the Coming Crisis – Part V

Pension Plans And The Detroit Bankruptcy

Please refer to the earlier parts of this series to better understand the context of this article.

The City of Detroit is in bankruptcy. Detroit is probably one of the most visible of the cities in the United States that have entered or filed bankruptcy proceedings. The primary issue confronting Detroit and many other large cities are the unrealistic pension and medical benefits with its police, fire and other governmental unions, negotiated with the governmental agencies or politicians that confer such benefits. A rising remark is the statement by citizens that they have three police or fire departments. The first is the one running around on the streets now, and the second and third are long retired.

The health benefits enjoyed by governmental employees and retirees in Detroit are out of control even when compared to Detroit’s free spending brethren. Detroit’s health care per retiree are higher than the thirty largest United States cities. That is the cost per retiree and not the overall cost. In Detroit, retiree costs comprise about 66% of the total health care costs for the city. The current workers receive the remaining 33%.

In the Detroit bankruptcy, the city may have a better chance of successfully reorganizing its debts if it takes the knife to the medical benefits. The pension benefits are more difficult to cut, even in bankruptcy. Further, the Michigan Supreme Court has found that the Michigan State Constitution has clear and strong prohibitions against reducing pension obligations, but such prohibitions do not apply to medical benefits.

This means that more Detroit city retirees would likely seek benefits under Medicaid and Medicare. Guess who gets the honor to pay for that?