Some people think Detroit’s bankruptcy is a model for dealing with the finances of the nation’s cities and states. Unfortunately, Bruce Rauner seems to be one of them.
“Detroit is the road map,” said Carrie Sloan of the ReFund America Project of the Roosevelt Institute. “People are invoking it in cities all over the country. Everybody is being warned about becoming the next Detroit.”
“And in every case, it’s about pensions,” she adds. “That’s interesting because so many other factors were more important in Detroit. Pensions were a pretty minor factor.”
But Detroit’s bankruptcy allowed federal courts to override the prohibition in the state constitution on reducing pension benefits. That’s what seems to have caught the eye of people like our governor.
In fact, in Detroit’s bankruptcy settlement, pensions were reduced far less than the governor’s emergency manager had advocated. And the shift from a defined-benefits plan to defined contributions that he had favored didn’t occur. Meanwhile, financial institutions that sold the city interest rates swaps took a much larger hit than he had called for.
Pensions weren’t the major factor in the city’s legacy expenses, according to an analysis from Demos. That distinction went to $1.6 billion in swaps and other exotic financial deals. Nor were pensions a major cause of its cash flow problems. There the biggest culprit, aside from the recession, was the dramatic reduction by the Republican governor and legislature of state revenues shared with the city, starting in 2011.
Once one of the most prosperous cities in the nation, Detroit has been losing population and industry for a long time, Sloan said, and the recession of 2008 hit the city harder than other places, with steep increases in unemployment and foreclosures. “And then, at a time when other cities were starting to recover, Detroit’s revenue was cut sharply by the state,” Sloan said. “That was what pushed the city over the edge.”
Compare Rauner’s budget proposal, which reduces state revenues going to municipalities by half, to his “turnaround agenda,” which includes a freeze on local property taxes and a law allowing municipal bankruptcies.
Rauner ginned up the state’s budget crisis by putting the kibosh on extending the temporary income tax increase. Then he left Springfield for a second campaign to build support for his agenda, which features a number of items plucked from the right-wing corporate agenda, from term limits to workers’ compensation cuts. That effort that largely failed. Now he’s back in Springfield, but he’s refusing to discuss budget solutions — including major revenue proposals he backed during the campaign — unless he gets his way. Like Michigan’s Republicans, he seems eager to create and exploit a crisis.
Rauner was forced to drop his proposal for local right-to-work zones after it failed to get a single vote in the House. Crippling the labor movement, particularly public employee unions, is his great passion. But his apparent effort to squeeze local governments into bankruptcy, where public workers’ pensions will be fair game, is a key element of his grand plan.
“The agenda is to privatize everything,” Sloan said. That includes replacing public defined-benefit pension plans with individual defined-contribution plans that provide meager benefits but handsome fees for investment firms. (And one more time, it’s not the state’s pension benefits that are unaffordable — it’s the pension debt, the result of borrowing against pensions to pay for necessary services that our regressive tax system can’t cover.)
“That effort [on pensions] goes hand-in-hand with making unions weaker,” she said, citing right-to-work laws across the Midwest. The larger goal is “to shift more power and money to the top.”
Photo: Torn paper economic news headlines/Shutterstock image