Since it first came out about two months ago, the story of Detroit’s bankruptcy has been fascinating and scary. The story that America’s media dishes out to us in 30 second sound bites doesn’t even come close to squaring with the stories by reputable journalists on the internet and in print media.
The story on the TV and radio is all about incompetence of local leaders. Now they must pay and all associated with the city must also be punished for that incompetence. But in print and online the story is much different. Detroit, like many major older cities, has been losing the richer citizens to the flight to the suburbs. They leave behind empty businesses, lost jobs and a smaller tax base for the city. The population that stays behind is also a population less able to care for itself, thus putting more stress on what resources the city has.
Detroit, again like many others, was sold a bill of goods on the fantastic investments that turned out to be toxic mortgages. In the contract Detroit also became liable for sales fees immediately if the value of the investments fell below a certain mark. That also came to be. Thus Detroit was hit almost by a perfect storm of financial reversals over a relatively short span of time.
All this serves as background for what may be one of the largest thefts ever in American history. As part of the bankruptcy someone has to decide what creditors Detroit will pay and what percent each creditor will get. One of the “creditors” is the pension fund negotiated in good faith between the city and the unions representing various workers. When Federal Judge Stephen Rhodes decided that even though public pension funds are guaranteed in the Michigan constitution, pensions really aren’t guaranteed. Should his ruling stand, governmental units throughout the country will be looking at pension funds as less a contractual obligation and more of a slush fund.
“The plundering of private sector pensions by corporate executives is nothing new. Books and columns by Johnston and other Pulitzer Prize winners have detailed how most S&P 500 companies have diverted mountains of cash from employee pensions to make their quarterly earnings look bigger, boost stock prices and fatten their annual bonuses—all unconscionable and corrupt acts that were perfectly legal, says Johnston, thanks to a Congress that rewrote the legal fine print at the behest of corporate lobbyists.
But the newest development in America’s unfolding retirement security crisis concerns public employees—people who worked in schools, public safety departments, etc. and often are exempt from Social Security because they have other public retirement plans. For years if not decades, top fiscal managers in a mix of cities, counties and states didn’t put away what’s now hundreds of billions of dollars for civil service workers. Now, the same class of public sector executives are taking steps to cut these retirement packages. The question is not whether the cuts are coming, but how will they unfold.
Take Detroit’s bankruptcy filing. Beyond the exceptionally nasty politics surrounding the largest municipal bankruptcy in America, what was pivotallast week was a ruling by the federal bankruptcy judge that classified the promised retirement benefits as “unsecured” debt. That’s a subordinate class to “secured” debt holders, such as investors who bought bonds, and it means that the Court can order reduction in retiree benefits. The fact that Michigan’s state Constitution forbids this kind of breach of contract did not apply, the bankruptcy judge said, because a federal proceeding trumps state law. Without getting lost in the legal details, the big question is how big a hit will Detroit’s retirees take. A pension in the city averages $19,000 a year.”
The average pension for a Detroit worker is $19,000 a year. These workers are not eligible for Social Security, so for many the pension is it. $19,000/year is less than $1600/month – not much to live on. One would assume if the pensions are cut for retirees, many of these folks will be destitute.
In Illinois a couple of days later the state legislature voted to cut future benefits to make up for the state’s failure to make adequate payments into the retirement funds. So rather than raise a tax to make up the difference, it was much easier to steal from future retirees.
“The final deal, passed by a Democratic legislature and signed into law by Democratic Governor Pat Quinn, caps benefits, cuts cost-of-living increases for retirees, raises the retirement age by up to five years for younger workers, and offers an optional 401(k) plan to lure workers to leave the pension system. Workers will contribute 1 percent less to their retirement funds under the plan, in an attempt to compensate for the $100 billion in givebacks. But a retiree can expect to lose thousands of dollars a year under the new law, and workers would be barred from changing the plan through collective bargaining in the future. The average Illinois public employee pension is $32,000 a year, but 80 percent of state workers affected do not participate in Social Security, as Illinois is one of 15 states which covers their employees instead through their public pension program. So these pensions represent the sum total of Illinois public employees’ retirement income. “When you cut someone’s wages, at least that person can say, I’m not working for you,” says Ross Eisenbrey, vice president of the Economic Policy Institute. “By cutting retiree pensions, this is literally reaching into their bank account and stealing from them after the fact.”
Like Michigan, Illinois has a constitutional restriction on impairing pensions for retirees. But unlike Detroit, Illinois was not forced into pension restructuring due to bankruptcy. In fact, Illinois is a wealthy state, with the fifth-largest GDP in the nation, a low tax burden that includes a flat 5 percent income tax (residents with poverty wages pay the same percentage as millionaires), and a history of corporate tax giveaways. On the same day that pensions were cut, the state Senate also approved a multimillion-dollar tax break for the agribusiness giant Archer Daniels Midland. “They didn’t even have the respect to wait a day,” says AFSCME’s Steve Kreisberg. The union is part of a coalition planning to sue over what they consider an unconstitutional theft.”
In the past couple years many cities have declared bankruptcy or are talking of it. This is unprecedented in our history. None of these bankruptcies are due to paying workers too much or giving them too much of a retirement. Pensions are a deferred compensation. If paid as part of their regular compensation and placed in a fund, the money should be there years later.
If stealing from the public pensions becomes legal, it will become widespread. We will then watch the biggest theft ever in America as money is taken from workers in order to keep from raising taxes on the wealthy or to keep from closing loopholes.
We will also see the end of retirement in the US except for the wealthy.
Oh – and while Illinois gave ADM a multi-million dollar tax break the very day they cut workers pensions, Detroit announced they would fund a huge new home for hockey’s Red Wings at a cost of around $400 million days before the ruling on pensions.