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Bankruptcy or Bunko? The Right’s War on Detroit’s Public Pensioners
(Photo: Steve Brown / Flickr)

Bankruptcy or Bunko? The Right’s War on Detroit’s Public Pensioners

(Photo: Steve Brown / Flickr)

The purposeful, ideologically driven assault on democratic government orchestrated by ALEC and forces in Michigan’s Statehouse has starved already-ailing Detroit of revenues. Through the emergency financial manager, they will continue to redistribute public assets to corporate pockets with little or nothing in return.

Give credit where it’s due: The political right has, for the moment, successfully laid the blame for Detroit’s looming bankruptcy at the feet of local officials. A close look at the situation does indeed reveal ineptitude and even corruption on the part of some officials in the halls of Detroit’s government. Yet much of that behavior was simply an ill-fated and feeble response to problems caused by the larger national subprime debacle. A factor more important than this macro-economic component is the purposeful, ideologically driven assault on government and its agents orchestrated by forces in Michigan’s Statehouse. They effectively have starved an already-ailing city of revenues through tax policies that redistributed funds from state and city coffers to corporate pockets with little or nothing in return. Gov. Rick Snyder and the political and economic forces that sustain him are exploiting the situation as an opportunity to deliver a deathblow to the public sector, public pensioners in particular.

Although it appears the sky is falling over Detroit, it actually is being pulled down by the influence of groups like ALEC (American Legislative Exchange Council) and the Michigan-based, Koch/de Voss-funded Mackinac Center. The real story is not the bankruptcy. Orchestrating the performance are the think tanks whose real goal is to force local governance to bow to their agenda and to neutralize the traditional check on their power posed by public-sector unions by defunding public-sector pensions and health care. Once Chicken Little is taken out of the scenario, it becomes obvious that it is merely another skirmish in a war on the public sector begun in Scott Walker’s Wisconsin and Chris Christie’s New Jersey. In this case, however, instead of failing in a full frontal attack on labor as they partially did in those other two states, the tactic is to harvest the low-hanging fruit of cash-strapped municipalities and cannibalize public assets for private interests.

Although the mainstream media has accepted the narrative that the city’s funding of its negotiated pension obligations is the cause of Detroit’s financial problems, a more honest, constructive and long-term perspective is to see the contracts themselves as victims of a revenue shortfall caused by a whole host of reasons. Depopulation, disinvestment, massive defaults at the heels of the subprime lending crisis and decades of overly generous tax breaks offered to businesses – not pension and health care obligations that were honestly negotiated in more prosperous times – all played a role in the systemic dysfunction created over generations.

“Michigan is the national leader of the pack in giving away free money to companies that have done little to create a single job in the state, and where they are created, they cost enormous sums in off-setting tax bonuses,” writes Amy Hardin (Democracy Tree, June, 2013). Hardin quotes a study by the group “Good Jobs First” that tracked “mega-deals” (deals over $75 million) brokered by states nationally in the past 35 years. Michigan had the most, with 29 such deals. “Michigan forfeited a whopping $7,101,236,000 (yes, billion),” Hardin continues, “to mostly large Fortune 500 type companies in return for little if anything at all.”

In addition to corporate tax giveaways, Snyder stanched the flow of a reliable revenue stream long provided by the Michigan Business Tax. He and his Republican compatriots in the Legislature jettisoned that flow in favor of a corporate flat tax in 2012. Had the Michigan Business Tax remained intact, state revenues for 2013 would have amounted to at least $1.320 billion. Now, in 2013, projected revenues for the state coffers are between $310 million to $410 million instead, roughly a fourth of the previous rate. This has profound implications for cities such as Detroit that rely in part on state revenue sharing for their funding.

Subordinating the needs of the working class and needy in Detroit to the further aggrandizement of corporate and wealthy interests is a time-honored practice in Michigan. There was, after all, Ford Motor’s Fairlane development. Begun in 1968, it merely exacerbated the flight of capital to suburbs like Dearborn. Then there was the Renaissance Center. Begun in 1977, it was inspired and funded in great part by Henry Ford II’s vision of a revitalized Detroit, one based on the flawed logic that upscale stores on the waterfront would drive a recovery. In 1980, to satisfy GM’s conditions for building a plant in Poletown (an ethnic enclave on the border of Hamtramck and Detroit), then-Mayor Coleman Young threw Community Block Grants – federal funds earmarked for refurbishing and revitalizing neighborhoods – at GM like chum to a shark, razing 500 to 600 acres of housing and businesses to accommodate the corporate behemoth. The project cost the city $200 million and $60 million of lost tax revenue over 12 years, and caused a woefully diminished housing stock in areas where such a loss had a profound impact.

The prize, however, should go to disgraced Mayor Kwame Kilpatrick and his deal with Wall Street. His moral shortcomings are perhaps overshadowed by the sheer lack of common sense in looking to the architects of credit default swaps as the answer to Detroit’s problems. Kilpatrick tragically sought to cover pension costs by issuing first a $1.4 billion bond issue (Bloomberg News, March 2013) then an additional $9.3 million that year in securities backed by the usual suspects: UBS, AG, Bank of America’s Merril Lynch and J.P. Morgan Chase. The process continued after 2005 with the same banks enabling a total of $3.7 billion of bond issues. “The debt sales,” the article continues, “cost Detroit $474 million, including underwriting expenses, bond-insurance premiums, and fees for wrong-way bets on swaps. … “

Had Detroit’s move to bankruptcy come, as it should have, at the end of a studied and thorough debate in the halls of local government among elected representatives, then it would not be shrouded in the cloud of suspicion that hangs over it. But this was not the case. Detroit’s bankruptcy was a cure looking for a patient, a cure preordained by conservative forces that saw bankruptcy as potentially the only legal mechanism powerful enough – or so they hoped – to dislodge the constitutional protection surrounding the collective bargaining contracts of their nemesis, the public-sector unions. On its web site, ALEC watchdog scribd has documented ALEC’s influence on Michigan’s conservative caucus by painstakingly listing each ALEC-inspired piece of anti-labor legislation corresponding with that body’s 2012 legislative agenda. Among the bills proposed by the 15 Republican ALEC members in the Legislature have been measures that would prevent public unions from deducting political contributions (HB5085) and would prohibit deductions for dues (SB938) and three separate “right to work” measures that would limit collective bargaining (SB 116, SB 120 and HB 4054).

The cudgel of bankruptcy needs someone to wield it, and bankruptcy might never have been an option in a state with normally functioning representative governance. But government in Rick Snyder’s Michigan is anything but normal these days. Enter Kevin Orr, Snyder’s hand-picked emergency financial manager (EFM) for Detroit, whose authority derives from the latest incarnation of financial manager bills beginning as far back as 1988, when Public Act 101 provided the legislative groundwork for intervention in the city of Hamtramck’s finances. Thereafter, various versions of the law have been passed: PA 72 in 1990 then PA 4 in 2011. The EFM’s power increased with each iteration. Orr’s authority derives from the latest and most empowering of the EFM laws – PA436 – passed in 2012. Unlike previous instances, Public Act 436 grants the emergency financial manager complete authority over local officials with the power to nullify public rulings and bodies and to abrogate collective bargaining contracts. So important is this legislation to the Snyder/ALEC agenda that even after it was repealed recently by popular vote, the Republican majority in the Legislature reimplemented another version of it in an eleventh-hour session over the wishes of the electorate.

Orr is the perfect man for the job. In fact, it’s all in the family, as Snyder and Orr hail from the same high-flying corporate law firm, Jones Day, which specializes in corporate restructuring and bankruptcy. Furthermore, because Orr is African-American, Snyder dodges the potentially embarrassing specter of a white EFM delivering a devastating financial blow to a city that’s predominantly black. Steve Dibert of MFI-Miami (a mortgage industry watchdog) is less charitable in his assessment of the relationship. “It’s pretty evident that … Snyder and the rest of the GOP funky bunch is setting Detroit’s new Emergency Financial Manager up to be the fall guy for some type of WASPish Machiavellian endeavor. … “

Critics of Orr’s rush to bankruptcy can be found on both sides of the aisle. On the left is Tom Barrow, a mayoral candidate, CPA, president of Citizens for Detroit’s Future and former head of the Michigan Licensing Board of Accountancy. In a recent interview (Underground Live Radio, March 2013), Barrow called into question Orr’s conflation of Detroit’s long-term debt obligation with a short-term cash crisis.

“We really don’t have a cash crisis. We haven’t missed making bond payments; we haven’t missed interest payments; we haven’t missed payrolls,” said Barrow, who compares long-term pension obligations to a 30-year home loan. “Long-term debt does not create a short-term crisis. When I bought my house, I wasn’t expecting to pay it off in a year. I’m going to pay it off in 30 years, and I’m making my payments.”

When Barrow asked Detroit’s city treasurer whether the EFM would renegotiate the water funds, general revenue bonds, sewage fund bonds and general obligations bonds – all examples of long-term debt – the treasurer replied, “Well, we’re concerned about pension and health care.” Both of these are paid from the general fund, not from the operating budget. And at those times when the general fund may be experiencing a temporary loss (Detroit’s current general fund shows a $700,000 surplus), as a defined benefit, it can, as Barrow indicates, be replenished by reinvesting funds in the market. Pension funds have, indeed, done very well lately. Just how well they’ve done is evidenced in a recent headline from a Bloomberg report (August 2013) titled “Pension Funds up 12% Get most in 2 Years as Stocks Soar.”

“That’s the advantage of a defined benefit fund,” Barrow said. “But they’ve convinced the public that pensions and health care are driving a short-term cash crisis when they’re not. I had to conclude the whole thing is a fabrication.”

Suspicions come from other quarters. Take, for instance, bond market expert Kate Long, who, after running the numbers (Reuters, June 2013), indicates that the pension fund is actually “reasonably well-funded according to national standards.” It is unclear to many skeptics how the $614 million gap in funding reported in 2011 has now swelled to $3.5 billion, but a significant clue can be garnered from turning to the end of Orr’s report to the creditors that lists Jones Day as one of its authors. The report – a daunting pdf filled with doomsday prognostications titled :City of Detroit Proposal for Creditors” – is just what the doctor ordered for Snyder, et al. Unlike most routine municipal budget statements that are straightforward listings of liabilities and assets, the Jones Day report is filled with editorializing subheads like “UNSUSTAINABLE RETIREE BENEFITS” and the even more revealing “HIGH LABOR COSTS AND RESTRICTIVE EMPLOYMENT TERMS.”

Orr’s contention that he’s “bent over backwards” to negotiate concessions from stakeholders is also suspect. In an interview with Mlive, (July 18, 2013), Robert Gordon – the lawyer for Detroit’s two retirement systems – expressed frustration. “Any expectation that, within 30 days of having received access to the EM’s data room, creditors could have fully completed their analyses as well as in-depth negotiations regarding a highly complex restructuring of the city’s finances, would be entirely unrealistic.” Furthermore, acting from either an attack of conscience or common sense or simply an instinctive reversion to his legal training, even Michigan’s Republican attorney general said recently that he would defend the pensioners’ constitutional right to their benefits.

The idea that an emergency manager invested with absolute power will be able to reverse systemic social and economic problems compounded over generations is not only naïve but dangerous in its implications for representative democracy. The notion is born of an ideology that sees all problems through a narrow economic prism, one that attributes want of any kind to a simple lack of personal initiative and makes wealth synonymous with virtue. But now that emergency financial managers have been around for some time, there is enough empirical evidence to gauge their effectiveness. For the most part, in Michigan communities such as Pontiac, Ecorse, Highland Park, Hamtramck and Benton Harbor, where EFMs have had free reign, their efforts have not redounded to the benefit of the general populace but merely have aided the transfer of public assets to private interests and done little to stem the unemployment and endemic poverty their presence was to have rectified.

One has only to examine the continuing economic stagnation in any of the Michigan communities that have had EFMs to illustrate that not only have they failed to reverse the downward economic trajectory in these places, they have, in fact, subverted the very fabric of local governance. Benton Harbor is a good example. Emergency Manager Joe Harris (originally appointed in 2010 by then-Gov. Jennifer Granholm and reappointed in 2012 by Snyder) issued an edict forbidding elected officials to meet or to conduct city business of any kind. Harris was replaced in January 2013 after a combative relationship with elected city officials. He was succeeded in February 2013 by new EFM Tony Saunders, a 27-year-old Detroit native with a background in marketing and a only brief history in local government.

Saunders has promised a more conciliatory approach with public officials. So far, however, he has continued the policies begun by Harris that involve funneling land and tax incentives to companies like Whirlpool, which, in turn, underwrote a nonprofit development group called the “Consortium for Community Development.” Its goal – with money from a combination of Whirlpool and government funds – is the development of an exclusive golf resort called “Harbor Shores.” Public parks and land have been confiscated by eminent domain to develop the resort, whose clientele will consist of wealthy patrons, mostly from Illinois, and will provide only minimal, low-paying service jobs to the citizens of Benton Harbor.

The situation in Detroit and Michigan in general illustrates what happens when conservative elements driven by laissez-faire notions of market purity obtain near-absolute power. An emasculated government without the power to provide a check on their agenda has long been the dream of corporate interests and individuals of great wealth. And it appears Snyder’s tenure has gone a long way toward making that dream a reality in Michigan. One can only hope that there still remain some elements of society – whether they come from the judiciary or simply aggregated blocks of resistance arising from the middle and working class – powerful enough to turn the tide in Michigan and Detroit and to restore the idea that a social contract must work for all segments of society, not just the rich and powerful. Detroit’s pensioners did not cause the city’s financial problems and should not be made the scapegoats for the ill-conceived financial schemes and greed of the wealthy and powerful.

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