Orr said that the city’s debilitating debt, a product of decades of a deteriorating tax base and generous promises to pensioners, is simply no longer sustainable. Orr said Friday that the city’s 700,000 residents deserve a city that works more than bondholders and 30,000 city workers and retirees deserve all the cash they were promised.“The residents will be happy,” Orr said of his plan. “The creditors will be sober and rational. The employees and the retirees are going to be distressed.”
Labor leaders are not happy with the new plans, but if its any consolation, Detroit’s public workers can take solace in the fact that they are not alone. Detroit’s problems may be particularly bad, but as an excellent Economist profile of public pensions reminds us, states and municipalities from California to New Jersey are struggling with exactly the same problems. The Economist advises these governments to begin cutting their pensions now, and early signs suggest this is already beginning to happen:
Not everyone is fooled. Moody’s, a ratings agency, is switching to a discount rate based on bond yields when calculating the states’ creditworthiness. Amazingly, even under their own rosy assumptions, state pension schemes are in trouble. In Illinois they are only 40% funded; in New Jersey, 53%. As people live longer, their pensions cost more. In California, the giant CalPERS fund is requiring taxpayers to chip in more from 2015 and the CalSTRS fund for teachers needs an extra $4.5 billion annually for the next 30 years—more than the surplus the state is now trumpeting. The governor of Illinois, Pat Quinn, has called a special legislative session for June 19th to discuss pensions, after two ratings agencies downgraded the state’s debt. […]If costs are not cut, the eventual result will be a huge rise in taxes when the pension funds run out of money. The burden will fall on private-sector employees, who do not qualify for such a gilded retirement. They will not be happy.
Public employees take heed: politicians and union leaders can and will promise you the moon, but they cannot and will not always keep their word. You are not only vulnerable to the risk of cuts to your pension through the courts; you are likely to face layoffs as cities and states cut their payrolls in a frantic effort to balance the books as pension costs hit. Losing your job won’t just affect your current income; under most defined benefit pension programs, leaving the job before retirement age will substantially reduce your future pension.Governments need to shift workers over to defined contribution plans as quickly as possible. The risks of the old way of doing business are just too large to ignore.[Detroit image courtesy of Shutterstock]