Why Detroit Went Down

Yesterday, a federal judge approved an $18 billion bankruptcy filing by the City of Detroit in the largest municipal bankruptcy in U.S. history.  It's not going to be pretty.  Creditors, pensioners and other claimants may get as little as 15 cents on the dollar.  Local unions say they'll file an appeal on the grounds that cutting pension benefits violates the Michigan constitution (which it does, but the judge says do it anyway).

Fox News predictably blamed unions and retirees, saying pension liability was the "key problem".  Detroit Emergency Manager Kevyn Orr said the same thing.  This is what Buster likes to call total bullshit!  (But we must consider the source.)

In reality, Detroit succumbed to a terrible decades-long cash-flow problem.  City revenues fell steadily as a result of declining population (almost 2 million in 1950, 700,000 today), corporate tax subsidies and out-sourcing, reduced auto manufacturing, and soaring, chronic unemployment.  Also, the city ignorantly entered into exotic, costly and one-sided rate-swap deals pushed by Wall Street vultures.  And yes, the city did fail to make all of its required pension payments and did spend that money elsewhere, but even so, Detroit's pension liability is 77% funded, which ain't bad given all the shit that's gone down.  (By contrast, the Kentucky State Employees Retirement System is only 27% funded.)*

I won't claim any expertise in municipal bankruptcy but Detroit's financial problems seem insurmountable and it's clear everyone's going to take a haircut, even the retirees.  But I hope the bankruptcy judge finds a way to be as generous as possible with pension benefits and uses the bigger scissors for other obligations.  Blaming unions and pensions is blatant scapegoating.  Detroit's problems were not caused by retired librarians and garbage men, but I'm afraid they're gonna take the hit. 

(*Rolling Stone 10/3/13)