Detroit: Myths and truths about bankruptcy

Greg Gardner | Detroit Free Press

DETROIT -- Suddenly, everyone's a Detroit expert, whether he or she has ever been here or not.

Greedy unions. Decades of neglect. Too much government. Not enough government services. Over-dependence on the auto industry. There's probably someone who has blamed the bankruptcy on bad pizza.

Some of this volunteered wisdom is sprinkled with kernels of truth. A good bit of it is just plain wrong, or certainly strange and out of left field — such as the Forbes.com columnist who said Detroit's finances would soon be on the path to prosperity if only the Federal Reserve restored the gold standard. So it's all Richard Nixon's fault?

With the city of Detroit's financial laundry hanging out, the Detroit Free Press decided to "truth squad" the nuggets of facts, pseudo-facts, observations, opinions and insights put forth from the national media and commentators of all stripes.

Here's our best interpretation of what's accurate and insightful along with the exposure of half-truths and canards. There are two misconceptions often repeated the past several weeks: The domestic auto industry and Detroit are synonymous, and that bloated pension benefits pushed the Detroit budget into ruin.

The fact is that the auto industry — now posting strong domestic profits as demand rises — has not been connected financially to the city proper and its operations for decades.

Meanwhile, Detroit police and fire pension benefits, when compared with those in other major cities such as Kansas City, Mo., and Los Angeles, are modest. Many Detroit public safety retirees — perhaps most — are just getting by.

Many of the sins come from oversimplifications of a complex problem in the making for decades. The national media and other commentators, either as slaves to pith or ideological belief, say simply that "Detroit has failed" or that years of one-party rule are to blame.

What's more accurate: Like the fall of Rome or the causes of the Civil War, it's wasn't any one thing but a long, multifaceted process at play.

"The tone of the coverage seems to be more about whether we will survive this. What resources have to be in place to turn the city around," said Donyale Padgett, a Wayne State University professor of diversity, culture and communication. "On the other hand, the social media coverage and blog comments are brutal. The national metaphor seems to be similar to a fighter in the last round. ... One more blow could bring the whole thing down."

Some of the analysis put forward is spot-on and insightful, such as that of Brookings Institution researcher and author Bruce Katz, who pointed out in Time magazine's Aug. 5 cover piece that Detroit is an example of how city governments and city economies aren't necessarily connected, an economic divergence increasingly apparent nationwide.

"City governments don't equal city economies. It's possible to have unsustainable city budgets and dysfunctional politics and very exciting regional growth prospects, and all of those trends happening at once," he is quoted as saying. Katz is co-author of "The Metropolitan Revolution."

In the Time piece, "Broken City: How Detroit's epic bankruptcy could help the rest of the country," writer Rana Foroohar handles the Motor City's bankruptcy as the unique animal it is, but also as a harbinger of bad financial tidings to come, or that have already arrived, for other big cities.

"If Detroit manages to wiggle out of its pension liabilities, then other cities may start to think bankruptcy isn't a bad idea," Time quotes Paul Dales, senior U.S. economist at Capital Economics, as saying.

"On the other hand, if Detroit's bankruptcy results in years of court battles without clear winners, other cities may find settlement and compromise a more appealing prospect than default," Foroohar writes. "Either way, Detroit is making it impossible to ignore the financial issues holding cities back, and that can help everyone."

"You don't have a Sputnik moment without some sort of very visible catalyst," Time reports Mohamed El-Erian, CEO of Pimco, the world's largest bond-investment company, as saying. "Detroit could be it for America's cities."

Here are some of the media reports and commentary we looked at the past week:

Claim: Sky-high pension payouts and sweetheart union deals strangled Detroit.

Source: Daniel Amico of FreedomWorks, a Washington, D.C., lobbying group dedicated to "lower taxes, less government and more freedom." It was posted Wednesday under the headline: "Detroit Bankruptcy — Just what the doctor ordered."

What was said: "Government employees and their overbearing unions have been on a decades-long crusade to defraud the taxpayer and unjustly enrich themselves. When everyday Americans are struggling to find job security and save for retirement with defined contribution plans, selfish and greedy public-sector unionists have unparalleled job security and retire with golden parachutes (that) would make any middle American look like a pauper in comparison."

Reality: The average annual pension for retired Detroit police officers and firefighters is about $34,000, roughly half that of such pensions in Los Angeles and Chicago, 25% less than in Kansas City, Mo., and 36% below benefits for those in Dallas. Retirees from Detroit's general city pension fund receive, on average, less than $20,000 a year.

"Even by Michigan standards, these are not fat pensions," said Leon LaBrecque, managing partner with the financial advisory firm LJPR in Troy. "I see a lot of these people, and their pay is lower and their multipliers are lower than retirees in Grand Rapids or Lansing or Warren or the (Michigan) State Police."

One factor that has made Detroit's pension underfunding worse: There are only 3,200 active workers paying into a system that pays benefits to 9,300 retirees. In Chicago, 12,026 actives pay into a fund that supports 9,035 retirees.

Not all pension plans are built the same, with varying benefits and formulas for determining check amounts. But the major extra benefits afforded to Detroit police and fire retirees, such as early retirement options and paid health care, are also available in other big cities.

Two years ago, Detroit police and fire unions agreed to changes that reduced future pension benefits and saved about $60 million, said Mark Diaz, president of the Detroit Police Officers Association.

The truth is, Detroit's pension changes may come to other cities eventually, with or without bankruptcy.

Claim: The health of the Detroit Three auto companies and the city go hand in hand.

What was said: Fox News host Sean Hannity and former White House economic adviser Austan Goolsbee got into a shouting match Wednesday night over President Barack Obama's statement, before the 2012 election, that his administration "refused to let Detroit go bankrupt."

Goolsbee maintained that the president was referring to the auto industry. "He said, 'Detroit!'" Hannity fired back. "Detroit's now bankrupt! Why?"

Reality: Indeed, Obama did say it that way, but he was clearly talking about the auto industry.

OK, so the auto industry and the city are culturally and emotionally tied. But no way are they synonymous. The financial ties have grown tenuous over the last 30 years. There are only two assembly plants inside city limits, Chrysler's Jefferson North plant and General Motors' Detroit-Hamtramck center. GM is the only automaker headquartered in the city.

Michigan remains the industry's manufacturing and engineering core, but the bulk of those jobs are outside the city, in Macomb, Oakland, western Wayne, Washtenaw, Ingham and Genesee counties.

Claim: City economies and budgets are not the same thing.

Source: Bruce Katz of the Brookings Institution and co-author with Jennifer Bradley of "The Metropolitan Revolution."

What was said: "City governments don't equal city economies. It's possible to have unsustainable city budgets and dysfunctional politics and very exciting regional growth prospects, and all of those trends happening at once."

Reality: Detroit's recent spurt of downtown development, largely fueled by Dan Gilbert and Quicken Loans' real estate binge, is real. Only time will tell whether it sparks other developers to take similar risks, but the city's bankruptcy won't stop those who see opportunity at affordable prices.

Richard Florida, a University of Toronto management professor and urbanologist, offered this in the AtlanticCities.com: "Detroit's downtown urban core is seeing more investment, economic activity and an influx of talent than it has in decades. This revitalization is concentrated and spotty, and it is far from inclusive, but it is certainly something positive — generating jobs, revenue and much-needed hope and optimism that provide a foundation to build upon."