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.

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10 responses to “Detroit and Public Employee Contracts: How Will the Detroit Bankruptcy Impact Teacher Contract Negotiations?

  1. Josh gutterman

    Very unfortunate!

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  2. Retired- no longer Public Enemy Number One

    The reader is encouraged to consider a small child’s question- “Daddy, why do you have to go to work?” The simple answer I gave to my 3-year old back in the 1980’s was “to make money so I could buy you more Legos.” We both laughed, but the interchange crystallized the “deal” all of us make with society- I will work in exchange for my ability to “run” my life as I see fit- necessities, pleasures, hobbies, family, charity, whatever.

    My personal circumstances required working 5 days, usually 5 nights, and often on weekends. We made it! For all the 43 years that I worked in NYC schools during the days, the self-declared “employer of last resort” promised me a small pension for the future in exchange for receiving a smaller salary in the present. The Mayors and the many Chancellors would come and go, but the “deal” never changed. They were collectively no different from Wimpy, the little guy who “wanted the hamburger now but would pay for it tomorrow.”

    I more than fulfilled my obligation to society, certainly contributed toward the retirement allowance I receive, and am now supposed to feel threatened in two ways. All along, the big shots in society have told me that it’s MY fault that the financial meltdown took place, while they have to suffer living in fancy starter castles, driving fancy imported look-alike cars, and caring only for their investments in the hedge funds that build private schools at public expense and call them “charter schools.” All this while the wealthy are whining and bleating about how expensive MY retirement allowance is!

    Now, however, there is a new and more serious reason to feel threatened. Could it be that the failure of the social contract will extend out and up, so that even the state and Federal governments will break the social contract, the “deal” I made to buy those Legos?

    Many who read this are still trying to do their best in a thankless public school environment. The miracles you perform on behalf of the kids don’t seem to count because the kids don’t vote and especially because they don’t have big investments.

    One of my former Principals, a wonderful, honorable, and decent man, often referred to the rewards of teaching as “psychic income.” Sadly, such income only counts in the moral, ethical, and spiritual sense, and not at all in the minds of the sleek, fat corporate titans who will do everything they can to break the social contract so as to enrich their already bloated treasure chests, many of which lie across national boundaries, making even the traditional national boundaries irrelevant.

    If you are still teaching, good luck to you, keep working hard to make miracles, but don’t count on ever being rewarded in this world.

    Never!

    The day may soon come where the major financial players will openly campaign for things like the public flogging of government workers, who will be declared once and for all to be the root of all the problems in modern society.

    Who knew that we were so powerful?

    If you are already retired from the schools, enjoy what you can and enjoy it now- if the “big guns” have it their way, we will all be foraging in the dumpsters behind Waldbaum’s before too long.

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  3. Pingback: Remainders: Detroit’s lessons for NYC’s next teachers contract | GothamSchools

  4. The UFT, though not so smart, can wait. Police and firefighters have binding arbitration, they will either agree on contracts or go to arbitration. And our only good choice is to piggy back on them.

    Most people are unaware of tier 6, which is a huge, huge loss for everyone covered under it, now and forever. Tier 6 members pay a huge percentage of their salary for their entire carrer, 4.5% at $55000, then 5.75% at $75,000, they only get 35% of their pension after 20 years, then if they get to 25 years they’ll collect only 40% of their final salary. They will get a penalty if they’re not 63 years old of 6.5% per year they chose to collect their retirement without the age, no matter how many years they have worked(start at 25, you need to work 38 years). Wow did we get slammed already!

    10 years from now there will be a huge twist in the cities around the states, employees will be paying more than their retirement cost, you probably would be better with a 401k now. Lets say you made 100,000, you have to contribute 6,000 a year, at 8% interest you would have $1,320,000, at 9% that’s 1.7 Million. Theoretically salaries and inflation would match, but if in 38 years your salary never grew and inflation grew at 3% over 38 years, you’d still have an inflation adjusted amount of nearly $600,000.

    Now they want medical costs paid for by us too? The pendulum has to swing back, either they need to pay teachers far more, or no one will want to be a teacher.

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  5. Pingback: Detroit and Public Employee Contracts: How Will the Detroit Bankruptcy Impact Teacher Contract Negotiations? | Ed In The Apple ← NPE News Briefs

  6. New people are being screwed by the new pension system. It is sad because people won’t come to work in these jobs anymore. As for my pension, it should remain untouchable since that system was in force when I joined the pension system plus I view this as deferred wages – we always earned less than the public sector. Plus the state constitution – as long as it is not changed. We are lucky in some respects that our pension system is in fairly good shape – the financial crisis notwithstanding. Look at Illinois and New Jersey for example, I am sure there are others. Detroit will be used by the city in contract negotiations.They will use the health insurance card for sure, too – eventually we will we paying a small portion of our health insurance – but once a inch is given they will ask for a mile…..just my humble opinion here.

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  7. I believe we are fabulously lucky. Our pensions are far, far, safer with the new pension tier. Screwing the younger workers, making them pay a huge percentage into the system secures our future. I wish our union would examine Tier VI, as I believe the average worker retiring at 63 will not get as much out as they put in.

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    • Bob
      The vast percent of teacher pensions are funded by the employer based on acturarial calculations – the current rate, about $8B a year is dramatically higher than ten years ago … more retirees living longer.

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  8. 3 Points to explore further on this:

    1. Mayor Bloomberg wants you to believe the cities rising costs associated with retirements are permenant, they’re not. We’ve just been through the greatest recession in a century, and with stock gains the portion the employer must contribute will fall hugely. There is a lag time. The actuaries figure a number(7% projected growth rate for retirement investments). If investments earn more less than that the employer must make up the difference- NYC in our case. Mayor Bloomberg, ever the genius when it comes to hiding money and deriding employees, actually fiddled with the formulas and had them changed so it looks worse now(he did or maybe still does expect to negotiate contracts) and wanted a strong had for himself. In 3 years(with growth of 8% +) the City’s contributions will fall by 5-billion plus dollars. Again note the lag time, we are just to 2008\2009 in making up for low performance of investments.

    2. 10 years from now, when 1/2 the new teachers are paying huge sums into NYS retirement the city will contribute far less. Again I would ask Michael Mulgrew to run the numbers, what percentage would a teacher, starting at 25, retiring at 63, under tier 6, actually contribute to their retirement. I would bet it’s surprisingly small how little the city would contribute.

    3. Teachers, DC37 etc. all but those Cops, Firefighters, and Sanitation workers, contribute MOST, far more than 1/2 of their retirement costs, once again with decent growth it could be nearly all; However those other groups I mention contribute a tiny portion due to their ability to retire so early.

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  9. 5 years without an increase!!!! My expenses have increased each year and the cost of food has gone up so much. We go to work each day and put in 150%. I guess the powers that be understand how it feels to be an everyday working person – they can not relate. The above post by Josh Gutterman says it best. I won’t be taking any vacations this year (I work in the summer) I just want to pay my bills and keep a roof over my head!!!!!! My daughter has to have two teeth extracted (wisdom) and it will cost me about $350 because our plan changed recently and they no longer cover our expenses. $350 is a huge expense for a person like me. I don’t have extra money. I’ve been a teacher for many years and have a “good education” and every cent goes to basic expenses. There is no extra money.
    Here in NY it gets harder and harder.

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