Pension Time Bombs

Detroit’s bankruptcy is an implosion of overpromises, underfunding, national recession and local depression.  Detroit’s residents and creditors are feeling real pain from their bankruptcy.  It’s an unusual case because pension obligations are being forcibly reduced, sending waves of alarm to unionized workers across the US.

For decades, local politicians agreed to wage and benefit deals that exceeded Detroit’s capabilities, and for the last 5 years, pension fund investments have yielded miserly returns, far less than the 6%-7% that some pension fund managers fantasized was realistic. 

Long ago the automotive industry abandoned Detroit, taking with it a remarkably well-paid workforce that funded property taxes, but the auto industry did not take the proportionate share of debt, infrastructure, and service costs when it left.  Detroit’s population loss is not unique — New Orleans, Cincinnati, Birmingham and Buffalo each suffered major declines in population, stressing the remaining taxpayers.  

Detroit is not unique in promising more than its taxpayers can deliver.  Spending on pensions averages about 10% of a city’s general fund spending.  But cities such as Detroit, San Jose, Oakland and Berkeley allow pension costs to exceed 25% of the general fund spending. 

A few states are in a similar overextended condition.  Illinois acknowledged its outsized pension problems because Governor Quinn pressured the Assembly by withholding their pay until they authorized measures to rein in the $100 billion of underfunding.  Rhode Island continues nasty fights with government unions, again due to pension excesses it cannot honor.

State and local government pension overspending is not inevitable.  Most jurisdictions exercised competency and honesty to avoid becoming financial dead-beats.  In 2011, pension funds of $3 trillion were being managed for 19.4 million government workers.  State and local pensioners in 2011 received $216 billion in benefits funded by $136 billion in contributions and ample investment earnings.  

Unions will mount court challenges to right-sizing pension obligations through bankruptcy, but that’s not the key discussion.  Taxpayers deserve a thorough actuarial assessment of oversized wage and benefit agreements benefiting public employees, then the discussion should focus on oversized benefits as vote-buying corruption.  That conversation is needed before any politician mentions “bailout.”

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research

 

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