These are scary times for Detroit’s 23,500 municipal pensioners and their families in the wake of federal bankruptcy Judge Steven Rhodes’ landmark ruling on Wednesday. The city’s once-sacrosanct pension program is now fair game for cuts.
The Federal judge who approved the petition to launch a painful restructuring of the city’s stunning $18 billion long-term debt dealt a serious blow to a widely held belief that state laws preserve public pensions. Now the city’s emergency manager, Kevyn Orr, is free to raid or scale back Detroit’s pension program as part of a larger effort to dig the city out of an enormous financial hole.
The ruling may be a much-needed wakeup call for scores of other cities and states that have looked the other way while the funding levels of their government pension programs fell far behind long-term obligations. For years, state and local governments have been playing imaginative or patently dishonest games with their pension funds, thinking they could get away with it.
The modus operandi was much the same in state after state. Government officials underfunding or skimming retiree pension funds to meet other more immediate costs; financial officers papering over or hiding the extent of the funding shortfalls; and private financial managers exaggerating the return they could deliver on pension fund investments while often leaving the fund vulnerable to unexpected market swings.
States emerged from the recession with pensions underfunded to the tune of more than $4 trillion, according to State Budget Solutions, a non-partisan fiscal watchdog. Nine states—Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky and Illinois— had set aside less than 60 percent of what they need.
Meanwhile, 61 cities reported a gap of more than $217 billion between what they had promised their workers in pensions and retiree health care and what they had saved to pay that bill, according to a study by the Pew Charitable Trust.
Atlanta, Boston, Chicago, Charleston, W.Va., New Orleans, Omaha, Portland and Providence, R.I., among others, led the list.
“I think the major domestic issue in the United States in the next 10 years is going to be, how do we pay for the promises that this society made to the people who lent us money and the people who work for us,” Richard Ravitch, a former New York lieutenant governor and an authority on state finance, said in an interview Thursday.
Ravitch praised Judge Rhodes’ ruling on Detroit’s bankruptcy petition and sharply criticized union leaders, city officials and pension trustees for playing accounting games with the pensions over the years that heavily contributed to the city’s financial crisis.
“If the pension funds were adequately funded to begin with, there wouldn’t be a problem as far as the retirees are concerned,” he said. “If the trustees in Detroit hadn’t [messed] around the way they did, these poor people would not be sitting holding the bag. Because a fully-funded plan is the same as being a secured creditor. You’re protected in bankruptcy.”
Back in 1975, when New York City was on the verge of bankruptcy, the unions and the banks concluded that if the city filed for bankruptcy, they would be in worse shape than if the restructuring was handled outside of a bankruptcy proceeding, Ravitch recalled.
“That’s why they all made the concessions they did,” Ravitch said. “So it’s hardly news that bankruptcy would preempt state contracts.”
In summing up the history of government pension programs, Ravitch said, “Every incentive in this system is to kick the can down the road” rather than meeting the problems head on.
“Politicians don’t want to spend taxpayer money on legacy costs, they want to spend it on current benefits,” he said. “You don’t get elected by spending money on contributions to pension funds. You do it by hiring more cops and more firemen.”
But that may be changing.
On Tuesday, the Illinois state legislature passed landmark legislation that will trim retirement benefits for state workers, a move designed to fix one of the worst financed state employee pension in the country – more than $100 billion in arrears.
The plan’s sponsors say it will generate $90 billion to $100 billion in savings by curtailing cost of living increases for retirees, offering an option 401 (k) plan for those willing to leave the pension system and sapping the salary level used to calculate pension benefits.
That deal was years in the making before Democrats and Republicans finally reached an accord. Now Chicago is approaching its day of reckoning on pensions programs. Under state law, Chicago must increase its contributions to its workers’ pension funds by $590 million in in 2015, to a total annual contribution of $1.4 billion for current and future retirees, according to The New York Times.
If no pension deal can be reached in the Windy City by November of next year, when the city drafts its next budget, Mayor Rahm Emanuel and other city officials will have to raise taxes, or slash spending, or do both.
“Without reform and revenue, we cannot make the critical investments in our future – and the future of our children and neighborhoods,” Emanuel said. “Without reform and revenue, we cannot be the city that we want to be.”
Top Reads from The Fiscal Times:
- 6 Steps to Ease the Student Debt Crisis
- Why Obama Can't Rescue the Middle Class
- Hagel Puts Military on Alert: Big Cuts are Coming