Saving America's Cities

Saving America's Cities

At yesterday's conference, "Save Our Cities: Reforming Public Pensions to Protect Public Services," think-tank researchers, professors, and public officials alike shared their insights on the problems facing public-sector pension funds.

The conference, sponsored by the Manhattan Institute with RealClearPolitics, began with remarks from MI vice president of programs Michael Allegretti, who explained its main theme: Escalating public benefits mean less funding for public services and less hiring of public workers.

In the first of two panels, Joshua Rauh, a professor at the Stanford Graduate School of Business, called Detroit "the canary in the coal mine" -- the largest city to have bankruptcy driven by "legacy costs." Rauh added that while pension contributions have "risen dramatically" in the 20 largest cities in the U.S. over the past twelve years, those contributions are "destined to rise much more" unless fundamental reforms are enacted.

E.J. McMahon, president of the Empire Center for Public Policy, Inc., noted that the most acute pension problems are a result of a "failure over many years to pay the required contributions" -- and that even the required contributions are artificially low due to "accounting fictions" that Rauh had touched on. These fictions include overly optimistic assumptions about pension funds' investment returns.

To make matters worse, state and local governments promise continuing health-insurance coverage -- coverage that, unlike pension benefits, is not pre-funded at all. McMahon explained that while these health benefits are "the first thing to go" if serious problems arise, elected officials and union leaders "turning a blind eye" to the problem.

Marcus Winters, an MI senior fellow who researched the winners and losers in teacher pension programs, stated that, while many teachers may refer to their pension wealth as the best part of their compensation, teachers in fact receive the generous payout only after working for many years. Teachers who leave before reaching the required benchmark, by contrast, receive "little pension wealth." Winters cautioned that teachers do not understand how backloaded their pension programs are.

Stephen Eide, also an MI senior fellow, explained how pension obligations "crowd out" other budget priorities, a topic he covered in a recent report. Eide said problems can occur when revenue growth fails to keep pace with growth in any major spending category. Cities can't run deficits, and most of a city's budget goes toward personnel costs.

Former Michigan governor John Engler delivered the first keynote address, speaking on his experience of enacting comprehensive pension reform, adding that there are reasons to be concerned about the proliferation of pension systems at the state and local levels, and that there are ways to improve transparency through state legislation.

The second panel focused more heavily on the logistics of pension reform. MI fellow Daniel DiSalvo, who penned a RealClearPolicy original piece earlier this week, discussed how the political landscape of pension reform has "dramatically changed" since the Great Recession. The decades-long, stable political arrangement in which Democrats expanded the generosity of pensions and Republicans didn't complain has been turned on its head; today, Democrats are leading reform efforts and Republicans are under pressure to push for "more retrenchment."

Eileen Norcross, a Mercatus Center research fellow who also contributed a piece to RealClearPolicy this week, highlighted the fact that unions in Detroit have challenged the city's bankruptcy, buttressing their arguments with reports of excess funds -- funds that were in part created by the aforementioned fictitious accounting practices. When an audience member asked for examples of more inspiring pension practices, Norcross pointed to Milwaukee and,the state of Washington, noting that, while their funds are "more underfunded than they recognize," these governments make their annual contributions.

MI's Steven Malanga explained that federal bond insurance is not a panacea, given that not all states and municipalities are in the same boat. Many cities and states would object to being asked to pay for that insurance. Malanga also stressed that we need to be careful not to recreate the same problem, allowing cities and states to refund themselves and then having similar problems reemerge a few years from now.

When asked if there is a role for the federal government in pension reform, former Los Angeles mayor Richard Riordan said that Congress and the president should look at the fact that, in the next several years, "city after city, state after state, will go bankrupt." He supported a plan to have the Treasury develop an insurance fund for city and state governments, but he added that governments that receive insurance should have to contribute money and commit to certain reforms, like switching to more realistic accounting practices.

The conference concluded with remarks by San Jose mayor Chuck Reed (whose interview with Stephen Eide can be found here), after an introduction by RealClearPolitics Washington bureau chief Carl Cannon. Reed walked the audience through his push for substantial pension reform in San Jose, noting that it is difficult to reconcile the premises of giving retirees the benefits they have earned, and giving citizens the services that they deserve.

Echoing one of the conference's recurring themes, Reed warned that unfunded liabilities will translate into one of two outcomes: service cuts, or tax increases. Unless cities and states stricken by pension woes recognize the problems addressed by the panelists, and are willing to make the necessary reforms, it appears they will soon be heading down the same path as Detroit.

Joseph Fleming is a RealClearPolicy intern.

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