Detroit bankruptcy: Is it a warning sign for America? (+video)

How Michigan Gov. Rick Snyder has dealt with financial crises in the state – and how he will handle the Detroit bankruptcy – could hold lessons for the rest of the US.

By , Staff writer

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    State-appointed emergency manager Kevyn Orr (r.) and Michigan Gov. Rick Snyder (l.) address reporters during a news conference on Friday in Detroit. On Thursday, Detroit became the largest city in US history to file for bankruptcy.
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Gov. Rick Snyder (R) of Michigan could be forgiven for sounding like a bit of a cheerleader when discussing Detroit's bankruptcy Sunday on NBC's "Meet the Press."

"I'm very bullish about the growth opportunities of Detroit," he said.

On one hand, finding the silver lining of perhaps the worst fiscal disaster in the history of America's cities is his job – it's hard to imagine Michigan truly thriving so long as its largest city is an economic millstone. Yet, on a much more personal level, it seems like Governor Snyder sincerely believes he was built for this.

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A businessman who was elected during the depth of the recession, when Michigan stood as America's worst-case scenario, Snyder has made sweeping changes to the public sector in the state – from pensions to health care. Detroit, in many ways, is the final exam he has been preparing for since taking office.

Indeed, considering that Detroit's bankruptcy could drag out through the 2014 election, how Snyder is seen to manage it could be crucial to his reelection prospects. But more broadly, how Detroit and Michigan navigate their seismic changes could hold lessons for the country. All the problems that the city and state are facing are looming for states from Illinois to California.

In that way, Snyder's big moment could offer a hint of the sort of belt-tightening that could lie ahead for many parts of the country.

For now, pension and health care benefits will be safe through the end of the year for Detroit public employees, Kevyn Orr, the emergency manager appointed by Snyder, told the Detroit Free Press Friday. 

The move is designed to offer a period of stability before what could be a time of enormous fiscal upheaval.

Thomas Berry of Livonia, Mich., who retired from the Detroit Police Department six years ago after more than 34 years on the job, told USA Today that the remaining months of 2013 will be "huge." "You've given me five months to evaluate," he said. "We're going to sock away more and maybe spend a lot less."

Spending a lot less without gutting city services is what the Detroit bankruptcy is all about. The city faces $18.5 billion in debts. 

It is a situation that Snyder will be familiar with as governor. When Snyder took office the Michigan Public School Employees Retirement System (MPSERS) faced an unfunded liability of $45 billion. Last September, Snyder signed a bill that addressed the problem by something akin to the voucher system critics accuse Rep. Paul Ryan (R) of Wisconsin of proposing for Medicare.

Under Snyder's plan for MPSERS school employees receive $2,000 as well as up to 2 percent in matching contributions to a 401(k) plan. Under the law, school employees must also contribute more of their own money toward health care, and school districts cannot spend more than 24 percent of payroll on pensions.

The plan reduces MPSERS's unfunded liability to $30 billion.

Illinois, by comparison, has a total unfunded liability of $100 billion for its pensions, and Gov. Pat Quinn (D) has suspended all pay for state legislators until they address the issue.

"I've tried everything in the book to get [the legislature's] attention," Quinn said in a press conference earlier this month. "It's time for the legislature to legislate."

In Michigan, Snyder has had the support of a Republican Legislature, but some of his reforms have rankled his own party. Earlier this year, five Republican senators introduced legislation to repeal a Snyder-backed tax on retiree pensions. And Senate Republicans adjourned this month without taking up Snyder's call to expand Medicaid to 320,000 low-income residents.

As governor, Snyder has also signed bills that force public employees to pay a greater share of their health insurance and that have ended retiree health care entirely for two-thirds of current Michigan legislators and all future legislators.

"This is an exceedingly generous benefit that is clearly out-of-step with the private sector," Snyder said upon signing the bill in 2011, according to the Associated Press.

Understandably, state employees have not been thrilled. Responding to the prospect of state employees having to pay 20 percent of their own health care costs, the state's largest teachers union told the AP in 2011: "The real losers in the debate continue to be the employees who just got a greater burden of health care costs shifted onto their backs."

The uproar in Detroit is likely to dwarf anything Snyder has had to deal with so far. There is talk of pensioners getting only 10 cents for each dollar they have been promised.

But Snyder said he is prepared.

"We went through all the other processes you could," Snyder said on "Meet the Press." "There were no other viable options and once you go through every other option, then you should consider bankruptcy. We're at that point."

And his focus, as always, appears to be on the future. When Republican state Sen. Rick Jones called the retiree pension tax "extremely unfair" for people who have "planned their life for their retirement and then suddenly, in the midst of their retirement,... get a new tax," the businessman Snyder had a ready response.

The new tax "is fair to our young people," he said earlier this year. "We were [using] a tax system that was driving young people to leave our state."

Likewise, as Snyder looks to make his state's signature city a symbol of something more than economic fraud and collapse, he appears to be looking beyond the thicket of political wranglings and lawsuits that lie ahead.

"There’s many outstanding things going on in the city with the private sector, with young people moving in the city, it's got great opportunity," he said on "Meet the Press." "The last major obstacle is the city government."

Now, Snyder is jumping in head-first, and other states with cities in similar – though less dire – straits are watching, Eric Scorsone, a Michigan State University economist, told AP.

"It's aggressive in the sense that most states don't intervene in local affairs to the same extent."

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