Cornell profesor R. Richard Geddes says public-private partnerships can help get the Detroit economy up and running. Photo by Sylvan Lane/Medill News Service.
WASHINGTON – Detroit’s attempt to restructure municipal workers’ pension plans may have far-reaching implications for other American cities dealing with similar issues.
The question of whether a state constitutional ban on diminishing or changing pensions applies to bankruptcy proceedings is “the most important” aspect of Detroit’s battle for solvency, said David Skeel, a professor at the University of Pennsylvania Law School.
At a panel hosted by the American Enterprise Institute, a conservative think tank, Skeel said that question will likely be taken up eventually by the U.S. Supreme Court. If the high court gets the case and rules that Detroit can restructure pensions, other cities with pension shortfalls like Chicago could file for bankruptcy to resolve their issues.
However, “if the Supreme Court says pensions can’t be restructured, you won’t see another city file for municipal bankruptcy,” said Skeel.
Detroit is expected to propose paying pensioners more than other unsecured creditors, according to USA Today, with the state offering up to $800 million to limit pension cuts.
On Dec. 3, 2013, a city bankruptcy court ruled that pensions can in fact be cut during bankruptcy, even though the Michigan constitution prohibits it.
As lawyers representing pensioners, retirees, unions, banks and bondholders fight for their own piece of the settlement, those on pension will likely receive less money than they were promised.
Detroit filed for bankruptcy under Chapter 9 last July, claiming it couldn’t pay off a massive $18 billion to $20 billion debt.
While the city had been bleeding money and residents since the American manufacturing industry began to crumble in the 1970s, Detroit’s financial situation hit a dangerous low in April 2012, when Mayor David Bing and the city council gave the state of Michigan greater fiscal oversight of the city in exchange for financial support.
By February 2013, the state took financial control of Detroit, appointing Kevyn Orr as emergency financial manager of the city.
Orr released damning report on the extent of Detroit’s financial woes in May, and was put in charge of reaching deals with the city’s creditors, unions and pension boards. He couldn’t appease them, and filed for bankruptcy, blaming the city’s problems on a shrinking tax base, high pension costs, widespread tax evasion and extensive government corruption.
Each member of the AEI panel emphasized Detroit’s steady population decline as a major cause of its bankruptcy. Because the city’s economy was heavily dependent on the auto industry, it collapsed as manufactures moved plants internationally and struggled to compete against international automobile companies.
While the economic foundation crumbled, the city suffered from racial tension and rioting. By 2010, Detroit lost 68 percent of its 1950 population. In those six decades, the population contracted from 1.85 million to 713,000 residents, according to the U.S. Census.
Even though the panelists staked Detroit’s ability to pay its debts and reignite its economy on drawing more people into the city, not one of the experts suggested a way of doing that. Instead, R. Richard Geddes, a professor of infrastructure policy at Cornell University, said Detroit could look to public-private partnerships to manage services at a lower cost.
Geddes argued that based on the idea of economies of scale—the larger the economy, the lower the relative cost of maintaining it — Detroit can provide public services and manage infrastructure less expensively by contracting private companies to do the job for government.
“There’s global expertise in structuring the arrangement, and then designing, operating and maintaining these systems. Creative use of innovative financing…can really help in this process,” he said. “This market is amazing.”
