Last Thursday, Detroit made headlines by becoming the largest city in U.S. history to file for municipal bankruptcy. Just two days later, Helen Thomas passed away, marking the end of an era for both her and the city. While their fates are not directly linked, both events are rich in implications.
For five decades, Helen Thomas held one of the most coveted positions in journalism as a Presidential Correspondent, relentlessly questioning presidents and challenging their narratives. Few people have had the luxury of publicly holding the world’s top leader accountable—a task that must have been particularly entertaining during the Nixon and Obama administrations.
However, Thomas lingered in the spotlight long after her best days. She could have gracefully exited with her legacy intact years earlier, but instead, her final years were marred by controversial remarks regarding Israel and Palestine made on May 27, 2010.
In the aftermath, she retired amid considerable backlash, and even President Obama described her remarks as “offensive,” asserting that her retirement was a just outcome. Figures such as Bill Clinton and Ari Fleischer also condemned her. Ultimately, only Ralph Nader came to her defense.
Decline of a Great City
Similar to Thomas, Detroit’s once-thriving economy spiraled downward. The auto industry’s boom in the early 20th century fostered unrealistic growth expectations among city leaders, leading to a dangerous imbalance between incoming revenue and promised obligations.
Over decades, the city endured severe mismanagement, a declining population, and dwindling tax revenue, accruing a staggering debt of $18.5 billion. Detroit’s population plummeted from approximately 1.8 million in the 1950s to about 700,000 today—a decline of over 60 percent. Unfortunately, the math simply did not add up.
As the latter half of the 20th century unfolded, U.S. auto manufacturers lost substantial market share to Japanese competitors, and following the economic collapse of 2008-09, Detroit found itself at the epicenter of the crisis. Despite the bailout efforts spearheaded by President Obama, the city was unable to resolve its structural problems.
In the wake of the bankruptcy filing, services like trash collection and law enforcement have struggled to function effectively. Reports from FoxNews.com indicate that Detroit now faces an approximately 18 percent unemployment rate, one of the nation’s highest violent crime rates, and about 80,000 abandoned or blighted buildings.
Yet, a judge in Ingham County is determined to navigate the city through these turbulent waters…
Detroit’s Bankruptcy and the Pension Fund Crisis
On Friday, Circuit Judge Rosemarie Aquilina ruled that Detroit’s bankruptcy filing goes against the Michigan Constitution, as it could lead to reduced pension payments for retirees. It seems Judge Aquilina fails to grasp the essential nature of bankruptcy and its necessity, akin to trying to defy gravity or dictate natural occurrences by decree.
The bankruptcy filing also highlights a significant actuarial issue that could spell disaster for pension funds nationwide.
As reported by the New York Times, a shocking $3.5 billion shortfall unexpectedly surfaced in Detroit’s pension system.
Until mid-June, there had been some optimism surrounding the health of the city’s pension fund. Retirees, including clerks, police officers, and bus drivers, were thought to be secure. Then the alarming news broke regarding the pension’s significant deficit, attributed to calculations from a firm engaged by the city’s emergency manager.
How could such a massive discrepancy emerge so suddenly?
For years, the actuarial profession has grappled with how to accurately assess the value of future pension payouts. This contentious issue may appear technical, but it has tangible implications, amounting to trillions of dollars across the nation. Depending on the outcome of this dispute, it is possible that many municipalities will discover they have over-promised benefits that they cannot reasonably fulfill, even if they do not face bankruptcy.
What is alarming is that this situation does not stem from typical corruption or mismanagement of pension funds; rather, it is linked to a potential fundamental error embedded in actuarial standards. This long-standing mistake may have resulted in unrealistic representations of pension costs, causing many entities to misjudge their true financial obligations. Over time, this oversight has influenced generally accepted accounting practices, remained unnoticed by external auditors, and even affected credit ratings of states and municipalities.
For decades, such errors have made pension plans seem less expensive than they genuinely are, hiding the reality that some cities may be in deeper financial trouble than they appear.
Oops! Who could have imagined?
Sincerely,
MN Gordon
for Economic Prism
Return from Detroit Bankruptcy Uncovers Disastrous Pension Fund Fudge Factor to Economic Prism
