Detroit is leading the pack again. Unfortunately, the ignominious trail the Motor City is blazing leads to federal bankruptcy. Although Detroit is the largest U.S. city to take this path to date, the financial difficulties it hopes to solve are hardly unique in recent years. Detroit’s experience could establish a workable model for other troubled municipalities to follow.
Time line of decline
During World War II, Detroit was known as “The Arsenal of Democracy” because it built the tanks, airplanes, and other machines needed to defeat the enemy. It was the car capital of the world. Its people were able to work hard and build products the world needed.
In the 1950s, Detroit had a population of almost 2,000,000. Its population in the most recent census was down to about 700,000. Forty years of bad government, a race riot in 1967, a jailed mayor, the bankruptcy of two of the big three American automobile manufacturers, as well as a number of supplier employers either going bankrupt or leaving the city all resulted in Detroit seeking to resolve more than $18 billion of debt in bankruptcy.
Detroit is a union town. Its politicians can’t get elected without union support. The same unions also represent its municipal workers, ranging from the AFSME, Teamsters, Police Lieutenants and Sergeants, and Firefighters to the UAW. All have secured rich collective bargaining agreements with ample healthcare benefits and, in most cases, defined pension benefits, which cost money that must be generated by tax revenue.
For many years, Detroit’s spending has outpaced its tax revenues to pay both its active employees and four times as many pensioners. Unfortunately, the borrowing continued while the ability to collect revenue dwindled as both businesses and residents left the city.
Detroit taxed its citizens’ property (property tax) and income (income tax). It also taxed nonresidents working within the city with a nonresident income tax. Businesses were also taxed on property, income, and personal property. Detroit sought and obtained both federal and state grants to support its voracious spending habits. Unfortunately, as the population and tax revenue declined, politicians didn’t deal with the reality that they had to spend less and reform the expensive health care and pensions offered. They left it for tomorrow, and tomorrow has come.
Time to pay up
Until recently, the city just put off reality by borrowing. When the oncoming train was in sight, the newly appointed emergency manager (EM), who is not a politician, tried to get the unions to make concessions without the need for bankruptcy. The EM tried to negotiate with the unions’ bondholders and other debtors. As one might imagine, he had little success with these stakeholders.
Federal bankruptcy offers a path to solvency. Collective bargaining agreements can be set aside, and new terms can be established. Unions will have to accept that municipalities can’t pay more than they can afford, and politicians will need to learn they can’t promise more than the tax base can support.
Exactly what role the unions will play will depend on their lawyers in the bankruptcy proceedings. The normal strike threat will have no place in the bargaining. Judges, not politicians, will be in control. Contempt citations with possible imprisonment penalties will reduce any strike to a minor nuisance. Healthcare and pension benefits will be reduced for the people who were promised and earned those benefits by their long service to the city. There is no Pension Benefit Guaranty Corporation pension insurance for municipal workers. In the end, there will be a new beginning with a financial plan to run the city with a balanced budget, which the unions will necessarily have to accept, like it or not.
Where the path will lead
The EM’s term will come to a close. Politicians will once again run the city. One wonders if they will have learned a lesson. Will politicians balance a budget and say “no” to the unions that support and elect them? If not, bankruptcy will occur again. But let’s remain hopeful that new leaders will learn that you must say “no” to living beyond the tax revenue you collect. That’s a lesson our federal government has not yet learned.
During the months following the largest municipal bankruptcy in U.S. history―the Detroit bankruptcy―the process will be completed. Other municipalities will follow the path Detroit has taken. Let’s hope the bankruptcy is more than a temporary fix.
About: Michigan Employment Law Letter:|
Excerpted from Michigan Employment Law Letter and written by an attorney at the law firm of Vercruysse Murray & Calzone, P.C. This article is an excerpt from MICHIGAN EMPLOYMENT LAW LETTER. MICHIGAN EMPLOYMENT LAW LETTER is intended to provide information but not provide legal advice regarding any particular situation. The information in this article is to make you aware of the implications of several contemporary problems. This article is not intended to be, and should not be regarded as, a legal opinion or legal advice. It is simply not possible or prudent to offer legal advice or a legal opinion without a prior thorough investigation and analysis of the facts attendant to any specific situation. Contact the attorneys at Vercruysse Murray & Calzone, P.C.