BenefitsPro.com Blog: How Detroit can learn from Cincinnati
Executive Director Hank Kim will have a bi-weekly guest blog on benefitspro.com. His first post is titles, 'How Detroit can learn from Cincinnati'
How Detroit can learn from Cincinnati
It was a cry of defiance that should be heard throughout the nation. The people of Cincinnati fought back against the rising tide of public pension scapegoating across the country, casting ballots last month to soundly reject major changes to the city's public retirement system. Even though that system has funding liabilities estimated at $862 million, an astounding 78 percent of voters said no to an initiative that would have lowered benefits to the system's current participants, put new hires into a 401(k) plan and required the city to eliminate the funding gap within a decade.
Contrast Cincinnati's decisive pro-DB public pension action with the ongoing assault on pension plans in Detroit. Both of Detroit's plans – one for police and firefighters, another for all other city workers – are well funded. Both provide modest retirement income benefits – an average of $19,000 a year for police and firefighters (who are not eligible for Social Security), a little more for other city employees. Yet the city has spent a small fortune to win court approval to enter Chapter 9 bankruptcy so it can gut those plans and reduce retirement income benefits to as little as 16 cents on the dollar.
Why such radically different approaches? If we take a look at the political dynamics in each of those cities, we can easily determine which approach deserves to become the template for other municipalities and states.
Cincinnati's ballot initiative was the work of a group calling itself the Cincinnati for Pension Reform Committee – a private group made up of Tea Party members, funded primarily by out-of-state interests and with ties to the Laura and John Arnold Foundation, which has partnered with the Pew Charitable Trusts to push a pro-Wall Street, anti-DB public pension attack agenda in numerous states and municipalities.
But the out-of-state muscle clearly didn't impress Cincinnati. Both candidates for mayor went on record as opposing the initiative. So did the City Council, saying that closing off the current plan and requiring paying off the liability within 10 years would trigger severe reductions in city services along with significant tax hikes. Labor groups opposed the measure, as one would expect. But so did the city's business groups. Now unions representing city employees are pledging to work with the City Council – which failed to fully fund its pension plan over the past decade – to strengthen the plan and ensure its sustainability. All of the stakeholders in Cincinnati seem determined to fix their problem on their own terms, without outside interference, in a way that serves their citizens' interests and does its best to ensure that promises made remain promises kept.
It's a far different story in the once great city of Detroit, which is contending with $18 billion in long-term debt and a $400 million shortfall in annual operating revenues. Michigan Governor Rick Snyder, who now controls Detroit through his appointed Emergency Manager Kevin Orr, has demonized the city's “greedy” public employees and their “lavish” pension plans as a root cause of the financial dilemma. The financial burden of paying modest pensions from well-funded plans is, in their view, too great. The retirement income benefits of Detroit's public servants – in amounts that keep many of them just above the poverty line – is not only fair game, it's a primary target.
Curiously, the city's impressive art collection, valued at $15 billion, appears to be off limits. The city's promise – made after it filed for bankruptcy – to pay more than $280 million in taxpayers' money to build a new arena for the Detroit Red Wings professional hockey team is also apparently off limits. Seeing that Wall Street investors who took a gamble on Detroit bonds and complicated debt deals are made whole is a high priority – even though investments are inherently risky, while pension benefits are supposed to be guaranteed.
Despite the political hyperbole, Detroit's financial predicament was not caused by greedy city employees or overly generous pension plans. The real story of Detroit's demise is one of a formerly prosperous American city ravaged by unprecedented population loss, major tax base erosion, steep property value decline and loss of economic competitiveness. Once the nation's fourth most populous city, it's now barely in the top 20. And as a one-industry town, Detroit's fortunes have suffered mightily with the decline of the U.S. auto industry from world leader to struggling competitor in the global marketplace.
Add to that the devastation of the Great Recession and deep cuts in state revenue sharing aid – which account for nearly a third of the city's revenue losses since fiscal 2011 – and it should come as no surprise that Detroit is in the shape it's in.
There is no shortage of commentators who opine that taking benefits away from Detroit's retirees and city workers will not solve the city's financial problems. But pensioners who make $19,000 a year are not the formidable political force that Wall Street investors and big corporations are.
Detroit's political leaders have put a much higher priority on those interests than on the interests of their own citizens and public servants, which may well push their public pension beneficiaries from just above the poverty line to well below it. Cincinnati's leaders, on the other hand, put their municipal interests ahead of outside interests. What happened in Cincinnati demonstrates that when a city's elected officials put their people and pension plans first, there's strong potential for making public DB pension plans successful and sustainable – preserving retirement security for their beneficiaries and making those beneficiaries economic assets, not drains, for their communities.
To view the blog on benefitspro.com, click here.