Weee!! We're #1!! Highest tax burden in the country!! Highest public pension debt too!! Weee!!
I work in this industry and public pensions are a HUMONGOUS problem that is going to get a whole lot worse before it gets better.
A somewhat brief explanation:
Back in the 1970's several large American Corporations went bankrupt and the pensions that they had promised to their employees were nothing but liabilities of the (now bankrupt) corporation. Ie, pre 1970's if I hired you and promised you a pension your security for the pension was nothing more than my promise. If I later went broke, you didn't get your pension.
The Feds bailed out a few and obviously didn't like that so they passed a law known as ERISA. The formal name is the Employee Retirement Income Security Act of 1974. This is a REALLY brief summary of ERISA's provisions:
- Pension assets are now held in trust and cannot be accessed by a corporation's general business creditors.
- Employers are required to fund their pensions based on actuarial formulas supplied by the Feds (ie, I can't just promise you a pension anymore, now I have to put money away to cover the eventual cost and the money that I put away [see #1 above] is NOT accessible to me or my creditors).
All-in-all this is a very good thing for workers but the downside is that ERISA compliance is expensive which is the reason that private sector defined benefit pensions are practically non-existent today. Instead, most employers have switched to defined contribution pensions.
Explanation of defined benefit vs defined contribution:
- A defined benefit pension is a classic pension that many employers offered back in the 50's. Your pension is typically based on a formula that accounts for your years of service and your final salary or the average of your final few years.
- A defined contribution pension is more typical today, ie, a 401k.
When ERISA was passed it was phased in such that companies that had promised pensions to their workers didn't have to come up with all of the money to fund them all at once.
The major problem with ERISA (IMHO) is that public sector pensions were exempted from it. Thus, the defined benefit pensions promised to Municipal, County, and State employees like Illinois school teachers, Detroit police officers, California firefighters, etc are just like the old, pre-1970's private sector plans. They are a promise backed by nothing more than the credit of the promisor (ie, the State of Illinois, the City of Detroit, or the State of California). Further, public sector employees in some states have managed to push through State Constitutional provision guaranteeing their pensions and forbidding State Legislatures from amending the terms (I believe this is the case in Illinois).
Detroit is the tip of the iceberg or the Canary in the coalmine, if you will. Most of Detroit's liabilities in their bankruptcy were pension liabilities. Back in the 1950's when Detroit was a booming industrial city with a population of more than 2 Million and PLENTY of tax revenue their employees negotiated for rather generous pensions. The problem is that now Detroit is a hollowed out shell with a population of less than 700k and substantially less industry than they had 30, 40, 50 years ago. They simply don't have the revenue to meet their pension obligations. Full stop.
Some might argue that Detroit should raise taxes or cut services but those aren't really practical options. They don't have much of a tax base to raise taxes on and their rates are already high enough to chase off employers so further increases would meet with a problem defined by
Mr. Arthur Laffer decades ago. Their services are already atrocious so cutting those further isn't a better option.
This is a REALLY messy problem with frankly no good answers.
Some will argue that the public sector pensions were far too generous so the public sector employees should take a hit. I realize that public sector employees are generally an easy target and on a macro level that argument has some merit in some cases. However, on a micro level it is ridiculously unfair. A Detroit beat cop who has spent the last 30 years risking his life to protect the lives of the citizens of Detroit has earned his pension. It wasn't his fault (individually) that the pension system was unsustainable. The same is true for the Illinois school teachers, California fire fighters, etc. Those individuals took a job that included the promise of a pension. Those individuals didn't do anything wrong and they deserve their pensions.
The back side of that argument is that if there simply isn't enough money then there simply isn't enough money and there are no good solutions for that problem.
To the extent that I can offer a solution, I would suggest that Congress remove the public sector exemption from ERISA with an appropriate phase-in period. That will not fix the problem in Detroit (and other areas that are too far behind) but it would prevent the problem from duplicating itself in currently booming areas that will experience downturns at some point in the future.
