The city of Detroit has been in economic decline for decades. For much of that time its government has been mismanaged at best, and corrupt at worst.
But when Detroit finally went belly up last week, it was the city’s retirement obligations that did the most to bring it down. Nearly half the city’s debt, according to its emergency financial manager, is for pension, health care and other benefits promises that Detroit could not afford as its finances deteriorated, but kept offering to its workforce anyway.
Detroit’s retirement debts have been at the center of negotiations between the city and its creditors, and now that the Motor City is in federal bankruptcy court, the stakes in those negotiations will get bigger. That’s because Detroit’s emergency manager, Kevyn Orr, has challenged the city’s own assessment of its debt, essentially accusing the pension system of using risky, dubious accounting techniques to understate its true obligations. If Orr prevails in bankruptcy court with his views, the effort may have broader implications. That’s the case because other state and local government pension funds employ similar questionable accounting techniques that understate their true debts and, consequently, mask the real cost of funding those benefits.