Almost Midnight in Motown

March 16, 2012 - 11:21 AM

The city of Detroit, Michigan and its public unions are headed toward bankruptcy, and state governor Rick Snyder is making them an offer they shouldn't refuse.

With the city facing a $200 million deficit driven by exploding labor costs, it could be out of money by May. Snyder has offered the city $100 million in state-backed bonds to tide the city over until it restructures its labor agreements with the city's government employee unions.

The city could only have the money if it agreed to turn over financial decision-making to a nine-member financial advisory board of state and city appointees who would have the authority to amend labor contracts.

Naturally, the public employee unions aren't happy about it.

They like the way things are right now -- and why wouldn't they? Currently, Detroit firefighters can retire at age 55 and continue to receive 70% of their highest salary plus a 2.25% annual cost-of-living inflator until they die. As the Wall Street Journal reports today, the result is that "Employee benefits alone now make up about half of the city's general fund" and the city's health costs "have grown by more than 60% since 2008 while the city's pension bill has quadrupled to $200 million."

The hole is huge, and the city doesn't have enough cash to fill it.

Mayor Dave Bing's plan to lay off 1,000 workers will save $14 million, but state law and collective-bargaining agreements bar the city from modifying worker benefits. Ernst & Young calculated that Detroit could lay off 2,200 workers and still run out of money by July. If it fired all 11,000 city employees, Detroit still would be broke -- because it currently spends more on retirement benefits than wages, the Wall Street Journal says. "Pensions make up about two thirds of the public-safety payroll, and many collective-bargaining agreements entitle laid-off workers to pensions. The city has a $600 million unfunded pension liability and a $5 billion—you read that right—liability for retiree health benefits."

The math is simple: Detroit must reform its benefits for city workers and retirees.

Detroit's 2,000-member police force agreed to some changes last year that will save the city around $16 million a year, but the city's other 20 unions "aren't conceding as much as police," the WSJ says. That's why Snyder is proposing this agreement to create a new financial board to impose the changes.

With their city circling the financial drain, you'd think city leaders would be grabbing for the governor's life raft. But they are not. Instead, they're resisting it because they don't like the idea of control over the city being taken away from them and given to an unelected board. That's understandable but unfortunately, simply doing nothing or raising taxes isn't going to be enough.

The Motor City's population has fallen 25 percent in the last decade, prompting city leaders to increase property and local income taxes to make up for declining tax revenue. The result: More people leaving. And the city's unemployment rate is around 17 percent. More taxes, which Bing is proposing, will only make things worse by making the city uncompetitive.

The real solution is to try and renegotiate some of the luxurious benefits and pensions that have been doled out by politicians to the politically powerful unions. Renegotiating things now rather than facing the prospect of the city going into bankruptcy is better for everyone. If Detroit goes bankrupt, not only will it harm its reputation generally and among investors, it will mean massive layoffs of city employees and the complete voiding of all current union contracts. 

Sadly, most of the local government employee unions are resisting making concessions similar to what Detroit's police union did.

It's almost midnight in Motown.

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