Michigan Safety Net for Boomers Frays on Bankrupt Detroit

There’s a made-in-Michigan quality to Art Reyes, a third-generation autoworker with a pension, retiree health benefits and income that enabled him to send three of his four children to college.

He’s a product of the old Michigan, which gave birth to organized labor, worker protections and wages that propelled the middle class. That Michigan is almost gone. Now overseeing the nation’s largest municipal bankruptcy in Detroit, the state is at the forefront again, this time playing host to the unraveling of the homemade fabric that cloaked and comforted working families for generations.

“I’m literally one of the last at my facility to have a defined pension and health care as a retiree,” said Reyes, 45, a General Motors Co. employee and president of UAW Local 651 in Flint. His unit has 800 members, down from 9,000 when he joined in 1991.

Just as the bankruptcy of Detroit, the city that put the nation on wheels a century ago, is a symbol of urban decay, the effort to fix it through cost-cutting measures may set a stricter made-in-Michigan standard for the rest of the U.S.

Related: The $1M Check That Sat in a Drawer: How Detroit Went Bust

“Other major cities are not too far behind, and they are going to be watching,” said John Mogk, a professor at Wayne State University Law School in Detroit. “This could set the template.”

Wild Swings

While Michigan has ridden the wild swings of auto-industry fortunes for more than 75 years, it has struggled to recover from the economic swoon that began in 2008. The eighth-largest U.S. state, with 9.9 million people, Michigan was the only one whose population dropped in the last decade. It lost almost 550,000 jobs as unemployment stayed above 10 percent -- reaching a high of 14.2 percent -- from December 2008 through October 2011.

Bonds from Michigan issuers have lost about 4 percent this year, more than the 3.8 percent drop for the broader $3.7 trillion municipal-debt market, according to Barclays Plc data. Only 11 states have had bigger declines, the data show.

Union members made up 26 percent of the workforce in 1989, according to the Bureau of Labor Statistics. The number dropped to 16.6 percent last year, including the loss of 42,000 employees. While the predecessors of Chrysler Group LLC and GM that filed for bankruptcy in 2009 and emerged last year are now profitable, they’ve succeeded with smaller workforces and wage contracts for new hires cut by as much as half.

Comeback Kid

The auto industry recovery has helped Michigan’s economic growth exceed all states except North Dakota since 2010, according to the Bloomberg Economic Evaluation of States.

“We’re the comeback state in the United States,” Republican Governor Rick Snyder said in a July 26 interview. He also said Michigan wouldn’t bail out Detroit.

The comeback involves a redefinition of a state whose identity remains tied to motor vehicles and the union members who build them. The United Automobile Workers was born in Michigan after the historic Flint sit-down strike of 1937. Along with two major transportation arteries leading into Detroit -- the Edsel Ford and Chrysler freeways -- is Interstate 696, named after Walter P. Reuther, who led the UAW from 1946 to 1970.

Snyder, 54, the former chairman of the computer company Gateway Inc., was elected in 2010. The Republican-controlled legislature gave him the right to appoint emergency financial managers in distressed cities and school districts. That led to his selecting Kevyn Orr in March to oversee the operation of Detroit.

Unraveling Net

In a move packing a symbolic wallop, Snyder signed into law a measure prohibiting mandatory union dues in government workplaces, making Michigan the nation’s 24th -- and most unlikely -- right-to-work state.

“Starting in the 1930s, Michigan defined itself as a state that provided security for working people -- that was unprecedented,” said Kevin Boyle, a Detroit native, history professor and author of “Arc of Justice: A Saga of Race, Civil Rights and Murder in the Jazz Age.”

“Now that has unraveled. The question is what replaces that?” said Boyle, a professor at Northwestern University in Evanston, Illinois.

Orr said he expects Detroit to emerge from bankruptcy by the fourth quarter of 2014. How the financial solution will affect wages of workers, pensions of retirees and services to 700,000 residents is up to the bankruptcy court. Orr has proposed eliminating defined-benefit pensions for new employees or those with less than 10 years’ service, and moving retirees to federal programs from a more generous city-paid plan.

‘Death Rattle’

Detroit’s population, which peaked at 1.85 million in 1950, has plummeted to about 700,000, according to Census data. Manufacturing jobs fell to fewer than 27,000 in 2011 from about 296,000 in 1950. About 60,000 properties in the city, or 15 percent of all parcels, were barren, and at least 78,000 buildings were vacant, including 38,000 deemed potentially dangerous, Orr said in a report this year.

To some, the Detroit bankruptcy filing proves the economic formula that supported the state and its largest city no longer works.

“We all suffered through the death rattle of big government, big business and big labor,” said Patrick Anderson, principal and chief executive officer of Anderson Economic Group, in East Lansing, Michigan. “It was a terrifically successful model from about 1920 to 1974. That model hasn’t worked for at least 20 years.”

New Road

The economic outlook for Michigan is one that will be hampered by a disproportionate share of baby boomers, manufacturing job losses and slow income growth, according to a report from the University of Michigan’s Institute for Research on Labor, Employment and the Economy.

“We do appear to be emerging from the tunnel that was the most catastrophic period for the Michigan economy in our lifetime,” the report said, adding a caveat: “We won’t be traveling the same route as before, however, after exiting the tunnel.”

Although Boyle said it’s difficult to determine how much Detroit’s emergence from bankruptcy will redefine the city and the state, whatever happens will likely spill beyond Michigan’s borders.

“Detroit is such an extreme case,” Boyle said. “But watching from here out, it should provide an indication of the future for an awful lot of Americans.”

To contact the reporter on this story: Tim Jones in Chicago at Tjones58@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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