As the financial crisis of the City of Detroit has played itself, a lot has been written about the city’s “corrupt city government.” Casual observers might be left with the impression that theft and mismanagement are the roots of Detroit’s budgetary problems. I wish it was that simple, but it isn’t.
If “rampant corruption” was the primary problem, then I could believe that the solution would be to simply turn on the Bat Signal. We could call in the Caped Crusader (or a financial manager) and locate hundreds of millions of dollars – hidden under rocks, inside mattresses or deposited in Swiss bank accounts – that could be used to balance the budget. But that’s not going to happen.
To be sure, Detroit’s politicians have not helped the situation. There is reason to believe that the feds, which have been handing down corruption indictments for about a year now, are not finished yet. And one could cite decades of bone-headed decisions made by Detroit mayors and city councils that have contributed to today’s budget mess. Despite all of that, Detroit’s biggest problem isn’t corruption, or even incompetence.
What makes the city’s problems so hard is the harsh reality of operating a government – any government – in these times, especially in Michigan. Along with all other municipal and state governments, Detroit is feeling the impact of a recession that was deeper than anyone realized at the time and a recovery that is taking longer than rebounds from regular recessions take. Those factors overwhelm anything former Mayor Kwame Kilpatrick could have done to it.
For an example, let’s look at Detroit’s pension funds. A lot has been written lately about Detroit’s “unsustainable” legacy costs. The problem would be easily solvable if the shortfalls in pension and benefit funding could be attributed to greedy public officials stuffing their pockets with cash. The real story, however, is far more complicated and in no way limited to Detroit.
According to a recent Census Bureau report on the health of public sector pension funds nationwide, the total cash and investment holdings of funds surveyed decreased by a staggering 22.7 percent in fiscal 2009 (which in most cases ended June 30 of that year), thanks largely to the collapse of stock prices on Wall Street. That happened at a time when a sharp decrease in tax collections made it impossible for state and local governments to make up the difference from their own coffers.
For the fiscal year ended June 30, 2010, the Detroit Police and Fire Retirement System reported an investment return of about 7.4 percent. That’s not bad. But, it does not make up for the roughly 21.5 percent in losses it suffered the year before, when Wall Street went ka-boom. The Detroit General Retirement System earned a 6 percent return for the year ended June 30, 2010, but reported an eye-popping 31 percent investment loss a year before.
Public sector pension funds have been playing catch-up since reaching their peak asset values in 2007. Nobody in the pension fund world plans for the kind of market volatility seen in recent years.
Most state and local pension funds – taking the advice of highly paid consultants with impressive MBAs and nice suits – make plans (and promises) based on an average investment return of about 8 percent a year. However, from 2000 to 2009, the investment return for the average state-level fund averaged less than 4 percent per year, according to The Pew Center on the States.
For years, the consultants told pension funds that it was prudent to invest about 60 percent of their assets in the stock market. The consultants also advised the funds to invest part of their bond portfolios in mortgage-backed securities that turned out to be filled with toxic assets. Anybody who has been watching the performance of his or her 401(k) investments over the past decade knows how that kind of advice has worked out.
Of course, there is plenty of evidence that the Detroit pension funds could be better run. The losses in the funds’ “alternative investments” portfolio, for example, have been scandalous. But even under better management, those funds were unlikely to have sidestepped the financial tsunami of 2008.
It’s undeniable that, even if Kilpatrick had never spent liberally with his city credit card, or (as has been alleged, but not yet proved) steered city contracts to his friends, Detroit would have been unable to shore up the pension funds to make up for the losses. The money would not have been there.
The same kind of thing could be said about any other aspect of Detroit’s budget. Already burdened by things like decades of abandonment, the decline of the auto industry and the inability to collect money owed to it by the state, the city was in no shape to stand up to the body blow it was dealt by the Great Recession and the collapse of the nation’s housing market.
By all means, our leaders should root out all the corruption they can find. If Detroit’s city government can be reformed into a lean, mean, waste-free municipal machine, then it should be. But none of that will end the foreclosure crisis or provide a “mulligan” for the investment losses suffered in 2008.
To use a business analogy: It’s a problem if your employees are taking home reams of copier paper and improperly dipping into petty cash. But all of that becomes suddenly irrelevant if an electrical problem burns down the operation or a tornado hits the place. Likewise, residents of southeast Michigan might be better off (metaphorically) examining the wiring of our region and looking into the validity of the insurance policy, even as we (again, metaphorically) take steps to lock up the office supplies and install security cameras.
The actual problems Detroit faces are fixable. But to do that, we need to face what they really are. Calling in Batman won’t do the trick. The real solutions will require radical solutions, including a level of regional cooperation and sharing of resources never yet contemplated in this state.
Only if we are prepared to do that can we create a region that really works.
