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The truth about Detroit's pension woes

While the population was declining and public coffers were running dry, Wall Street banks were out to make millions.
Detroit Struggles To Re-Build A Bankrupt City Amidst Poverty And Blight
An abandoned home is seen with the Detroit skyline in the background on Sept. 5, 2013 in Detroit, Michigan.

Last week, the people of Detroit had to make a devastating decision. Vote for the so-called grand bargain that leads to painful cuts to their modest retirement benefits averaging $19,000 a year, or vote no and run the risk of losing even more. 

Sadly, politicians across the country are using these devastating choices as an opportunity to advance a right-wing ideology. They are pointing to Detroit as the boogeyman of what their cities and states could become, claiming that if they don’t cut modest worker pensions, they’re going to go bankrupt.

Politicians in standard budget fights from Anaheim to New York City claim that unless they privatize worker pensions, they’re “going to be the next Detroit.” In Florida, the Koch brothers and their allies used Detroit as an excuse to go after a perfectly healthy pension fund. But repeating this mantra does not make it so. In fact, these claims are baseless and show not only a serious misunderstanding of municipal finance, but also a stunning revision of recent history.

Detroit was dealing with a terrible and unique set of circumstances that no other city in the country can claim, no matter how much its politicians want to cut worker pensions. First and foremost, Detroit did not have a debt problem; it had a cash flow problem, caused by the dramatic depopulation of the city in recent years. Since the 1950s, Detroit lost 1.25 million people. Between the years 2000 and 2012 alone, the city lost 53% of its employed residents, a staggering exodus and a devastating blow to the city’s tax base. Half of that decline occurred in a single year -- 2008 -- when Wall Street crashed the national economy. Already struggling with a depleted tax base, Detroit was especially hard hit by the crash, which cut deeply into its key sources of revenue.

While public coffers were running dry, Wall Street banks were out to make millions. Mayor Kwame Kilpatrick, who now sits in jail, worked with Wall Street banks that designed an illegal borrowing scheme that evaded state debt limits and piled on unwise interest rate swaps. When interest rates plummeted, Wall Street demanded more than $300 million from Detroit to terminate these swap deals -- making a bad situation even worse.

These same Wall Street firms stand to make millions if other cities move to privatize their pension plans.

No other city in America faces the challenges that Detroit did. Despite the media firestorm about Detroit’s bankruptcy and that Detroit has become a popular talking point among politicians trying to scare their constituents, the fact is that municipal bankruptcy is exceedingly rare.

According to an analysis by Governing magazine, only 13 local governments have filed for bankruptcy since 2008. Five of those were dismissed. To put this number in context, there are more than 20,000 local governments in states that permit cities and counties to file for bankruptcy. That’s less than half of 1%. More than 99% of American cities don’t face what Detroit is facing. You don't need to be a statistician to know that’s nearly zero.

Detroit is emerging from decades of decline, and a year-and-a-half-long, highly complex bankruptcy process with a set of agreements that are at once political and financial, and tailored specifically to Detroit’s extraordinary circumstances. For politicians in other cities to appropriate measures taken in Detroit as one-size-fits-all-solutions to their own budget fights is not only misguided but irresponsible.

Pension benefits are a form of deferred compensation. Public employees pay a significant portion of each paycheck toward their pension, and many -- typically the workers doing the most dangerous jobs -- don’t earn Social Security. So, if they lose their pension, they’re left with nothing. Public sector jobs are notoriously paid less than those in the private sector, but the trade-off is the guarantee of modest, secure retirement. 

The lesson we should choose to learn from Detroit is how to better protect the modest pension benefits for workers in every city and state. We should not use the city’s bankruptcy as a callous attempt to rob other workers of their retirement security.

Jordan Marks is the Executive Director of the National Public Pension Coalition.