Public employees’ labor unions drive Michigan cities to bankruptcy with “protection” money extortion: give the unions whatever they demand, and they will see that essential public services aren’t shut down by union strikes.
An editorial from the November 26, 2010, Wall Street Journal:
Harbinger in Hamtramck
The bankruptcy lesson from a Detroit suburb.
More bad news out of Michigan: Facing a $3 million deficit on its $18 million budget, the Detroit suburb of Hamtramck is seeking permission to file bankruptcy. Other towns may not be far behind.
Hamtramck suffers from high unemployment and falling income, but its budget problems go deeper than the recession. The town began running million-dollar deficits 10 years ago due to union contracts that would make Greeks blush. City workers were entitled to annual wage increases at four times the inflation rate and eight paid weeks of vacation each year. That’s in addition to 15 paid sick days, three paid emergency leave days, three paid personal days and one paid birthday.
In 2000 the state appointed an Emergency Financial Manager who in five years managed to balance the budget by cutting the city work force, privatizing services and selling bonds. He got the unions to renegotiate some benefits by promising retirement service credits and promotions, but that set the city up for future pension woes.
Fast forward and the city again teeters toward bankruptcy. Workers still receive five weeks paid vacation and their health plans have no co-pays or deductibles. City health costs have risen nearly 40% this year and are expected to shoot up another 40% next year. Pension costs have climbed 36% in a year.
City manager Bill Cooper says that barring a favorable legal ruling in a dispute with Detroit, the town will run out of money by February. While the city has cut non-union staff and payroll, Mr. Cooper says the only recourse now is to prune public employee compensation.
The city has asked its unions for concessions, to no avail. So Mr. Cooper has now asked the state for permission to declare bankruptcy—the only way the city can force the unions to renegotiate their contracts. Michigan has never allowed a city to declare bankruptcy, and soon-to-depart Democratic Governor Jennifer Granholm isn’t eager to oppose her union supporters.
Instead the state has offered another Emergency Financial Manager and several loan and bond options. The city already owes $600,000 a year in bond payments from its last rescue and can’t afford more debt. The state, which is running a $1.4 billion deficit, also can’t afford to bail out Hamtramck and other municipalities that will soon come knocking. There are 68 municipalities on the state’s fiscal watch list, and 38 have higher stress scores than Hamtramck.
Municipalities nationwide are running a $574 billion unfunded pension liability, on top of $3 trillion in state unfunded liability. Philadelphia’s pension fund is set to run dry in 2015 and Boston’s in 2019. Chicago’s fund will be broke by 2019, when over half of the city’s revenue will be dedicated to pensions.
While many cities blame their deficits on the recession, their insolvency is the natural result of politically dominant public unions. By allowing workers to collectively bargain, states and cities have ceded control of the public purse to workers whose main interest is enlarging government. Hamtramck is a harbinger of bankruptcies to come, and a case study in why politicians from FDR to Fiorello LaGuardia opposed the creation of government employee unions.
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