December 10, 2013 at 7:27 am

Daniel Howes

Don't count on Team Snyder to aid in Detroit pension rescue

As foundations and the Detroit Institute of Arts push to create a fund to insulate the museum’s city-bought art from creditors and bolster underfunded city pension funds, a recurring question is percolating behind the scenes:

How much is the state willing to contribute? The answer, if a weekend op-ed from Gov. Rick Snyder is any indication, appears to be fairly plain — not much.

“We can’t bail out Detroit without adversely affecting the rest of Michigan’s 10 million residents,” the governor wrote. “But what we can do is work to change the practices and the culture that led to this historic crisis.”

Theoretically, anyway. But restructuring work rules and talking culture change are probably insufficient when Job One for the governor’s guy in Detroit, Emergency Manager Kevyn Orr, is persuading U.S. Bankruptcy Judge Steven Rhodes to approve a “plan of adjustment” that creditors can accept, however grudgingly.

In his decision last week allowing Detroit to move ahead with its historic Chapter 9 case, Rhodes sent the governor a decidedly mixed message. The judge agreed that the state constitution’s protections for vested pension benefits did not apply in federal bankruptcy, even as he not-so-subtly implored the state to aid a city that “needs help.”

What form that help might take he didn’t say. He didn’t have to, given ongoing talks spearheaded by Chief U.S. District Judge Gerald Rosen to form a fund that essentially would buy the DIA’s independence in exchange for bolstering city pensions with private money raised by foundations and museum donors.

There are all sorts of reasons, political and otherwise, why anything approaching a state contribution to a bailout fund for Detroit pensioners would be a third-rail for a sitting GOP governor expected to seek re-election next year, starting with his fellow Republicans in the Legislature and battles to fund everything from road improvements to higher education.

The blowback would be intense, a made-in-Michigan riff on the congressional tirades that greeted Detroit’s automakers five years ago this month as they begged for a taxpayer bailout to avert collapse. What about moral hazard? What about the consequences of bad decisions by the people in charge? What about the facts of federal bankruptcy, which trumps state law?

Instead, Team Snyder is emulating the Obama administration’s approach to the largest municipal bankruptcy in American history: no Detroit bailout legislation, no direct backstop for underfunded pensions now subject to federal bankruptcy law, and no special spending outside existing programs that can be used to support the city’s restructuring.

In Snyder’s telling, the state is supporting efforts to improve Detroit’s woeful public lighting, to bolster its transportation department, to accelerate blight removal, to augment city policing with state trooper patrols and to back small business formation with state programs — all of it helpful in its own way, but scant comfort to worried city pensioners.

A truth of Detroit’s unfolding bankruptcy is that its practitioners have concluded that they cannot finish the job without somehow using the power of the federal law to impair vested pensions, despite Article IX, Section 24 of the Michigan constitution. The impact on real people is likely to be undeniable; by how much, for whom and when remains to be seen.

Judge Rosen’s effort is designed to split the judicial baby as he sees it: even if state constitutional protections cannot withstand federal bankruptcy law — a conclusion destined for appeal — he is signaling there exists a compelling public interest to shore up pension funds underfunded by elected officials and mismanaged by pension fund trustees.

That’s a moral hazard all its own. Lost in the push to rally foundations and deep-pocketed donors around the interconnected issues of DIA art and city pensioners is a simple proposition with enormous implications. The region’s privately funded philanthropic community is being asked to bail out a generation or more of bad public-sector decisions by failed leadership it mostly did not elect.

And whatever funds Rosen could assemble from the donor community could imperil funding needs across the region, as philanthropic capacity and foundation missions are stretched to meet an audacious task in a time frame compressed by a bankruptcy court calendar and the limited tenure of the emergency manager.

It would be unprecedented, yet another marker of a fundamental transformation poised to reshape Detroit into a city that works again. But it may be necessary.
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Daniel Howes’ column runs Tuesdays, Thursdays and Friday.

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