Detroit: Pensions, Racism and Bankruptcy

Detroit’s current citizens and the public employees who serve them are not the cause of Detroit’s fiscal problems. They are the victims of forces beyond their control, including globalization, capital flight and racism. No one can, with any seriousness, blame Detroit’s librarians, social workers, garbage collection workers or street cleaners for the city’s catastrophic loss of population and tax base, the long decline and near-collapse of the Big 3 auto companies, or the 1967 riots, which launched a frantic exodus of businesses, white residents, and money from the City of Detroit to the suburbs.

As the suburbs grew and new highways encouraged sprawl in the 1950s and 1960s, Detroit’s manufacturing employment base and population—and especially its white population—began to decline. As Thomas Sugrue has pointed out, between 1947 and 1958, the Big Three built twenty-five new plants in the Detroit metropolitan area, all of them in suburban communities, most more than fifteen miles from the center city. As the jobs moved away, so did the city’s residents.

From 1.85 million in 1950, the city’s population declined to 1.62 million in 1960 and 1.51 million in 1970. By 1980, white flight was nearly complete: whites, who made up 83% of the population in 1950, were only 34% of the population, one million fewer than in 1950. The terrible riots in 1967 accelerated the movement of white families to the suburbs, but a combination of opportunity and racism had spurred hundreds of thousands to leave Detroit well before the U.S. Army occupied it. The hostility of whites toward blacks, their fear, and economic self-interest as they understood it led them to refuse to live in integrated neighborhoods, spurring them to sell their homes and abandon the city.

By the 2010 census, Detroit was down to 713,777 people, 83% black, 11% white, and 6% Hispanic. The city’s population was 1.1 million less than in 1950, but its white population was nearly 1.5 million less.

The loss of population, and especially the loss of wealthier, higher income white families, probably doomed Detroit even if the auto industry had not melted down. Black median family income has always been less than 65% of white median family income—and sometimes much less. So as the racial balance changed, the city’s income and wealth declined and made its fiscal situation tougher and tougher.

It’s unrealistic to expect Detroit’s remaining 700,000 residents, more than one-third of whom have incomes below the poverty level and whose per capita income is only $14,000, to support a city and an infrastructure built for 1.8 million. The state of Michigan and the federal government should be subsidizing the re-population of Detroit, paying people to move there, to buy and repair homes, and to invest in the city’s future—the way we once subsidized the population of the frontier. Instead, the governor has chosen to attack the city’s employees, breaking a bond of trust that has helped keep them on their jobs through the most trying times.

Legal scholars are debating whether federal bankruptcy law trumps the Michigan constitution and allows a bankruptcy judge to reduce the vested pension benefits that retirees and current employees have earned. The Michigan constitution itself is clear. Article IX, Section 24 provides: “The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” The provision is so utterly clear that Michigan’s Attorney General has broken with Governor Snyder and will argue in court that the governor has no power to use bankruptcy proceedings to reduce accrued Detroit’s pension obligations.

In other words, it is unconstitutional and illegal for the governor or any state official to take actions to impair the full right of Detroit’s public employee pensioners to the pensions they earned. As an agent of the governor and the state of Michigan, Emergency Financial Manager Kevyn Orr had no authority to include Detroit’s pension obligations in a bankruptcy petition, as he did. I believe the state of Michigan will ultimately be obligated by its constitution to make good on those pension obligations if they are diminished or impaired by the bankruptcy judge.

Governor Snyder’s contempt for the Michigan constitution is more than matched by his attitude toward Detroit and its public employees. Detroiters know that in 1998, Gov. John Engler promised that the state government would share tax revenue with Detroit at a level of $333 million a year for nine years if the city reduced its income tax rates. Mayor Dennis Archer kept his end of the tax-cuts-for-more-revenue-sharing bargain but the state didn’t, and Detroit ended up losing more than half a billion dollars in revenue. Already struggling, Detroit never recovered from that loss, having had to simultaneously reduce services and borrow more money to make up for the lost revenue.

Gov. Snyder continues to shortchange Detroit today. Michigan’s economy has been steadily recovering from the Great Recession, but its revenue sharing with Detroit has continued to decline—from $268 million in 2009 to $239 million in 2010 and 2011. Gov. Snyder cut this revenue stream even further last year, by an additional 28%, to $173 million. In short, as Detroit’s problems worsened, he piled on. Snyder and the state legislature treat Detroit like an unwanted foster child.

It’s really no surprise that the governor who signed so-called “Right to Work” legislation designed to weaken unions and undermine collective bargaining, and who cut unemployment benefits for jobless workers at a time of crushing unemployment would also try to separate employees from the pensions they worked decades to earn. Reducing the wages, benefits and income of working people is a goal Snyder shares with governors in Wisconsin, Indiana, Ohio, Florida and many other states.

Detroit’s public workers are not overpaid. The average non-uniformed Detroit public employee earns $41,385 per year—less than the 2010 national average annual wage of $43,194. Employee pay was reduced by 10% during fiscal year 2012. And despite a lot of noise to the contrary, the pension benefits under attack in Detroit aren’t exactly gold-plated either.

The average pension for non-uniformed retirees was less than $19,000 a year in 2011, and future benefits were reduced by more than a third in 2012. Previously, a thirty-year employee would receive a pension of 55% of final average pay and the pension would be increased by 2.25 percent of the original pension amount each year as inflation protection. Under the new, lower benefit structure, a 30-year employee would receive a pension of 45 percent of final pay and receives no COLA.

The city’s fiscal problems are not the fault of Detroit’s public employees. Those problems cannot be solved by flouting the constitutional guarantee that pensions cannot be reduced after they have been earned.