The worst problem facing America’s cities is what to do about their employees’ unaffordable pension and retirement health plans.
What makes the pension crisis particularly painful is that there just aren’t any good solutions to the dilemma that a growing number of municipalities are facing. Apart from the debacle in Detroit, scratch any of the wrenching civic bankruptcies in California – Vallejo, Stockton, San Bernardino – or those that may loom in places such as Syracuse, N.Y., or Scranton, Pa., and you’ll find that the city has made promises to its public employees about retirement and health care that just can’t be kept.
A promise, however, is a promise and can’t be casually shrugged off – especially when it’s backed up with a contract. That’s why many states, including California, have constitutional provisions forbidding any change in public pension plans outside the collective bargaining process.
Those protections notwithstanding, a collective bargaining agreement doesn’t do anybody any good if it becomes a suicide pact.
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Consider the cycle in which many cities now find themselves locked: As the costs of maintaining retirees take an ever larger share of each year’s budgets, city governments push their taxpayers to the limit – often with sales tax increases that hit the poor hardest – and cut into essential services such as police, firefighters and paramedics. Libraries and parks close; trees go untrimmed and potholes unfilled. The city’s physical infrastructure decays because there’s no money for basic maintenance. The result is a landscape dotted with urban zombies, going through the motions of civic governance while the quality of residents’ lives declines year by year.
Under the current system in most states, the only way a city can get out from under its pension obligations is to file for Chapter 9 bankruptcy protection. Then, if a federal judge finds that the city is, in fact, “insolvent” – meaning it has no money left to pay its bills or salaries – the local government can draft a recovery plan that includes cuts in pension and retiree health benefits.
So far, Detroit is the only bankrupt city to take that route, though San Bernardino may yet follow. Vallejo and Stockton have taken a different course with far-reaching consequences. Both have elected to leave their retirement systems untouched, while forcing the holders of their municipal bonds to accept huge write-downs on their investment.
Cities, however, depend on their ability to sell bonds for everything from paying this year’s expenses to maintaining sewers and streets. They’re attractive to investors not only because their returns aren’t taxed, but also because they’ve traditionally been regarded as a safe haven. A wave of municipal bankruptcies resolved mostly by stiffing the bondholders would wreck the system. In fact, wariness over the implications of the pension crisis already has had an effect and, for three successive years, more investors have sold municipal bonds than have purchased them.
Some will argue that it’s better to hurt “fat cat” investors than retirees on fixed incomes. That’s nonsense, however. The majority of municipal bonds are purchased by funds whose shares are held by private pensions and individual 401(k) accounts precisely because they’ve been seen as low-risk investments. That means that trying to resolve a municipal bankruptcy entirely on the backs of bondholders just spares one group of working people by hurting another.
The only equitable way out of the pension crisis is to spread the pain. There are two ways to accomplish that: One – and the more preferable – would be to voluntarily reopen the collective bargaining process and negotiate new, sustainable contracts. The other way forward is to amend the state constitution through the initiative process, so that cities can revise these obligations on their own.
A group of California mayors headed by San Jose’s Chuck Reed and San Bernardino’s Patrick Morris is weighing whether or not to put what they call “The Pension Reform Act of 2014” on a statewide ballot. The measure would amend the state constitution’s pension protections in a number of ways, but two changes are particularly important: One would allow legislative bodies or ballot initiatives to modify the amount employees are required to pay to fund their pensions and retiree health care; the other would let cities with public employee pensions underfunded by more than 20 percent reopen negotiations with their unions. If no agreement is reached within 180 days, the city government could unilaterally revise the contract.
You don’t have to know much about California politics – or have much imagination – to envision just how bitter and expensive the fight over such a ballot measure is likely to be. Even so, the consequences of continuing to avoid coming to grips with the pension crisis will inflict their own brand of pain.
There won’t be any winners, if we let our cities become hollowed out urban shells.