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Detroit bankruptcy is omen for other cities

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View from the Middle

By Jim Rohrer
I grew up in Ohio where the rivalry with Michigan is taught as a family value. Further, I lived in Michigan, and I witnessed firsthand the difficulty of running a business successfully because the prevailing union mentality focuses on “what’s in it for me vs. how can I help my company succeed.”
So if I seem to be defending Detroit over its recent bankruptcy, that is not my intention. But I do see some who seem to be delighted that this once great city has had to admit to being broken. It is a very sad event.
It is true that failure to make Detroit a safe place to live eroded the population base. Corruption was a way of life within city hall, and placating the unions was always the culture. All these contributed to the bankruptcy to be sure. Avoidable causes all, but a sad outcome.
Here are some other thoughts about the causes. The formula generally used for calculating pension funding requirements has embedded within it the assumption of much higher earnings on funds than is realistic today. Since 2000, Jeremy Gold, an actuary and economist, has been trying to bring attention to the bias built in to the actuarial calculations. Now, people are starting to listen to him. Detroit’s big surprise of a $3.5 billion hole was not caused by deception or corruption but by use of an outmoded formula.
How many other big cities are following Detroit with this outmoded model? I can tell you that even Google doesn’t know, but a recent New York Times Business Day article lists AT&T, Boeing, Exxon Mobil, Ford, IBM and Lockheed Martin as each having $10 billion of pension underfunding.  So the problem of underfunding pension promises is widespread. These corporations can probably catch up to their funding problems with future earnings, but cities generally don’t have a big positive cash flow.
So maybe we should stop pointing our finger at Detroit and remember that when you point your finger at someone else, three fingers are pointing back at you.

Jim Rohrer of Evergreen is a business consultant and author of the bi-books “Improve Your Bottom Line … Develop MVPs Today” and “Never Lose Your Job … Become a More Valuable Player.” Jim’s belief is that common sense is becoming less common. (More about Jim at www.theloyaltypartners.com.)