Detroit and Public Employee Contracts: How Will the Detroit Bankruptcy Impact Teacher Contract Negotiations?

Detroit has been traveling down the path to bankruptcy for a few decades. Last summer the AFT Convention was held in Detroit – a shiny huge convention center, a sleek monorail, downtown casinos and a wide swath of abandoned buildings. Block after block of boarded up stores, empty houses and clusters of men on street corners in the middle of the day. Cab drivers are the people’s philosophers – my driver said, “We never recovered from the ’67 riots.” (Check out a photo gallery of the riot here)

We have forgotten the severity of the riots,

… one of the deadliest and most destructive riots in United States history, lasting five days and surpassing the violence and property destruction of Detroit’s 1943 race riot.

To help end the disturbance, Governor George W. Romney ordered the Michigan National Guard into Detroit, and President Lyndon B. Johnson sent in Army troops. The result was 43 dead, 1189 injured, over 7,200 arrests, and more than 2,000 buildings destroyed. The scale of the riot was surpassed only by the New York City Draft Riots, which took place during the U.S. Civil War, and the 1992 Los Angeles riots.

“White flight” ensued as the middle class fled to the suburbs coupled with the erosion of the automobile industry, jobs evaporated and futile attempt after attempt was made to revitalize Detroit.

The final spiral into fiscal doom has been a decades long slide, with widespread repercussions.

Whether the federal bankruptcy statutes trump Michigan constitutional guarantees of public employee pensions will be argued in the courts. The Michigan constitution has language similar to the New York State constitution (“public employee pensions shall not be diminished”); however, the US Constitution Supremacy Clause trumps state constitutions.

Article VI, Section 2, of the U.S. Constitution is known as the Supremacy Clause because it provides that the “Constitution, and the Laws of the United States … shall be the supreme Law of the Land.” It means that the federal government, in exercising any of the powers enumerated in the Constitution, must prevail over any conflicting or inconsistent state exercise of power.

Bill Keller, in his NY Times op ed sees dangers for New York City, and, points to public employee pensions, which he calls a “pile of promises,”

Our great city is not on the verge of collapse — we are not Detroit — but it is in danger of slipping into decline. The issue is the same one that helped send Detroit toward bankruptcy last week and has put other American cities on the disabled list: the immense pile of promises made over the decades to the city’s employees — the teachers and cops and firefighters and bus drivers and sanitation workers and maintenance crews who labor to keep the city, physically and socially, in working order.

Paul Krugman takes a different spin, let’s call it the “shit happens” school of economics,

Sometimes the losers from economic change are individuals whose skills have become redundant; sometimes they’re companies, serving a market niche that no longer exists; and sometimes they’re whole cities that lose their place in the economic ecosystem. Decline happens.

True, in Detroit’s case matters seem to have been made worse by political and social dysfunction.

So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time — because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do.

The important thing is not to let the discussion get hijacked, Greek-style. There are influential people out there who would like you to believe that Detroit’s demise is fundamentally a tale of fiscal irresponsibility and/or greedy public employees. It isn’t. For the most part, it’s just one of those things that happens now and then in an ever-changing economy.

Nicole Gelinas, writing in the City Journal warns New Yorkers that the specter of 1975 should not be ignored and while the city is in far better fiscal shape than Detroit the patter of footsteps must not be ignored,

Detroit should stand as a warning: New York’s bondholders and public-sector workers can never look upon their city as “too big to fail” again. As Mark Kaufman, co-chair of the municipal reform and innovation practice at the McKenna Long & Aldridge law firm, points out, Detroit highlights a critical question that other cities must grapple with: “What does general-obligation debt really mean? What does full faith and credit mean? It’s not worth a candle if you have a city that can’t meet that obligation.”

Steven Rattner, a Wall Street financier and the architect of the 2009 bailout of the automobile industry, in a thoughtful essay, calls for the state of Michigan and the feds to step in lead the Detroit restructuring plans. The bankruptcy rules are harsh as far as public employees’ pension and health benefits are concerned,

The bulk of its obligations are to the grossly underfunded pension plans and for retiree health care costs — nearly half of the city’s total liabilities. The city has suggested that it cut these by 90 percent. Although retirees don’t have a lot of legal rights in the bankruptcy process, it is difficult to imagine — on either a human or a political level — an exit from bankruptcy that would include reductions of this magnitude.

While there are scores of mid-sized cities in fiscal distress, the Apple thrives. In New York State Syracuse, Buffalo and Rochester struggle, heavy industry has moved overseas, or technology has wiped away massive companies (i. e., Eastman Kodak in Rochester) and hi-tech job-makers seek locations around universities or like-minded companies,( i. e;, Silicon Alley in Manhattan) not blighted rust-belt cities.

Public employee pensions in New York State are fully funded, by which I mean actuaries set the rate of government contribution. The city rate has escalated sharply over the last decade, a combination of increasing numbers of retirees, retirees living longer and the 2008 economic downturn.

New York City’s contribution to city pension funds is expected to reach $8.06 billion for the fiscal year starting July 1, up 1.9% from the fiscal year ending June 30, 2013, according to a preliminary budget issued by Mayor Michael Bloomberg.

The projected pension contribution for the fiscal year starting July 1, 2014, is expected to decline by 0.1% from the fiscal year starting July 1, 2013. For the succeeding fiscal years, the annual city pension expense is expected to grow 2.4% and 3.1%, respectively.

The projected health plan costs are not funded through pensions, health plans are negotiated with the city by the Municipal Labor Committee, a coalition representing all of the city unions. While the number of city employees may remain constant the number of retirees will continue to grow and the costs to the city will continue to grow.

How does Detroit impact the current contract negotiations?

As the city sits across the table from union negotiators and in the case of the UFT a set of fact finders, there is no doubt the city will call for greater employee contributions to health coverage and bemoan the constantly increasing pace of required pension contributions.

The new mayor, endorsed by unions or not, will not start pushing gold coins across the bargaining table.