What Is Kevyn Orr's Legacy In Detroit?
Kevyn Orr soon will step down from his position as Detroit's Emergency Manager, leaving behind a mixed legacy. Having reached settlements with nearly all creditors, the city is now close to wrapping up its historic bankruptcy. But municipal government remains grossly dysfunctional.
During the bankruptcy trial, witnesses have testified about fire house alarm systems jerry-rigged out of fax machines and soda cans, computers that take 10 minutes to boot, and "way too many pockets" within city government in which workers "don't necessarily feel that it is their responsibility to provide a certain level of services — that it kind of goes the other way around."
One might reasonably ask has anything changed at all since Orr's appointment in March 2013. Given 18 months to address a crisis he described as "more than 60 years in the making," Orr proved himself mortal.
But Orr can lay claim to at least one crucial operational reform. The changes he made to workers' retirement benefits not only dramatically improve Detroit's shot at solvency, they will make the city —long a symbol of what not to do with respect to pensions — a model for government employers all over the nation.
Risk-sharing is what sets apart Detroit's new "hybrid" pension plans: no longer will taxpayers bear exclusive responsibility for addressing any shortfalls.
As of July 2014, the new plans' start date, a series of triggers kick in when either system drops even slightly below full-funding. The unfunded liability will be nipped in the bud by a combination of increased employee contributions and benefit reductions.
Orr's pension reform also includes tightened eligibility requirements and more modest benefits. Detroit will also cease masking the extent of the underfunding with highly optimistic assumptions about investment return. Orr dialed down the GRS and PFRS' so-called "discount rates" from around 8 percent to 6.75 percent.
Some may note out that "risk-sharing" with employees is not the same as risk-transference, as would have happened had Orr gone forth with his initial plan to implement a pure 401k-style system. True, there is still the possibility that, after all triggers have been exhausted and underfunding persists, taxpayers could be called upon to increase contributions.
But Detroit-style risk-sharing is still far more taxpayer-friendly than the systems that exist in nearly every other state and municipality. Despite pension reformers' enthusiasm for the 401k, their progress in convincing governments to move in that direction has been underwhelming. Orr's models breathe new life into a debate that tends to become bitter and stalemated.
Orr's changes to retiree healthcare are equally transformative. That $4.3 billion unfunded liability — officially larger than the unfunded pension liability — will be almost completely erased in bankruptcy, leaving no risk associated with legacy costs. Current retirees will receive modest stipends with which they can purchase insurance on the Affordable Care Act-mandated exchanges.
Yes, there are concerns that transferring retirees to the subsidized exchanges will only shift the liability to the federal government. But taxpayers are liable whether the costs are borne at the federal or state and local level.
The only point officials need to keep in mind, in addition to the legality of adjusting benefits for current employees and retirees, is that retiree healthcare is an inessential expense, which continues to divert resources away from more pressing public services.
The availability of the federal subsidies simply helps state and local governments reorder their priorities.
These reforms attest to the advantages of emergency manager government, and how it benefits elected officials.
Orr was well-positioned to enact the changes he did because of his freedom from the short-term political pressures that unfailingly thwart substantive pension reform.
Excessive pension debt was both an effect of the city's fiscal incompetence, and cause, as it tempted officials into hazardous shortcuts that wound up making a bad situation worse. Though no one thinks Mayor Mike Duggan and the City Council have an easy job ahead of them, Orr's pension reforms will at least make it less difficult.
This piece originally appeared in Detroit News
This piece originally appeared in Detroit News