Closing Pensions a Litmus Test for Detroit Reform

Published May 16, 2014

A Detroit money-grant and reform legislative package just introduced in the Michigan House contains dozens of new institutional arrangements, but just two critical and concrete changes to the city’s finances, one of which is both long-term and potentially transformational all by itself: ending the practice of granting new city employees traditional defined benefit pensions.

Guess which provision is being attacked by defenders of the Detroit status quo, including unions, special interests and the city’s political class?

Yet whether the reform package represents something more than just a cover story for delivering more loot to a dysfunctional city comes down almost entirely to that pension piece.

Firm Stand or Wobbly Step?
Specifically, will the Legislature demand that no new Detroit employees be enrolled in a retirement system that imposes long-term liabilities on taxpayers? If lawmakers cave, then the current drama is probably just one more chapter in an ongoing history of decline.

This is not to say the many institutional measures are necessarily just “rearranging the deck chairs on the Titanic.” But unlike the pension reform, whether they actually do any good is contingent on factors outside the Legislature’s control.

One measure in particular — creating a state oversight panel with authority over city budgets, borrowing, union contracts, etc. — could have a genuine impact. Or not. It depends.

If the current or a future governor appoints go-along-to-get-along types who view their job as making whatever compromises are necessary to keep the city’s status quo interests politically quiescent, then nothing will change and Detroit will probably remain a failed city. Alternatively, if the oversight appointees see their mission as being fierce watchdogs defending residents and taxpayers against the looters who brought the city down, the panel could do some good.

In other words, whether the new institutional arrangements have any impact is conditional. They depend on the abilities, energy and marching orders of those who occupy the new deck chairs. (The other key institutional changes include appointing a chief financial officer for the city approved by the oversight panel and adopting a city budget process that mirrors the one used by the state.)

Transformational By Itself

Very different from these “it depends” measures, closing the defined benefit pension system to new employees has an impact that is potentially transformational regardless of any other circumstances, appointments, future election outcomes, etc. It unconditionally puts the city on a glide path to eventually freeing itself from the dead weight of unfunded employee legacy costs.

Moreover, if this pension reform is compromised at the outset — if the defenders of Detroit’s dysfunctional status quo win the first critical round — it will likely set a precedent and tone that makes the institutional changes mostly ineffective right from the start.

As mentioned, the package contains one other concrete reform that matters a lot to the city’s ability to affordably provide services to residents, and that’s capping the value of employee health insurance benefits. This will help even though the proposed limit is hardly rigorous. It still exceeds the average private sector health benefit by around 25 percent.

The Legislature is under a great deal of pressure from Gov. Rick Snyder (R) and various special interests to (once again) hand Detroit a pile of state money. Individual lawmakers who represent districts outside the city are also hearing from constituents who resent being forced to give up state tax dollars and services to once again bailout Detroit.

With the genuine reform of closing defined benefit pensions to new employees, the politicians will at least have a valid response. Without it, just another round of “business as usual” will be a fair conclusion.

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