Detroit bankruptcy is not an anomaly

Many cities have similar problems with their pension plans

By Alex Halperin
Published July 19, 2013 1:03PM (EDT)
An abandonned car factory in Detroit                (Wikimedia)
An abandonned car factory in Detroit (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

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

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Related Topics ------------------------------------------

Bankruptcy Detroit Finance Labor Pensions Retirement Workers