought the tobacco settlement money was to be used for public health, not pensions.

9. Some suggest that the DIA itself should contribute $5 million a year to help save the artwork.  Others suggest that the unions might also contribute–they take in almost $5 million a year in dues.

10. Last week Judge Rosen, appointed to mediate the bankruptcy negotiations, forced Emergency Manager Kevin Orr to rescind his order to freeze pension benefits, suspend cost of living adjustments and to move current workers to 401(k) plans.  Orr’s moves were seen as the first steps to make the pension plans more sustainable.

11. Currently, one worker supports 2 retirees.  Firefighters retiring at 50 years old can earn 70% of their highest salary plus an annual cost of living adjustment of 1.9% a year.  The average public safety worker gets a $30,000 pension and municipal employee $20,000 a year, with many who retire in their 30s and 40s and have second careers.  Some say the pension plans are full of fraud and abuse.  Nearly a quarter of retired public safety officers receive a disability pension equaling 2/3’s of their pay. Twenty retirees under the age of 20 have somehow managed to qualify for pensions of $27,000 a year.

12. The Governor proposes that as part of the pension deal, that there would be independent management of Detroit’s 2 public pension funds—how likely is it that the unions will agree to that?

13. What about the precedent that state money, regardless of its source, is used to settle pensions?  When we have the next municipal bankruptcy, Benton Harbor, or Flint or Saginaw or Hamtramck will state money also be available?

Michigan lawmakers appear to be open to assisting the pension bailout.  Could it be good politics in an election year?  However, it is not the “Right Thing to do.”  It is one thing to try to save the DIA, it is another to bailout—which is the correct term as it is not a the pension plans.  The long term viability of Detroit is tied to its ability to eliminate debt and to restructure its pensions.  The restructuring was to set an example—even a national example of how to bring unsustainable retirement costs for municipalities under control.