On April Fool’s Day a federal judge ruled that Stockton, California could legally declare bankruptcy – allowing the city to default on its bondholders and restructure with the possibility of leaving pension plans untouched. Though city officials have seen decreases in police and fire personnel*, cut numerous other city jobs, and minimized employee benefits, they have yet to modify the city’s employee pension fund—currently underfunded by $900 million.
At 300,000 people, Stockton is the largest U.S. city to ever declare bankruptcy, but it likely won’t be the last.
Nine cities have filed for bankruptcy since Stockton in 2012. The judge’s ruling could set a national precedent for other cities, and could make creditors uneasy. It could also land the issue of municipal bankruptcy before the Supreme Court.
While some Stockton officials may have let out a sigh of relief Monday, there’s only so much to rejoice about when your city is officially bankrupt. Some have suggested that Detroit officials will follow a similar path, but bankruptcy does not have to be the Motor City’s fate. In fact, Governor Snyder’s hiring of an emergency manager might be his attempt to avoid such a route.
Rather than side-stepping debt, Detroit officials have an opportunity to enact real reforms that prevent the city from falling into Chapter 9. But these reforms won’t be easy.
When the Michigan Treasury Department discovered Detroit’s long-term debt of $12 billion, including underfunded pensions, it became evident that something had to change. That something includes city employee’s pension plans. Even Democratic Mayor Bing said that success is only possible if union members accept deep concessions of $100 million a year. As more and more people have fled the city—the only major American city to lose 25 percent of its residents in the past decade—Detroit officials face a challenge to maintain current residents and attract more people to Renaissance City.
But, if Michiganians hope for a renaissance, they must believe it’s worth an investment. Bankruptcy might not be a consolation to most, nor will higher taxes – especially with the current deficit at an estimated $20,000 per resident.
Corruption among city officials – such as the indictment of long-time pension lawyer Ronald Zajac for alleged bribery and misuse of city funds – doesn’t restore trust in the city. But perhaps his suspended career is a sign of progress.
The Zajac scandal sheds light upon systemic problems.
It’s not simply that city employee pensions place too heavy of a burden on Detroit taxpayer as much as the ability in the past of high-profile officials to ignore, and even encourage, extraneous costs. Sure, some reforms on employee pension plans are necessary to address the debt, but transparent and honest leadership would also contribute much to resurrecting Detroit.
*CORRECTION: This article has been modified from its orignal version. Police and fire were not “eliminated” as first reported. Police officers have been reduced by 25 percent and fire personnel by 30 percent. These reductions were not due to layoffs as much as a mass exodus of employees because of changes in benefits.