With Detroit moving through the bankruptcy process, attention is turning to the other Michigan communities in financial distress, and what can be done to keep them away from a Chapter 9 filing. The answer in many cases is pension reform.
Moodyís Investors Service last week said the final resolution of Detroitís pension obligations will be a benchmark for other cities that might be encouraged to follow Detroitís lead. Unfunded pensions were a huge catalyst for Detroitís bankruptcy filing, and they will be one of the significant factors for other cities that fail to trim the cost of retiree benefits.
Lincoln Park, the most recent Michigan city to be put under emergency management, has a mere 32 percent of its pension obligation funded, according to an analysis by the Mackinac Center for Public Policy.
Romulus sits at 45 percent funded, and even affluent Bloomfield Hills has just 51 percent of pensions funded.
In total, five of the stateís 100 largest cities are 50 percent funded or less, and those numbers will likely get worse.
Shifting city employees from a defined-benefit plan to a defined-contribution plan is one step municipalities can take. Bargaining with retirees to limit future cost-of-living increases is another.
Future revenues are unpredictable, and promising defined benefit pensions to the next generation of retirees is foolish.
Those employees are better off having realistic projections of what their benefits will be, based on actual returns on investment rather than unfunded promises.
Currently, Michigan has eight local governments ó including cities and school districts ó under an emergency manager. In addition to Lincoln Park and Detroit, those include Allen Park, Flint, Hamtramck, Highland Park School District, Muskegon Heights School District and Detroit Public Schools.
Nine other local governments are under state review or some other form of oversight.
Darnell Earley, emergency manager of Flint ó which teeters on bankruptcy ó is switching the city to a hybrid pension plan that reduces the long-term obligation.
This is a step in the right direction; residents canít continue to see 32 percent of their $55 million general fund go to supporting retiree pensions and health expenses and away from services that are essential to attracting residents and jobs.
Those in Flint who think bankruptcy will produce a deal similar to Detroitís are miscalculating. Detroitís situation is unique.
Its filing was the largest municipal bankruptcy in U.S. history. This brought it national attention and made the city somewhat of a martyr for the cause of urban and industrial revitalization.
Private companies and foundations contributed more than $800 million to mitigate the impact on retirees and to protect the Detroit Institute of Art from creditors. The state also made a substantial commitment, and one that Gov. Rick Snyder says wonít be repeated for other communities.
For them, bankruptcy is an option that should be avoided at all costs. Detroit should serve as a wake-up call for distressed cities to do the tough work of pension reform now, before they reach insolvency.