The Motor City Bankruptcy

On Thursday, July 18, 2013, the city of Detroit filed bankruptcy. With some $18 billion in debt, Detroit is now the largest municipal bankruptcy in the United States.

Fifty years ago, Detroit was the center of the automobile industry and had a population of almost 2 million. Today, Detroit has about 700,000 residents, with an unemployment rate close to 20 percent and average per-capita income about $15,000 annually.

Ross Kaminsky, a senior fellow at The Heartland Institute, responded saying, “what is most surprising is not that Detroit has filed for bankruptcy but that it took so long, and that there were enough suckers available over the last few years who bought Detroit bonds despite a future that should have been absolutely obvious.”

Detroit will not be the last city to file for bankruptcy. In less than three years, there have been 33 municipal bankruptcy filings across the United States. A study concerning the municipal government debt crisis recently released by The Heartland Institute and Truth in Accounting pointed out, “the current fiscal state of many of [Cook County, Illinois’] municipalities is unsustainable, and citizens will continue to see more tax increases or municipal bankruptcies unless drastic pension and spending reforms are made.”

One of the main issues Detroit faced was an unsustainable public pension system. Almost immediately after the bankruptcy filing two of Detroit’s largest pension funds sued to block the bankruptcy and actions cutting the city’s $3.5 billion in unfunded pension liabilities.

Matthew Glans, senior policy analyst at The Heartland Institute, has developed solutions for future municipalities.

“In the short term, per-year pension payouts should be capped at a sensible level, the retirement age should be raised, double-dipping should be eliminated, pension rate of return assumptions should be changed, and workers should be required to make higher contributions. In the long term, sustainability will require governments to follow the private sector’s lead and switch workers from defined-benefit pension systems to defined-contribution systems,” said Glans.

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