Detroit Bankruptcy Could Hit Millions of Retirees

July 25, 2013

With its bankruptcy filing, the city of Detroit has entered uncharted territory. It's a dark place that no major U.S. city has ever gone, but that could change. Despite the uncertainties surrounding what's expected to be a hard-fought legal battle, the outcome promises to inflict more pain on Detroit's already-beleaguered residents, businesses, creditors, investors and city workers, whose pension plans may now be invalidated, says John W. Schoen, an economics reporter for CNBC.

The case will also set a legal precedent that will be watched closely by other major cities across the country, which are struggling under the weight of years of accumulated debt and underfunded pensions covering millions of public-sector retirees. The bankruptcy filing follows a decades-long decline of a city that prospered through much of the last century as the capital of U.S. manufacturing. But as that industrial base has declined, so have the city's fortunes.

  • Detroit has endured booms and busts in the past. Even as the auto industry has roared back to life since the Great Recession, the economic recovery has left the Motor City in its rearview mirror.
  • Though unemployment has fallen from a peak of nearly 28 percent in 2009, some 16.3 percent of Detroit workers are still without a paycheck.
  • As a result, income tax revenues have fallen 30 percent in the last decade. Meanwhile, the national recovery in home prices has yet to spread to Detroit.
  • Property taxes are 20 percent lower than 2008 levels.

As tax revenues have shrunk, the cost of maintaining city services has grown. Tens of thousands of abandoned buildings and vacant lots, and a resulting increase in fires and crime, have increased the burden on firefighters and police. Some 40 percent of the city's streetlights don't work.

Once America's fourth-largest city, Detroit's population has fallen by a quarter since 2000. A shrinking population further erodes the tax base, intensifying the budget squeeze. As tax revenues have shrunk, the city's financial obligations have grown -- mainly to an ever-expanding pool of 30,000 retirees, promised lifetime pensions and health benefits by short-sighted government officials who consistently failed to fund those future obligations. The city now owes more than $17 billion -- roughly $25,000 for every resident.

Source: John W. Schoen, "Detroit Bankruptcy Could Hit Millions of Retirees," CNBC, July 19, 2013.

 

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