Just two years ago, when Detroit's deficit reached $45 million, Michigan Republican Governor Rick Snyder said bankruptcy was not an option. Since then, the deficit has skyrocketed to more than $380 million, while the city's debt has eclipsed $18 billion, forcing it to file for Chapter 9 bankruptcy.
Detroit is now officially the largest city in U.S. history to file for bankruptcy. And as part of the plan to restructure the city's finances, Kevyn D. Orr, Detroit's emergency manager, has called for deep cuts to the pensions of current retirees.
According to Steven Yaccino and Michael Cooper of The New York Times, "Many retirees see the plan to cut their pensions as a betrayal, saying that they kept their end of a deal but that the city is now reneging." Labor unions and the city's pension funds are fighting the cuts by suing the state on the grounds of Section 24 of Article IX of the state constitution, which states:
The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby.
“Does Detroit have a problem?” asked retired police sergeant William Shine. “Absolutely. Did I create it? I don’t think so. They made me some promises, and I made them some promises. I kept my promises. They’re not going to keep theirs.” Michigan's Attorney General Bill Schuette said this case will ultimately be decided by a federal bankruptcy judge.
Scholars at the Mercatus Center explained the numbers behind the pension imbalance:
In fiscal 2013, employee wages, benefits and pensions took up 41 percent of city revenues, and over the years the city has met its budget by skipping pension payments and issuing bonds. Detroit reports an unfunded pension liability of $634 million, but using more accurate accounting methods it's closer to $3.5 billion. Factor in health care benefits and this shortfall rises to $9.2 billion.
In a phone interview with Bretitbart.com, Sen. Rand Paul, R-Ky., explained the benefits of bankruptcy:
One is you get to start over. Bankruptcy lets you be forgiven of your debt. And you do so by getting new management, better management and by getting rid of unwieldy contracts, contracts that give you where public employees are getting paid twice what private employees are and things come back more to normal. That's the way cities and businesses can recover.
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