While only a small number of American cities have declared bankruptcy, many have significant financial problems along with a number of counties and states. In terms of bankruptcy, Detroit is best known, but the list includes San Bernadino and Stockton, California, Central Falls, Rhode Island, and Jefferson County, Alabama. Other cities have requested bankruptcy protection and were turned down by the courts. Various municipal agencies have sought bankruptcy as well. Among the cities known to have severe financial problems are Chicago and Philadelphia, with several states in similar binds, including Illinois.
The major cause of these financial difficulties are unfunded pension and healthcare benefits promised to public workers by politicians. Mike Bloomberg recently labeled the connection between municipal politicians and public workers as the “labor-electoral complex” noting that they place cities in a “financial strait-jacket” and “stymie reform. Nationwide, the unfunded liabilities of pensions alone have been estimated between one and four trillion dollars by actuaries and economists. Whatever that number actually is, it clearly represents a crisis for the nation, a great burden for current and future generations. The tremendous variation reported for unfunded liabilities depends on the expected rate of return on the funds invested, which are often purposely quite unrealistic.
It is considered a truism that workers took jobs in the public sector at lower wages than in private industry because they had more security, pension, and health benefits. However, over time union leaders pressured politicians in municipal administrations to raise pension and health benefits to unsustainable levels, given the funds that were being devoted to these programs. As part of a quid pro quo for the benefits, union executives pledged electoral support and labor peace. Little attention was paid to the cost of these benefits and how they would be paid off because that would happen sometime down the road when neither the union leaders nor the municipal officials would be around.
The recession made the pension crisis worse by lowering investment returns, though it also exposed the problems to the light of day. Another factor that caused worsening of the pension situation was the use of risky investments by fund managers attempting to bolster returns, but actually losing money. This was done to try and compensate for inadequate funding of the pensions in an attempt to provide the expected benefits. Municipal officials and fund managers often projected investment returns that were impossible to achieve, knowing that this would allow them to ignore asking for additional revenues for the pension funds. (Very bad for candidates running for re-election.)
So now that we have this looming pension crisis, how do we deal with it? One of the bad approaches is to cut back on city services, firing workers so that less pay and benefits will be needed, and delaying maintenance projects on infrastructure. This means sacrificing the city’s future, since fewer teachers result in larger classes and diminished educational achievement, fewer police, firemen, and sanitation workers means higher crime rates and decreased public safety and health, and so forth. This is what Detroit tried and it got them nowhere.
First of all, there are structural and demographic problems with the public retirement systems that must be addressed. People are living longer. As an example, the average life expectancy for both sexes in 1935 when Social Security was started was 61.7 years. In 2010, it was 78.7. Obviously, adjustments must be made in how and when people retire and how retirement payments are made. A policemen who goes to work at age 22, can retire after 20 years of service at age 42 and receive retirement and health benefits the rest of his or her life, the percentage of salary depending on the town. Though it’s understood that the work is dangerous and physical conditioning is important, the vast majority of retired municipal workers obtain other jobs while they receive their retirement benefits. This retirement after 20 years has to end.
Retirement for public workers should be 30 years at a minimum. If a policeman cannot perform his job after 20 years, he should do desk work or work for another municipal agency. Public workers should also be responsible for co-pays and deductibles for health care, as is true in the private sector. In addition, defined benefit plans should be phased out and replaced with defined contribution plans which employees have to contribute to. Though more revenue should be raised through fees or taxes to help the current plans meet their objectives, benefits have to be renegotiated with public workers to make pension plans and health care more sustainable, with changes more pronounced for younger employees. To avoid more Detroits, other cities, municipal agencies, counties, and states must find ways to compromise with their workers. There is no alternative.
Resurrecting Democracy
www.robertlevinebooks.com
Political junkie, Vietnam vet, neurologist- three books on aging and dementia. Book on health care reform in 2009- Shock Therapy for the American Health Care System. Book on the need for a centrist third party- Resurrecting Democracy- A Citizen’s Call for a Centrist Third Party published in 2011. Aging Wisely, published in August 2014 by Rowman and Littlefield. Latest book- The Uninformed Voter published May 2020