Could the Detroit Crisis Happen to the Rest of the United States?

July 31, 2013 - National Center for Policy Analysis

Detroit labor union workers and current retirees were dealt a blow recently when a U.S. bankruptcy judge ruled that the city's debt restructuring could continue on and bring changes to their pensions, says FOX Business News.

In 2009, Detroit's pensions were 93 percent funded, according to the Pew Institute, compared to other cities like Providence, Rhode Island, which was only 42 percent funded.
Pension data often lags, but the Pew study is the most up-to-date information.

Detroit was hit by the perfect storm in many ways, with policy incompetence and major debts. Most other struggling cities aren't in as dire straits:

Its total pension obligations for the city's 21,000 retirees are an estimated $9 billion in unfunded liabilities.
Of that $9 billion, $5.7 billion is tied to health care benefits for workers.

Detroit's pension landscape has also shifted in the past decade, according to the Detroit Free Press. In 2004, the pension was about 50-50 between workers paying into the system and workers collecting. Today, its 40-60, with more than half retired and collecting, and the remaining 40 percent bearing the load.

Some of the worst-funded pension systems, where participants are paying into the program but the state isn't necessarily meeting its obligations, include Illinois, California, New Jersey and New York.
For a city like Detroit, which has lost more than half its population in the past 50 years, raising taxes isn't as much of an option, and relying on the local economy to offset costs is also unlikely.

National Center for Policy Analysis Senior Fellow Pamela Villarreal says Detroit has a much less likely chance of recovery compared to other struggling cities and municipalities, simply because it was sinking for so long.

"Its economic growth and tax revenues are pretty slim right now," she says. "But overall, the default rate for city pensions is pretty low; it's historically been about 1 percent."

That being said, Villarreal points out that the Congressional Budget Office reports state and city pensions are at their lowest funding levels in more than two decades. She claims that a bankruptcy that would disrupt pension plans as is being seen in Detroit would be unlikely, but it's not impossible.

Source: Kate Rogers, "Detroit's Fallout: How Safe Are Other Municipal and City Pensions?" FOX Business News, July 24, 2013.