For state and local governments in Massachusetts and across the nation, Detroit’s declaration of bankruptcy last month should signal the beginning of the end of an all-too-common practice — letting benefits payable in the distant future become the distinguishing feature of public employees’ pay.
The pension and retiree-health promises that Detroit politicians made to city workers long ago aren’t the sole reason, or even the main reason, why the Motor City has as much as $20 billion in debts and unfunded liabilities. But there’s no solution to the current crisis that leaves those benefits intact while also leaving the city in a position to serve its dwindling populace adequately. Detroit can’t jack up its taxes, which are already sky high, without scaring even more residents and businesses away. Even if the city stiffs its lenders — who must be prepared to accept some cuts to their payments no matter what — it still has an estimated $9 billion in unfunded pension and health care liabilities to current and retired employees. To meet its required annual contributions to pension funds in recent years, the city has been borrowing, thereby digging itself deeper and deeper.
For Detroit, it’s too late; a bankruptcy court will have some ugly decisions to make about how to allocate the sacrifice. But for other communities and for Congress, keeping other municipal governments off the same path — and avoiding rude surprises for future public employees — should be a matter of great urgency.
No Massachusetts community is faring as badly as Detroit, whose fortunes have waned as economic changes have buffeted and transformed its signature auto industry. Yet many of Massachusetts’ so-called Gateway Cities are still struggling to replace the mill economies that once sustained them. In recent memory, the state has had to step in to arrest the downward spiral of Lawrence, Springfield, and Chelsea. With 351 cities and towns, each making its own promises of future benefits to workers whose unions exert considerable clout in local elections, Massachusetts is quite vulnerable to crises in municipal finance.
Because the complexity of their finances often defies outside scrutiny, and because even subtle changes in collective bargaining contracts can mean large increases in future liabilities, local governments can end up taking on huge burdens without their residents being any the wiser. And because of their ability to serially refinance their debts and put off required pension contributions, these governments are also well positioned to dig themselves into deep holes. It doesn’t help that many public officials who negotiate collective-bargaining deals often rely on support from employee unions to get elected, and these officials themselves participate in the same kind of public-pension systems as rank-and-file government employees.
Yet Detroit’s woes show that not just taxpayers but also government employees themselves have an interest in more transparent arrangements — in which these workers receive relatively more compensation up front, rather in the distant future, and the agencies that employ them are subject to more stringent requirements for funding their pensions fully.
Federal laws currently impose strict rules on private employers that offer pensions; these companies must set aside enough money in advance that retirees aren’t caught short if their employers go bankrupt years later. Those same rules don’t apply to public pensions. Congress should change that, because state and local officials can’t be counted on to adequately prepare for employees’ retirement.
Local governments can end up taking on huge burdens without their residents being any the wiser.
In flush times, state and local governments can afford to set aside more money, but there’s little pressure to handle ugly long-term problems. During economic rough patches, state lawmakers are more willing to make unpopular cost-cutting choices — such as the Legislature’s 2011 reform of municipal employees’ health care — but the pressure to refinance debts and stretch out today’s obligations deeper into the future only grows.
Detroit shows where such an approach can lead: Desperate for money, it entered into complex interest-rate gambles with Wall Street financial companies and lost, making its own plight worse. Once among the nation’s most prosperous cities, Detroit is at the point where its art museum may have to unload precious works to pay down debts. When a city is selling off its assets just to pay what it promised to yesterday’s employees, its hopes of regaining its footing are slim.
Other communities, in Massachusetts and elsewhere, will have more room to maneuver — as long as they’re pressed to put aside money, and to never promise more than they can pay up front.