Detroit's tumble toward bankruptcy is forcing an examination of the city's public pension debt, and therein exists a reality check for other governments with similar obligations. The Detroit experience also provides a cautionary lesson about what can happen when government fails to see the writing of economic and demographic change on the wall.
As for pension-related debt, Detroit knew it had a problem, but under a magnifying glass the problem has grown from bad to worse. The majority of the city's overall debt is tied to salary and pension obligations. Such commitments, particularly in regard to pensions, remain constant over time, unlike revenue streams that fluctuate. In Detroit's case, they have fluctuated sharply downward as diminishing population and industrial output has decimated the tax base.
Like a cold spray of water from Lake Erie, the city's managers were hit by an accounting report suggesting they had underestimated the amount of overall debt by a cool $3.75 billion. The accountants said it happened because the city, like other government entities around the country, has been prone to under-calculate the long-term value of commitments to public pensioners.
Without delving into the actuarial details, it seems Detroit's pension managers have relied on a system of projections that is either too optimistic, or not conservative enough to earn a rating of high stability. And this is not just an issue for Rust Belt industrial towns with a legacy of highly empowered private and public labor unions.
Earlier this year, the Utah State Auditor raised concerns over the calculus used by the Utah Retirement Systems to measure the long-term solvency of a fund that covers 190,000 public pensioners. Like Detroit, there are concerns the Utah fund is too optimistic in its projections for long-term return on investment.
The Detroit experience certainly adds weight to the argument that such funds should be open to more inspection and be subjected to more diligent analysis of their capacity to meet future obligations.
In the same vein, Detroit has demonstrated the folly of waiting too long to react to major demographic and economic changes. It was hardly a surprise that an exodus of automotive jobs would reduce population and hence tax base, but leaders were unable to get their arms wrapped around the problem in a way that might have turned default into something other than a dire inevitability.4 comments on this story
Again, this is something that could happen here. Tooele County is similarly grappling with an upside-down balance sheet as a result of erosion of its revenue base. The loss of some military-related jobs and a reduction in revenue from fees generated by burial of hazardous waste has taken Tooele to its own crossroads. There, officials seem to be working to engage the problem head on, and not taking the Detroit tact of kicking a rusty can down the road until the road ends.
Too often, government leaders fail to act aggressively enough to make the necessary fiscal adjustments to cope with the large macro-economic trends that effect their communities. As Detroit struggles to pull itself out of such a morass, other governments are wise to reassess the state of their debt obligations, and to watch for the signs of change that leaders in Michigan failed to take seriously.