How Detroit's Bankruptcy Might Influence Education

Kate Murray

On Thursday afternoon, Detroit became the largest city in United States history to file for Chapter 9 bankruptcy protection.  Chapter 9 is the section of the bankruptcy code that provides for the reorganization of municipalities, including large cities like Detroit.  The difference between Chapter 9 and other bankruptcy filings lies in the inability to liquidate the municipality’s assets to distribute to creditors, who, in Detroit’s case, are a whopping 100,000 people.  (Detroit Free Press)

This financial crisis has been six decades in the making, according to Michigan Governor Rick Snyder.   Not only has Detroit racked up $18.5 billion in debt and liability, but the city also saw half of its population flee over the past 60 years.   Governor Snyder describes the bankruptcy as “a low point in the city’s history,” but also believes that it will be the foundation of a new future for Detroit.  

Detroit’s 16.3 percent unemployment rate led to a 30 percent decrease in tax revenue over the last 10 years.  This has resulted in two major problems.  The first is that the cost of maintaining Detroit’s 140 square miles has grown, and the bankruptcy is causing a fear that the city won’t have money to continue funding city services like police force and road repair to the 700,000 citizens.

Secondly, the loss of tax revenue over the last decade forced the city to borrow money in order to pay off the 30,000 lifetime pension plans promised to retired city workers by “short-sighted government officials who consistently failed to fund those future obligations” (John Schoen, NBC). These pension holders are looking at a large cut in benefits that will likely be made permanent, and individual creditors are facing a dime per dollar repayment until the city gets its feet back on the ground. 

What does this mean for education in Detroit?  Detroit Public Schools is unfortunately one of the city’s many creditors.  Individual creditors are looking at between ten and 17 cents per dollar reimbursement, but the school system might not face such a harsh situation.  A DPS Spokeswoman said that it is too soon to tell if and how the bankruptcy will affect the city's schools (Jackie Zubrzycki).  Emergency manager of Detroit Public Schools Jack Martin was appointed last month, and will work closely with the city throughout the bankruptcy process to protect the district’s 40,000 students. 

As for teachers and education workers, they are employees of the state and therefore unaffected by the potential pension cuts at this moment in time.  That being said, this case will likely set precedent for many other cities and states.  Michigan is one of seven states that specifically ban cuts in retiree pension and benefit payments in its Constitution.  Union officials are filing suit that the city cannot cut benefits, so state-appointed emergency planner Kevyn Orr must attempt to invalidate the city’s pension contracts. 

Union officials urge the city to collect the supposed hundreds of millions of dollars owed in unpaid taxes before cutting benefits, but that doesn’t seem to be the direction the planners are going.   If Orr is successful in cutting pensions, city and state workers in states with similarly underfunded pensions may see their future benefits phased back as well.  John Schoen states, “Future public sector workers can all but count on lower retirement benefits, as many state and local governments scale back the kind of financial promises that sank Detroit. With retirees living longer, those promises have become too costly to make.”

Teachers can rest easy for now knowing that state pensions aren’t impacted by the Detroit bankruptcy.  However, Detroit’s alarming financial crisis exposes poor long-term planning, including the lifetime benefits promised to public workers that the city failed year after year to fund.  Cities and states will look at Detroit as an example of what not to do, and this could very likely result in scaled cuts to pension plans for all public sector workers, including teachers, around the country over the next few years.

Kate Murray is a senior at Boston College studying International Studies and Chinese.  She is spending the summer working with Gingko Tree in downtown Detroit, writing about higher education and the Edu Tech industry.  Kate loves baking, Boston, bao zi, and believing in Detroit!

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