Getting Detroit Back on Its Feet

After suffering through decades of economic decline and official mismanagement, the city of Detroit sought bankruptcy protection last week, becoming the largest American municipality to take that extreme step. The city’s debts total a staggering $18 billion, far more than it could ever afford to pay back given its shrinking population and tax base.

There is no doubt that bankruptcy proceedings will be very painful for Detroit’s population of 700,000. Bankruptcy cases can drag on for years, and city services, which have already been slashed, could deteriorate further.

But the bankruptcy case might also allow Detroit to be relieved of paying back its bondholders and banks much of estimated $9 billion they lent to Detroit on overly rosy assumptions. This group will, of course, push the city and state to also force concessions on city workers and retirees, whose pension funds are underfinanced by about $3.5 billion.

But city officials should resist the idea of cutting the pension payments for the city’s public workers, which averages $19,000 a year. Unlike the situation in other troubled cities where government officials made lavish pension promises and workers gamed the system to inflate their benefits, Detroit’s are quite modest. Moreover, city employees have already had their pay and benefits reduced significantly in recent years. Slashing the meager fixed incomes of retirees will also hurt the city’s weak economy because they are more likely to spend most of the money they receive in local businesses. Labor unions also argue that Michigan’s Constitution protects their pensions from cuts, which will set up a potentially long legal battle that the city can ill afford.

There are many causes to Detroit’s financial problems. Foreign competitors and global economic forces have battered its industrial base, particularly the Big Three automakers. Corrupt and inept government officials have squandered its wealth. And a flight to the suburbs by businesses and residents has sapped its resources and spirit. In recent years, the city has tried to respond these challenges by raising taxes and severely cutting spending on vital services like police, fire and even streetlights. But its efforts have not been sufficient to pull it out of a downward spiral that in many ways exacerbated its decline by, for instance, undermining public safety.