On July 18th, 2013, Detroit, Michigan filed the largest municipal bankruptcy claim in United States history in terms of the city’s population and the size of its debts and liabilities, raising concerns that other major metropolitan areas across the United States might succumb to similar financial distresses.

Characteristics of cities that have filed for municipal bankruptcy in the past five years are not shared with New Orleans, Louisiana. Notable characteristics among economically distressed cities include payments of legacy costs that exceeded the economic capabilities of the municipalities, increased numbers of public employees, decreased tax revenue, loss of jobs to foreign competition, and population fluctuations within the past 50 years.

Since 2005, New Orleans has seen an increase in business start-ups, a population gain, and a massive decrease in unemployment rates. Furthermore, industrial activity in the city is not concentrated in any specific sector, allowing for New Orleans’ economy to thrive even if one sector falls into economic distress. This is in stark contrast with Detroit, whose economy failed after its principal economic sector, the automobile industry, received a $24.9 billion bailout in 2008 from the federal government to avoid complete bankruptcy.

In essence, New Orleans, Louisiana has already economically recovered since Hurricane Katrina. Now, the focus should be to withhold and continue to strengthen the city’s economic stability in future years. To continue to avoid economic decline, New Orleans cannot employ public employees in numbers that are disproportionate to the growth of the city’s population, thus enabling excessive legacy costs in the future that the city will not be able to afford. To avoid legacy costs, the city should favor Defined Contribution (DC) plans, specifically 401K retirement plans, for its public employees rather than traditional multi-year labor contracts, known as Direct Benefit (DB) Plans, that enable legacy costs.

Municipal employees that retire under DC Plans contribute to their pension funds over the course of their employment. Therefore, municipalities will contribute less to the pensions of their employees, thus reducing legacy costs and ultimately reducing potential financial distress.

Prepared by:

Elisa Diaz, Cailyn Flynn, Alfred Jackson and Michael Pashkevich

This report was written by undergraduate students at Loyola University New Orleans under the direction of Professor Peter F. Burns

Bankruptcy Policy Brief

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