The Spectacle Blog

Bailouts and Detroit’s Massive Pension Problem

By on 9.28.13 | 12:31PM

As The Hill reported, and as Joshua noted yesterday, the Obama administration will send Detroit $320 million in federal dollars in emergency funds. The funds will be used to demolish properties, hire police and firemen, install security cameras on buses, and fix streetlights. Detroit is currently in bankruptcy proceedings and faces $18.5 billion in unpaid debts. Not included in that figure is about $9 billion in unfunded pension liabilities, a figure Detroit estimates is only $634 million.

This infusion of federal dollars is not unlike the kind of spending that agencies have distributed across cities since the 1960s--dollars meant to help improve blight, public safety, and other infrastructure needs. But that record of spending begs the question: Why hasn't it worked in the past?

Now consider yesterday's news from The New York Times. Since the 1990s, Detroit's city council had been skimming the "excess earnings" from the pension system to award workers extra payments. As I argued at Neighborhood Effects, this was made possible by the dangerous fiction that is U.S. public-sector pension accounting. In other words, Detroit is not alone in abusing its pension system. Other states and cities have looked at (artificial) actuarial surpluses and decided they could skip payments, expand benefits and not fund them, and use pension funds for other purposes. The structural problems continue. 

Decades of poor financial management, economic decline, and corruption are not going to be fixed easily. And a bailout from Washington D.C., while fixing some short-term problems, may also signal to other cities that they can continue avoiding the hard choices that need to be made regarding budgetary and financial realities, of which they even recognize only a fraction.

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