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Pension Despair
Illinois and Detroit Shake Things Up
Illinois governor Pat Quinn photo courtesy of Getty Images.

Illinois governor Pat Quinn photo courtesy of Getty Images.

Melancholy and some relief filled the corridors of the Illinois state legislature last night as it finally worked up the chutzpah to pass modest but important pension cuts over the heads of union leaders and some demurring lawmakers. Predictably, dissenting Democrats called it draconian, a handful of Republicans said it didn’t go far enough, and unions, which prefer the bill vetoed, will contest it in court. But some much-needed $90-100 billion in savings is reportedly on the horizon for the state with the worst debt crisis in the union. This is only the first of many necessary reforms and it’s far from a comprehensive fix, but given Illinois’ dismal record over the past two years, any step forward should be seen as an accomplishment. Hopefully the state uses this as something to build on and doesn’t treat this as the last word in the matter.

But while this is an important step towards solving the biggest pension crisis in the country, the decision in Detroit’s bankruptcy court may be even more important in the long term. As we reported yesterday, a federal bankruptcy judge ruled that Detroit could use bankruptcy to override the constitutional provision forbidding pension cuts. This is big for Detroit, but it’s also a big story in California, where cities have been struggling to get their finances in order due to their inability to cut pension benefits in bankruptcy. This ruling should make it much easier for bankrupt cities and their creditors across the country to argue that cutting pensions is a legitimate course of action, regardless of what the state constitution says. The New York Times reports:

Even before Tuesday, Franklin was warning that it would challenge to Stockton’s plan. Documents on file with the court suggest it was planning to argue that no plan could be “fair and equitable” if Calpers were paid in full while Franklin received less than a cent on the dollar.

“Their argument just got strengthened,” said Karol K. Denniston, a bankruptcy lawyer at Schiff Hardin in San Francisco who has been advising a taxpayers group that formed after Stockton declared bankruptcy. Referring to the judge’s decision in Detroit, she said, “Franklin Templeton is going to have a lot to say about this ruling.”

This is a boon for cities that desperately need to restructure pension benefits, but the big losers here are the public workers who are likely to see many of their promised benefits cut. We have sympathy for most of the people who did nothing wrong beyond naively believing the sweet promises of lying politicians and conniving union bosses who knew very well that the lavish pensions weren’t being funded, and we repeat our advice to all public sector workers across the country, including teachers: do not plan for your retirement on the basis that you will get 100 percent of what you’ve been promised. Assume they will give you the shaft and save accordingly. Remember, you can’t count on any of these people to put your interests first; politicians and union bosses will both take a deal that makes everybody look and feel good today but shafts retirees decades into the future.

Yet despite the pain it will cause to public workers, the bankruptcy court’s decision is a sensible one as it is coping with the consequences of an ugly hole in the American system of state and local governance. Unlike workers in the private sector, state and local employees get to vote in the elections that determine who sets their pay. We’ve set up a system in which the path of least resistance is for politicians and union heads to negotiate big pension deals and then underfund them. The union leaders look good before their members because they’ve negotiated an increase; the politicians get support from union leaders and voters for promising a big pension boost but, because the union leaders tacitly agree to look the other way when the promises aren’t funded with tax increases or spending cuts, the politicians don’t pay a price to non-union voters for giving away the store.

Far from being a rare abuse of power, this situation describes business as usual across much of the country. Union leaders can huff and puff all they want, but they have been guilty of lying to their members for many decades about the security of their retirement income and conniving at behavior that, if it took place in the private sector, would be criminal.

Along these lines, one positive element of what on balance may turn out to be a disappointingly small reform in the new Illinois law is a provision that allows union leaders to sue officials if pension promises are underfunded. This may not work as union leaders want it to; it will make it significantly harder for politicians to make phony promises to shut up the unions. The result will be stiffer spines at the bargaining table; if you actually have to pony up to pay what you promise, you will promise less.

But more than anything, this decision is further proof that the blue social model does not work. Cities and states aren’t making enough new money in tax revenues to pay for the services that they currently provide. If the blue model was working, cities and states that paid high wages and high pensions to their employees—and provided lots of social services through unionized workforces—would be attracting so much new investment and business that the revenue would pay the expenses of blue governance. But that isn’t happening.

This, in turn, is terrible news for Democrats. Even as Democrats attempt to celebrate the nation’s biggest new entitlement program and predict decades of Democratic majorities based on immigration and demographic trends, the economic foundations of the blue social model are eroding. It was the Democrats, after all, who had to take the axe to pensions in Illinois and Rhode Island, and there will be more states to come. And while the federal government, unlike state governments, can print as much money as it wants, even federal finances are going to be challenged by the costs of an unsustainable social model.

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  • rheddles

    We have sympathy for most of the people who did nothing wrong beyond
    naively believing the sweet promises of lying politicians and conniving
    union bosses who knew very well that the lavish pensions weren’t being

    I have as much sympathy for them as for the people swindled by Bernie Madoff. Their desire for security overwhelmed their knowledge that if something is too good to be true, it probably isn’t. One of the great tragedies of life is that each generation must learn this lesson as though it had never been taught before.

    • Gene

      I’m in agreement with you, though I do in fact have sympathy for those people–up to a point.

      I’d like to believe, however, that the “great tragedy of life” that you refer to could somehow be prevented for future generations. I’ve long thought that libertarians, who love to paint great pictures of the benefits of life with more freedom, do a very poor job of talking about the other side of that coin–namely, that a life with a lot more freedom means a life in which people must exercise a lot more responsibility as well. It’s obvious why politicians keep on selling that free lunch, and I can understand their fear of asking voters to wise up and rise above a 4th-grade level of understanding how the world works. I hate the idea that this is an unsolveable problem, however.

      • Anthony

        Where the public goes wrong generally is in whom it accepts under various competing labels as representatives – not men of proven knowledge, ability, and purpose but men who appeal to various unexamined prejudices. Hopefully, Gene, your generation can remedy that 4th grade….

        • Gene

          My Generation — HAH! I’m a boomer. Too late for us, methinks.

          • Anthony

            You’re so right but do some good where you can.

  • Kavanna

    There’s much more to come. A fair solution will impose losses all around. But various parties will not see it that way, of course. For each, “fair” will mean the losses should be borne by everyone else.

    The “blue social model” that WRM talks about with such perceptiveness has been sustained, in recent decades, not by taxes, but by a deceptive Democratic party and its urban machines, in cohoots with the Fed and Wall Street and their advanced machinery for rolling over and repackaging debt. This weird alliance — pseudo-educated liberals, corrupt machine politicians, willfully deluded voters, and high finance — started to come apart in 2007, with plenty of mutual recriminations. Massive intervention has slowed the slide, but can’t stop it here, any more than it can be stopped in Europe or Japan.

    The only pity I have in this situation is for the bankruptcy judges who have to supervise the resolution of each of these messes.

    • rheddles

      And pity for the people who played by the old rules and are about to see their savings inflated to worthlessness.

  • Bruce

    This was a very well done essay, WRM. Blunt, strong, honest and insightful.

  • Anthony

    “Hopefully the state uses this as something to build on and doesn’t treat this as the last word in the matter.” We shall see (and given vote came after Detroit decision, I speculate how many yea votes can be attributed).

  • AD_Rtr_OS

    Reality will continue to be denied.

  • Kavanna

    BTW, could you post dates with these postings? If they’re outside the context of a stream or feed, you can’t see a date.

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