Detroit goes bust

It’s official: the city of Detroit is bankrupt. The Detroit News reported that the city filed a petition for bankruptcy protection this afternoon. The city is in a severe economic crisis and simply lacks the ability to raise sufficient taxes to pay its mounting bills. The city’s population fell more than 26% from 2000 to 2012 and...

It’s official: the city of Detroit is bankrupt. The Detroit News reported that the city filed a petition for bankruptcy protection this afternoon.

The city is in a severe economic crisis and simply lacks the ability to raise sufficient taxes to pay its mounting bills. The city’s population fell more than 26% from 2000 to 2012 and totals about 700,000 — down from almost two million in 1950. Some 36% of Detroiters lived below the poverty level between 2007 and 2011, the census found.

Among the many knotty issues that a bankruptcy court will need to settle will be pension and retiree health care debt. Detroit’s debts total $18 billion, and servicing those debts takes up $0.38 out of every dollar in taxes the city collects. That number was projected to grow to $0.65 on the dollar, according toGov. Rick Snyder. Out of that $18 billion, more than half is made up of unfunded pensions and retiree health insurance commitments.

Like Illinois, Michigan’s state constitution treats pension benefits as a contractual obligation that may not be reduced, but that has yet to be challenged in such a large municipal bankruptcy. Detroit’s retirees (full disclosure – that includes my father) are understandably nervous.

Illinois government workers will want to watch events in Detroit closely, because what happens there will set precedents that will apply here. Illinois unions put great stock in pensions and on the protections that the state constitution attaches to them, but a contract is no stronger than the people who make it. If the government simply doesn’t have the money, its promises are worthless, and there’s no point in suing if there’s nothing to collect.

As much as government unions want to protect traditional pensions, individual 401(k)-style retirement accounts do offer one huge advantage that is especially important when governments are in precarious financial condition: the assets belong to employees and are beyond the reach of a bankruptcy court.

It’s too late for Detroiters, but that’s something Illinois government workers might want to keep in mind.