When it comes to Detroit, much of the nation’s attention is focused on the bankruptcy case which is expected to be decided on by a judge early next week. But over at City Journal, Steven Malanga asks the question (h/t Megan McArdle) that is likely to persist as more and more cities go through bankruptcy: can the federal government step in to back these cities up?
The question isn’t an academic one. As the pension crisis has spread, a number of cities are teetering on the brink of insolvency, and many would much rather receive a lifeline from the feds than go through the pain of bankruptcy. Even for those cities that do go bankrupt, there’s no guarantee that their problems will be solved: municipalities like Vallejo and Jefferson County, Alabama have gone through arduous bankruptcy proceedings only to emerge with many of their problems intact. And when this happens unions, pensioners, city officials, and sympathetic press figures will continue to make the case that their problems simply aren’t solvable and that innocent city residents and pensioners shouldn’t be forced to suffer for bad decisions they played no part in. Yet while we at Via Meadia have been somewhat sympathetic to these arguments, Malanga makes a strong case that this course of action is unwise:
Politicians and unions have been emboldened in resisting reform because they expect that the federal government won’t let big cities or their major pension systems fail. Late last year, Detroit city council member JoAnn Watson invoked the memory of Mayor Coleman Young’s pilgrimage to visit Jimmy Carter after Carter won the presidency. Young “came home with some bacon,” Watson said, and she called on President Obama to deliver similar largesse. Cities are already set to benefit from one federal bailout: the Affordable Care Act, better known as Obama- care. Chicago and Detroit have announced that they will send retirees to seek health insurance on state insurance exchanges, which federal taxpayers will subsidize. Other cities with strained budgets will almost certainly follow suit.
Bailout advocates argue that some American cities have such massive retirement debts that they could never repay them without Washington’s help. Riordan, for instance, has proposed federal guarantees of state and local pension debts in return for reforms that would improve the accountability of retirement systems. But what these nearly insolvent governments really need are voters angry enough—and worried enough—to bring an end to the special interests’ tight grip on the public purse.
From our perspective, it may be the case that bailing out cities is the right move in certain extreme circumstances: the residents of an entire city shouldn’t be abandoned as their city sorts out its problems. But the moral hazard problem Malanga raises is real, and it’s important that politicians in struggling cities don’t simply assume that the possibility of a federal bailout gives them license to make reckless choices. If the Feds do step in to bail out a city, they need to make sure that it comes with serious political changes to go along with the money. To do otherwise would only encourage poor decisions today.