Monday, July 22, 2013

Detroit bankruptcy: Is it a warning sign for America?

Detroit bankruptcy: Is it a warning sign for America?, How Michigan Gov. Rick Snyder has dealt with financial crises in the state – and how he will handle the Detroit bankruptcy – could hold lessons for the rest of the US.

Gov. Rick Snyder (R) of Michigan could be forgiven for sounding like a bit of a cheerleader when discussing Detroit's bankruptcy Sunday on NBC's "Meet the Press."

I'm very bullish about the growth opportunities of Detroit," he said. On one hand, finding the silver lining of perhaps the worst fiscal disaster in the history of America's cities is his job – it's hard to imagine Michigan truly thriving so long as its largest city is an economic millstone. Yet, on a much more personal level, it seems like Governor Snyder sincerely believes he was built for this.

A businessman who was elected during the depth of the recession, when Michigan stood as America's worst-case scenario, Snyder has made sweeping changes to the public sector in the state – from pensions to health care. Detroit, in many ways, is the final exam he has been preparing for since taking office.

Indeed, considering that Detroit's bankruptcy could drag out through the 2014 election, how Snyder is seen to manage it could be crucial to his reelection prospects. But more broadly, how Detroit and Michigan navigate their seismic changes could hold lessons for the country. All the problems that the city and state are facing are looming for states from Illinois to California.

In that way, Snyder's big moment could offer a hint of the sort of belt-tightening that could lie ahead for many parts of the country.

For now, pension and health care benefits will be safe through the end of the year for Detroit public employees, Kevyn Orr, the emergency manager appointed by Snyder, told the Detroit Free Press Friday.

The move is designed to offer a period of stability before what could be a time of enormous fiscal upheaval.

Thomas Berry of Livonia, Mich., who retired from the Detroit Police Department six years ago after more than 34 years on the job, told USA Today that the remaining months of 2013 will be "huge." "You've given me five months to evaluate," he said. "We're going to sock away more and maybe spend a lot less."

Spending a lot less without gutting city services is what the Detroit bankruptcy is all about. The city faces $18.5 billion in debts.

It is a situation that Snyder will be familiar with as governor. When Snyder took office the Michigan Public School Employees Retirement System (MPSERS) faced an unfunded liability of $45 billion. Last September, Snyder signed a bill that addressed the problem by something akin to the voucher system critics accuse Rep. Paul Ryan (R) of Wisconsin of proposing for Medicare.

Under Snyder's plan for MPSERS school employees receive $2,000 as well as up to 2 percent in matching contributions to a 401(k) plan. Under the law, school employees must also contribute more of their own money toward health care, and school districts cannot spend more than 24 percent of payroll on pensions.

The plan reduces MPSERS's unfunded liability to $30 billion.

Illinois, by comparison, has a total unfunded liability of $100 billion for its pensions, and Gov. Pat Quinn (D) has suspended all pay for state legislators until they address the issue.

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