D. Dowd Muska


The Inevitable Bailout of Bustout Cities

January 31, 2013

How broke are America’s cities? A new report by The Pew Charitable Trusts examined the unfunded liabilities of 61 municipalities. The findings are deeply disturbing.

Wildly generous retirement benefits bestowed by detached-from-reality pols have accrued a tab in the hundreds of billions of dollars. In fiscal 2009, the most recent year for which complete figures are available, the 61 jurisdictions, employing 45 percent of the nation’s city employees, had only 74 percent of the assets necessary to cover pension obligations. The shortfall: $99 billion.

Pew’s pension analysts documented both penny pinchers and spendthrifts. Among the champs: Milwaukee (113 percent), San Francisco (97 percent), Wichita (94 percent), and Indianapolis (94 percent). The irresponsibility club featured Charleston, West Virginia (24 percent), Providence (42 percent), Omaha (43 percent), and Portland, Oregon (50 percent).

Knowledge of the pension pickle is common. Less visible is the bill for other postemployment benefits (OPEB). Primarily retiree healthcare coverage, Pew concluded that for this commitment, “cities had set aside just 6 percent of $126.2 billion in projected costs … leaving $118.2 billion in unfunded liabilities in fiscal year 2009.”

Once again, there were heroes and zeroes. Los Angeles began to squirrel away revenue for its OPEB in 1987. Denver, Louisville, and Sioux Falls are at the front of the pack as well, while 33 cities have saved nada, and are “paying for their retirees’ health care out of their treasuries on a pay-as-you-go basis.”

It didn’t have to be this way. Decades ago, municipal officials and state lawmakers could have recognized the changing compensation environment, and taken action. First on the to-do list would have been conforming the wages/salaries of city workers to counterparts in the competitive, accountable sector. Such a shift would have greatly reduced pension expenditures, since retirees’ monthly loot is based on what was received during the last several years on the job.

Chicago (pension funding: 52 percent) provides an instructive example of inequity. The latest research from the National Compensation Survey, which collected Windy City-region data in 2010 and 2011, revealed that the hourly rate for employees in state and local government was $31.89. At $22.20, private workers didn’t measure up. (For service jobs, the disparity was massive: $23.38 vs. $11.29.)

Putting a halt to “retirements” before the age of 65 would have been another wise tactic. So would a ban on pension “spiking,” the sleazy practice of employees using overtime and paid leave to artificially inflate earnings. Pew’s study includes an anecdote about a 50-year-old West Virginia police lieutenant who spent three years manipulating his wages in order to boost his annual pension from $33,000 to $53,000. The scheme potentially put the Mountain State’s taxpayers on the hook for an additional $574,000.

A bolder change would have been the end of defined-benefit plans for new hires. Defined-contribution systems leave no unpredictable fiscal legacy, and are more aligned with the modern labor market’s high degree of mobility. Some didn’t wait to move to 401(k)s: “As long ago as 1981 in Little Rock and 1987 in Washington, D.C., all new non-uniformed … employees were enrolled in defined contribution plans.” The past few decades have seen a smattering of cities follow suit -- not nearly enough to have a significant impact on the total unfunded-pension monstrosity.

The scale of the OPEB problem wasn’t fully known until this century, when the Governmental Accounting Standards Board mandated disclosure of the liability. Now that the severity of the crisis is known, reforms are essential. Boosting employee contributions is an obvious approach. Stopping post-employment healthcare altogether is better. (Portland, Maine doesn’t offer the perk.) Those already drawing benefits can be a source of savings, too. Jersey City, reports Pew, “voted to shift retirees to a new health plan that caps payments to medical providers, unless retirees opt to pay the difference in premium costs to stay with their current health plan.”

With rare exceptions, high-population municipalities face declining or stagnant populations. Drug prohibition, welfare, high taxes, and political corruption have rendered the places unlivable, and thus incapable of raising the revenue needed to meet immense financial burdens.

So it’s all but certain that mayors will descend on state legislatures and D.C. for help. The enormously powerful unions that “represent” policemen, firemen, social workers, educrats, and other municipal employees have the forced-dues dollars to fund aggressive agitprop and fight effective lobbying campaigns.

Most Americans don’t work for cities, but most Americans aren’t farmers or bankers or employees of the United States Postal Service. In Bailout Nation, everyone gets a subsidy eventually.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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