Promises Are Like Piecrusts... Detroit, 2013
Promises are like piecrusts, made to be broken.
Often attributed to V. I. Lenin
The city of Detroit declared bankruptcy on Friday, July 19, 2013, at 4:06 p.m. Central Daylight Time. The special referee and the governor said that the city could not meet its obligations and that the amount of debt, some 18 billion dollars, had become unsustainable. Both of them tried to strike a positive note saying that this was a new start for the city, a new sunrise, a new effort. However, buried in the self-congratulatory speeches was the brutal fact that the city pensions, the promises that Detroit made to its workers, had become an unsecured debt, i.e. the pensions were worthless or skeletal, to use a death metaphor. However, it was also clear that some debt would get some money, that owed to bondholders and banks. Let it be noted that these individuals and institutions have the ability to socialize their losses through the American tax system. Declaring their loss on their taxes means they pay less taxes and we, the taxpayers, make up that shortfall. However, this method of recouping losses is not available to pensioners - they simply lose.
The ability to dump pension obligations by bankruptcy is a fairly new phenomenon, beginning, I believe, in the 1990's. I can think of Continental Airlines, Enron, Amerian Airlines, as companies that evaded their pension responsibilities with this financial device. Then cities such as Stockton, CA. and Central Falls, R.I. declared bankruptcy. And now Detroit, once the heart of industrial America, the home of the American automobile, the city that wheeled the world, has reneged. Next stop: a state will declare bankruptcy to free itself from promised pension and health benefits.
The larger question remains unasked: Why now? The Fox News pundits and others carefully outline the scale of benefits, calling them insupportable - the damned Democrats and Socialists made promises they couldn't keep - Fox News byline. However, unmentioned is the fact that these benefits have been sustainable for at least the last twenty-five or more years. So something must have happened. What?
The pension funds invested in the American stock market, which crashed in 2008, and their investments, then so safe, have not recovered. So the cities and counties, think Orange County, CA, couldn't maintain their level of promised benefit. So they borrowed. The investments have not recovered their level of yield and now the pension funds are in trouble.
Quite a feat for the bankers, yet they continue to oppose any meaningful reform, i.e. a higher level of reserves. This means that when they take risks, more of THEIR money would be at risk, instead of depositors.