No More Detroits
The Motor City’s downfall stems from a lot of bad policies, but one has been especially damaging: overspending on public-sector employees. In Detroit, pension and health care benefits for public workers and retirees make up half of the city’s $18 billion debt. The true cost of these benefits was hidden by accounting tricks: Although the city had estimated the pension shortfall alone at $644 million, emergency manager Kevyn Orr now projects it at nearly $3.5 billion.
By no means is this problem confined to Detroit. In my native California, the total debt for public retirees’ benefits is widely gauged at $180 billion. This figure, however, is based on the pension funds’ assumed rate of return of nearly 8 percent, the same rate projected in Detroit and many other pension systems. Calculations based on more realistic rates have forecast these unfunded liabilities in California at a ruinous half-trillion dollars.
While it may be difficult to understand why cities and even entire states would doom themselves to insolvency by undertaking these obligations, the answer is simple: Democratic politicians, who have near-total political control of California and of America’s biggest cities, support this massive transfer of wealth to public employees. In return, public-employee unions dedicate their vast financial resources and their unrivaled on-the-ground campaign operations to elect and re-elect these politicians.
It’s no surprise that Michigan Gov. Rick Snyder plans to cut Detroit’s unaffordable public-employee pensions through bankruptcy proceedings. Considering the power of public-employee unions within Democratic politics, it’s also no surprise that a Michigan judge, oddly rebuking the governor for disrespecting President Obama, rejected Detroit’s filing because these public-employee benefits are supposedly sacrosanct even in bankruptcy, when the city is collapsing before our eyes.
Pointing out that overspending on public-employee benefits leads to fiscal instability does not mean that public employees are bad people or that they deserve to fall on hard times; it’s just observing a simple truth. As their unions continue demanding destabilizing benefit packages from their Democratic partners in government, public employees should understand that their benefits will not be spared in the resulting fiscal collapse that has befallen Detroit, and that looms on the horizon in California and many other states and cities.
On the federal level, is there anything we can do in Washington to stop the fiscal carnage from spreading further? Yes — if we balance the federal budget, stop using accounting tricks and gimmicks to disguise the true cost of federal programs, and cease accumulating unsustainable liabilities in our entitlement programs, then city and state governments would feel less liberated from the constraints of fiscal responsibility.
However, since the Senate has made it clear that fiscal responsibility is not a priority, we need to try something more targeted and politically feasible.
Aside from the poor example it sets, the federal government enables reckless spending on public-employee pensions by offering hope of assistance from Washington if things get bad enough. Buoyed by the prospect of a federal bailout, local and state governments are encouraged to view their pension funds as “too big to fail,” creating systemic moral hazard.
Not surprisingly, former Obama administration “car czar” Steve Rattner and the Detroit Free Press have called for a bailout for Detroit. Despite Mr. Snyder’s insistence that a bailout is not in the cards, Vice President Joe Biden and Detroit Mayor Dave Bing have not ruled it out.
To stabilize the nation’s public-employee pension systems and to prevent federal taxpayers from being billed for failed pension funds, I have introduced the Public Employee Pension Transparency Act in Congress. The bill would achieve two simple things: First, using federal permission to issue tax-exempt bonds as leverage, it would encourage state and local pension funds to increase transparency and to assume realistic rates of return. Second, it would prohibit Congress from bailing out any state or local pension funds that go insolvent.
We should not wait to see which cities and states will replicate Detroit’s sad fate. With municipalities from Stockton, Calif., to Harrisburg, Pa., having already gone bankrupt, and with a Morningstar study finding that 21 state pension systems are funded below fiscally sound levels, and with Senate Joint Economic Committee Republicans estimating America’s government retiree obligations at nearly $3 trillion, it’s time to shore up the nation’s pension funds before this rising wave of debt becomes a tsunami that wipes out our economy.
Rep. Devin Nunes, California Republican, is chairman of the House Ways and Means trade subcommittee.