Is the Detroit Bankruptcy Just the Beginning?

Detroit has filed for chapter 9, making it the largest municipality ever to declare bankruptcy. The city owes over $18 billion, which amounts to over $25,714 per resident. While that is less than the average person’s federal debt ($52,945.64), Detroit does not have the luxury of printing money and controlling the world’s reserve currency. Detroit’s financial woes are long in the making, but they are hardly unique.

The largest source of Detroit’s debt comes from retiree benefits. The city estimates that it has $3.5 billion in unfunded pension funds. Currently, 40% of the city’s revenue goes toward retirement benefits and debt. This is mathematically untenable, which is why the city expects to be determined insolvent in bankruptcy court.

Detroit has already raised taxes to the highest allowable amount under state law. It has cut its police force by 40% in the past decade, and 4 out of 10 street lights don’t work. The retirement benefits crisis has been fueled by a declining population. The city had 1.8 million residents in 1950, but now only has a population of 706,585. According to the U.S. census, the city has about 99,000 vacant housing units.

While these factors have brought the city’s financial troubles to a head, Detroit is far from the only city in the country with funding problems. A PEW study of the 61 largest cities in the U.S. found that they have a combined $385 billion in pension liabilities as of FY 2009. Of this, $99 billion is unfunded. What is more troubling than the pension numbers is the problem of unfunded retiree health care liabilities. Total, the 61 cities had $126.2 billion in retiree health care liabilities. Yet only 6% ($8 billion) of these were actually funded. The Remaining $118.2 billion were being paid as they occurred directly from the city treasury. Detroit epitomizes this trend. In 2009, Detroit funded 93% of the $7.91 billion in pension liabilities. However, less than 1% of the $5.001 billion in retiree health care liabilities were funded.

Chicago is another city whose financial troubles may soon come to a head. Moody’s recently downgraded Chicago’s debt because of $19 billion in unfunded pension liabilities which Moody’s estimated at closer to $36 billion. When it comes to pension funding, Chicago is the 5th worst major city in the country. Only 52% of pension liabilities are funded. The state of Illinois as a whole is the worst state in the country in this regard: only 51% of its pensions are funded.

Additional Resources

The Wall Street Journal, Change of Heart over Detroit: http://online.wsj.com/article/SB10001424127887324328904578620142397625384.html?mod=WSJ__MIDDLENexttoWhatsNewsTop

Forbes, The Free Market Plan to Save Detroit: http://www.forbes.com/sites/modeledbehavior/2013/07/22/the-free-market-plan-to-save-detroit/

The New York Times, Cries of Betrayal as Detroit Plans to Cut Pensions: http://www.nytimes.com/2013/07/22/us/cries-of-betrayal-as-detroit-plans-to-cut-pensions.html?pagewanted=all&_r=0

U.S.A. Today, Detroit Not Alone under Crushing Pension Obligations: http://www.usatoday.com/story/news/nation/2013/07/21/detroit-bankruptcy-pension-obligation/2573457/

Detroit Free Press, Detroit Bankruptcy: How Fast Will it Go? http://www.freep.com/article/20130722/NEWS01/307220030/detroit-bankruptcy-kevyn-orr

The Fiscal Times, Detroit’s 60-Year Decline into Bankruptcy Hell: http://www.thefiscaltimes.com/Articles/2013/07/21/Detroits-60-Year-Decline-into-Bankruptcy-Hell.aspx#page1

Detroit Free Press, Detroit’s 20 Largest Unsecured Creditors: http://www.freep.com/apps/pbcs.dll/article?AID=2013307190029

U.S. Bankruptcy Court for the Eastern District of Michigan: www.mieb.uscourts.gov

The Wall Street Journal, After Detroit, Who’s Next? http://online.wsj.com/article/SB10001424127887323309404578616320174430366.html?mod=opinion_newsreel

The Wall Street Journal, Detroit’s Bankruptcy Is So 1990s: http://online.wsj.com/article/SB10001424127887323993804578615782463422760.html

The PEW Charitable Trusts, 30 Cities: An Introductory Snapshot: http://www.pewstates.org/research/data-visualizations/30-cities-an-introductory-snapshot-85899380032#

The PEW Charitable Trust, A Widening Gap in Cities: http://www.pewstates.org/research/reports/a-widening-gap-in-cities-85899442341

Detroit Free Press, Michigan AG Challenges Judge’s Ruling that Detroit Bankruptcy is Unconstitutional: http://www.freep.com/article/20130719/NEWS06/307190075/

The Huffington Post, Atlanta to San Diego: 7 Cities’ Pension Problems: http://www.huffingtonpost.com/huff-wires/20130102/us-broken-budgets-municipal-pensions-glance/?utm_hp_ref=media&ir=media

City of Atlanta, Pension Reform – Frequently Asked Questions: http://www.atlantaga.gov/index.aspx?page=234

Governing, Hybrid Pension Plans Attracting More States, Cities: http://www.governing.com/topics/public-workforce/pensions/gov-hybrid-pension-plans-attracting-more-states-cities.html

Forbes, America’s Fastest-Growing Cities since the Recession: http://www.forbes.com/sites/joelkotkin/2013/06/18/americas-fastest-growing-cities-since-the-recession/

U.S. Cities Growing Faster Than Suburbs: http://blogs.wsj.com/economics/2013/05/23/u-s-cities-growing-faster-than-suburbs/

Forbes, America’s Emptiest Cities: http://www.forbes.com/2009/02/12/cities-ten-top-lifestyle-real-estate_0212_cities.html

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