Detroit bankruptcy is not an anomaly

Many cities have similar problems with their pension plans

Topics: Detroit, Pensions, bankruptcy, Finance, Labor, Workers, Retirement, , ,

Detroit bankruptcy is not an anomalyAn abandonned car factory in Detroit (Credit: Wikimedia)

In Detroit, nature is reclaiming thousands of abandoned houses and empty lots. Empty, hollowed-out buildings, like factories and a train station, are important landmarks. The crime and poverty rates are among the highest in the country. In many respects, the city is an American cautionary tale. But according to the Guardian the pension plans’ driving the city into bankruptcy is something many American cities and companies face.

To keep up with their targets, “an increasing percentage of pension managers are pouring money into risky investment strategies in the hopes of getting a better return on pension dollars.” In public pension funds, such as those run by cities and states, it’s even worse. As unemployed people pay fewer taxes, the funds accumulate less revenue and “according to Standard & Poor’s, unfunded or underfunded pensions are common; the assets compared to the liabilities of the average state pension plan is roughly 72.9% as of 2011 (the most recent date for which information is available).”

The Guardian:

Detroit is not alone, although its pension problems are particularly dire. The city’s two pension funds are suing, objecting that emergency manager Kevyn Orr has no right to cut retiree benefits. The two pensions “have claims to $9.2bn in unfunded pension and retiree health care liabilities”, according to the Detroit Free Press, whereas Orr claims they are underfunded by $3.5bn. The pension funds dispute his accounting.

Detroit’s fight over its pension liabilities mirrors that of Stockton, California, where pension plans also did not take well to being second-class citizens in a bankruptcy. A bankruptcy is a process that allows a court to decide which creditors get paid back, and in what order.

Pension plans fear they will fall to the bottom of the pile – behind banks that lend money and hedge funds that hold city and state bonds. And they are largely correct in their fears.



In other words, now that Detroit is in bankruptcy, retired workers will be competing against Wall Street for their share of a shrinking pie. Many American cities and states face the same problem, and a place doesn’t have to look as ostentatiously corroded as Detroit to have invested a pension fund badly:

One economist, Guardian columnist Dean Baker, estimated in 2011 that the shortfall in public pensions could be as huge as $1tn. A monster of this size cannot remain hidden long. It will catch up with cities and states. And since they don’t have the money to pay into pensions, there is a chance that the problem will require the federal government to step in with a bailout.

Alex Halperin is news editor at Salon. You can follow him on Twitter @alexhalperin.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 13
  • Close
  • Fullscreen
  • Thumbnails
    Clare Barboza/Bloomsbury

    Uncommon Apples

    Api Étoile

    Like little stars.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Calville Blanc

    World's best pie apple. Essential for Tarte Tatin. Has five prominent ribs.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Chenango Strawberry

    So pretty. So early. So ephemeral. Tastes like strawberry candy (slightly).

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Chestnut Crab

    My personal fave. Ultra-crisp. Graham cracker flavor. Should be famous. Isn't.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    D'Arcy Spice

    High flavored with notes of blood orange and allspice. Very rare.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Esopus Spitzenberg

    Jefferson's favorite. The best all-purpose American apple.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Granite Beauty

    New Hampshire's native son has a grizzled appearance and a strangely addictive curry flavor. Very, very rare.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Hewes Crab

    Makes the best hard cider in America. Soon to be famous.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Hidden Rose

    Freak seedling found in an Oregon field in the '60s has pink flesh and a fragrant strawberry snap. Makes a killer rose cider.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Knobbed Russet

    Freak city.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Newtown Pippin

    Ben Franklin's favorite. Queen Victoria's favorite. Only apple native to NYC.

    Clare Barboza/Bloomsbury

    Uncommon Apples

    Pitmaston Pineapple

    Really does taste like pineapple.

  • Recent Slide Shows

Comments

Loading Comments...