Detroit's Latest Pension Disgrace?
As states and cities grapple with budget shortfalls, many are betting big on an unproven formula: Slash public employee pension benefits and public services while diverting the savings into lucrative subsidies for professional sports teams.Leave it up to America to get its priorities right. After all, sports stadiums are so much sexier than pensions! But Sirota is right, when it comes to economic activity, the benefits of defined-benefit plans are greatly under-appreciated or completely ignored.
Detroit this week became the most prominent example of this trend. Officials in the financially devastated city announced that their plan to slash public workers’ pension benefits will move forward. On the same day, the billionaire owners of the Detroit Red Wings, the Ilitch family, unveiled details of an already approved taxpayer-financed stadium for the professional hockey team.
Many Detroit retirees now face big cuts to their previously negotiated retirement benefits. At the same time, the public is on the hook for $283 million toward the new stadium.
The budget maneuvers in Michigan are part of a larger trend across the country. As Pacific Standard reports, “Over the past 20 years, 101 new sports facilities have opened in the United States — a 90 percent replacement rate — and almost all of them have received direct public funding.” Now, many of those subsidies are being effectively financed by the savings accrued from pension benefit reductions and cuts to public services.
In Chicago, for instance, Mayor Rahm Emanuel recently passed a $55 million cut to municipal workers’ pensions. At the same time, he has promoted a plan to spend $55 million of taxpayer money on a hotel project that is part of a stadium development plan.
In Miami, Bloomberg News reports that the city “approved a $19 million subsidy for (a) professional basketball arena” and then, six weeks later, “began considering a plan to cut as many as 700 (librarian) positions, including a fifth of the library staff and more than 300 police.”
In Arizona, the Phoenix Business Journal reports that regional governments in that state have spent $1.5 billion “on sports stadiums, arenas and pro teams” since the mid-1990s. Meanwhile, legislators are considering proposals to cut public pension benefits.
In New Jersey, Gov. Chris Christie is blocking a planned $2.4 billion payment to the pension system, at the same time his administration has spent a record $4 billion on subsidies and tax breaks to corporations. That includes an $82 million subsidy for a practice facility for the Philadelphia 76ers.
The officials promoting these twin policies argue that boosting stadium development effectively promotes economic growth. But many calculations rely on questionable assumptions.
In a 2008 data review by University of Maryland and University of Alberta, researchers found that “sports subsidies cannot be justified on the grounds of local economic development.” In addition, a 2012 Bloomberg News analysis found that taxpayers have lost $4 billion on such subsidies since the mid-1980s.
“Sports stadiums typically aren’t a good tool for economic development,” said Holy Cross economist Victor Matheson in an interview with The Atlantic. “Take whatever number the sports promoter says, take it and move the decimal one place to the left. Divide it by ten, and that’s a pretty good estimate of the actual economic impact.”
Of course, while stadium subsidies are promoted in the name of economic development, pension benefits are rarely described in such terms – even though the data suggests they should be. Indeed, an analysis by the Washington, D.C.-based National Institute on Retirement Security notes that spending resulting from pension payments had “a total economic impact of more than $941.2 billion” and “supported more than 6.1 million American jobs” in 2012.
Despite that, retirement benefits are often the first item on politicians’ chopping blocks. Pensions, after all, may support local economies, but they don’t result in shiny new stadiums.
In a sports-obsessed country, that makes those pensions a much bigger political target than any taxpayer handout to a billionaire team owner.
It doesn't take a genius to figure out why defined-benefit plans boost economic activity. As the demographic shift continues, more and more people are retiring with little or no savings. But those retiring with a known pension payout are able to plan better, spend more and contribute to economic activity and state sales taxes.
Unfortunately, Detroit's pension nightmare is only getting worse. Earlier this week, the city's pension holders endorsed a debt-cutting bankruptcy plan:
Detroit's bankruptcy plan approached a new stage Monday after city pension holders endorsed a debt-cutting plan that would dent, but not decimate, their future benefits.I've said it before and I'll say it again, Detroit is a shit hole. Only third-world countries cut off water to their residents and even they do a better job than Detroit in managing their public services. The public outrage spawned the Detroit Water Project, a platform to help donors pay the delinquent water bills of people in Detroit.
General retirees, who comprise the bulk of those affected, would get a 4.5% pension cut and lose cost-of-living increases. Retired police officers and firefighters would surrender part of their annual cost-of-living increases.
Contingent on the vote was an agreement by the state and private funders to make $816 million available to shore up pensions. That amount represents the present value of the city's world-class collection of the Detroit Institute of Arts, which the city said would be placed in a separate trust.
The official count, filed late Monday night, showed 82% of those eligible for a police or fire pension who voted supported the plan. Roughly 73% of other retirees and employees with pension benefits who voted favored the plan. Voting lasted through early July.
The voting margins from pension holders were seen as an endorsement for the city's plan to confront an estimated $18 billion in long-term obligations.
"The voting shows strong support for the City's plan to adjust its debts and for the investment necessary to provide essential services and put Detroit on secure financial footing," Detroit Emergency Manager Kevyn Orr said
Despite the critical nature of the vote, a sizable chunk of those eligible sat out. About 59% of police and firefighter pension holders and 42% of other pension holders cast ballots, according to the city's legal filing.
Some 32,000 current and retired city employees faced a stark choice: Vote for the plan to cut most pensions and eliminate a future cost-of-living increase, or reject the plan and risk more severe cuts.
"It is not what my heart wanted to do and it still isn't. But I have to support what's best for our retirees," Shirley Lightsey, president of Detroit Retired City Employees Association, said in an interview Monday before the vote filing in bankruptcy court.
The vote, after weeks of tense campaigning, also sets up a confirmation trial scheduled for next month on the city's restructuring plan, the final phase of the bankruptcy case.
Federal bankruptcy Judge Steven Rhodes will have the final say, and will hold a trial on whether the city's reorganization plan, which also includes about $1.5 billion in reinvestment in services and blight removal, is viable.
On Monday, a court-appointed, independent financial expert came to that conclusion in a report. It found the city would likely be able to provide basic municipal services, meet revised obligations to creditors and avoid future default under the plan's terms and using its assumptions.
But Detroit's efforts to fix its ailing municipal services have also met resistance. A crackdown on delinquent water customers since March bubbled over with a public protest last week following concerns voiced by Judge Rhodes. On Monday, the city announced it would stop shutoffs for 15 days while it tries to promote its payment options and financial assistance available for customers.
Opposition has been building in Detroit for months after officials at the city's Water and Sewerage Department in March said they would shut off water service to delinquent customers.
Mr. Orr has said the water-shutoff approach—which affected more than 15,000 people, at least temporarily—wasn't misguided. Rather it was a sign of the city's effort to provide basic city services in a fiscally responsible fashion.
Pay close attention to what's going on in Detroit because it's coming to a city near you. And while Americans for Tax Reform founder Grover Norquist goes on CNBC to blast Obama and Democrats on tax reform, he conveniently fails to mention how America's plutocrats, which now include overpaid hedge fund managers, are skirting their fair share of taxes using questionable practices.
But hey, as long as America has nice sports stadiums, who cares about public pensions? Oh well, at least King James is going back home to Cleveland to give that proud city a fighting chance at an NBA championship. Go Cavs go! :)