Unfunded Pension and Retire Health Care Liabilities are a Problem for more Cities than just Detroit

Posted by PITHOCRATES - July 28th, 2013

Week in Review

The problem all our big cities are having is the cost of pension and retiree health care for their public sectors.  These cities made ridiculous promises during their contract negotiations with their public sector unions.  Promising them generous pension and health care benefits for life for retirees.  Benefits a later generation would have to pay for.  Which is why these cities are imploding under these costs.  And why Detroit filed bankruptcy.  These cities never put away the money for these future benefits because they were just too costly.  Besides, they no doubt thought, when the bill comes due it will be someone else’s problem.  And that’s where we are today.

How bad is it?  Really bad.  Especially in Detroit.  A city that has about half the population it had when it entered into those agreements.  And nowhere near the automotive industry it had back then.  A race riot in 1967 caused a white flight.  And the black middle class would follow years later.  As the jobs left Detroit for the suburbs.  And the people followed those jobs out of the city.  Just decimating the tax base that has to pay those unfunded benefits (see The Retirement Surprise In Detroit’s Bankruptcy by Robert C. Pozen posted 7/25/2013 on Brookings).

When Detroit recently filed for bankruptcy, one number surprised a lot of observers–$6.4 billion in other post-employment benefits (OPEB). OPEB is primarily comprised of unfunded obligations to pay health care costs for municipal employees.

By contrast, the unfunded pension obligations of Detroit were $3 billion–less than half the size of its OPEB…

The Pew Charitable Trust did a study in 2013 of both pension and OPEB shortfalls in the 30 largest cities in the United States. The three cities other than Detroit with the largest pension shortfalls were:

$14,302 per city household in New York City;
$12,170 per city household in Philadelphia; and
$11,389 per city household in Portland, Oregon.

But the shortfalls for OPEB, primarily healthcare obligations, were significantly larger. According to Pew, the three cities other than Detroit with the largest OPEB shortfalls were:

$22,857 per city household in New York City,
$18,962 per city household in Boston
$13,487 per city household in San Francisco.

These numbers are staggering.  Based on the U.S. Census, there are about 264,209 households in Detroit.  If you divide the total unfunded pension and health care costs by the number of households you get $35,578.  That is, to pay this outstanding debt it will cost each household in the city of Detroit $35,578.  Which will be very difficult to do when the median household income in Detroit is $27, 862.

Those in the union say these people are owed their retirement and health care benefits.  Because they made a deal.  But they didn’t make a deal with the people currently paying the taxes.  What this amounts to is generational theft.  Like all those municipal pensions and health care benefits.  For when they made those generous agreements the people who ultimately had to pay them weren’t in the room when they signed those contracts.  In fact they weren’t even born yet.  The people demanding their benefits now and their union representation apparently had no problem sticking it to future generations.  They were the ones in the room when they signed those contracts.  And didn’t give the people stuck paying for their benefits a second thought.

All big cities with big public sectors have the same problem.  They may not be ‘Detroit’ bad but they have bills that they won’t be able to pay.  There are about 100 U.S. cities with a population of a quarter million or more.  If each one of them had this problem that’s about $1 trillion in unfunded benefits just in these cities alone.  With trillion dollar deficits already, Obamacare coming on line and Social Security and Medicare projected to go broke the federal government just won’t be able to bail these cities out.  Perhaps bringing the days of generational theft to an end.  Which may be the only good thing to come from a wave of municipal bankruptcies.

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Even Democrats are Complaining about the High Cost of Government Workers Bankrupting their Cities and States

Posted by PITHOCRATES - April 29th, 2012

Week in Review

So who isn’t paying their fair share?  I know who you’re probably thinking.  And if you are you’re wrong.  For here it is direct from a Democrat mayor’s mouth (see Steven Malanga: How Retirement Benefits May Sink the States by STEVEN MALANGA posted 4/27/2012 on The Wall Street Journal).

Chicago Mayor Rahm Emanuel recently offered a stark assessment of the threat to his state’s future that is posed by mounting pension and retiree health-care bills for government workers. Unless Illinois enacts reform quickly, he said, the costs of these programs will force taxes so high that, “You won’t recruit a business, you won’t recruit a family to live here.”

We’re likely to hear more such worries in coming years. That’s because state and local governments across the country have accumulated several trillion dollars in unfunded retirement promises to public-sector workers, the costs of which will increasingly force taxes higher and crowd out other spending. Already businesses and residents are slowly starting to sit up and notice…

Government retiree costs are likely to play an increasing role in the competition among states for business and people, because these liabilities are not evenly distributed. Some states have enormous retiree obligations that they will somehow have to pay; others have enacted significant reforms, or never made lofty promises to their workers in the first place.

Indiana’s debt for unfunded retiree health-care benefits, for example, amounts to just $81 per person. Neighboring Illinois’s accumulated obligations for the same benefit average $3,399 per person…

Back in Illinois, Dana Levenson, Chicago’s former chief financial officer, has projected that the average city homeowner paying $3,000 in annual property taxes could see his tax bill rise within five years as much as $1,400. The reason: A 2010 Illinois law requires municipalities to raise the funding levels in their pension systems using property tax revenues but no additional contributions from government employees. The legislation prompted former Chicago Mayor Richard Daley in December to warn residents that the increases might be so high, “you won’t be able to sell your house.”

What was that about the 1%?  Just who is it living off of the generosity of the 99%?  Who isn’t paying their fair share?  And is asking others to pay far more than their fair share?  Who is it that has pension and retiree health care plans worth several trillions of dollars?  All funded by tax dollars from the 99%?  As well as the 1%?  Our government workers.  That’s who.  Those people who have made themselves more equal than the 99%.  Even though they claim to be a part of the 99%.  While living more like the 1%.  But one thing you can say about the 1%.  They’re not bankrupting their cities and states like these government workers are.  Or destroying our lives to pay for their lives.

You want to talk class warfare?  Let’s talk class warfare.  The richest 1% pay approximately 30% of all federal income taxes.  The richest 10% pay approximately 70% of all federal income taxes.  And we don’t pay any of these rich people with our taxes.  They get it however they get it.  But they don’t get it from us.  The taxpayers.  So they providing a huge net good for us.  Paying the lion’s share of taxes.  And not taking our money from us.  And yet these are the people that we vilify.  While those who are harming us the most get a free pass.  Now that’s some clever class warfare.  Making it sound like it’s the rich who are oppressing the middle class.  While it is the wealthy government class oppressing the middle class.  And they do it very well.  You’ll hear people everywhere say that the government should stick it to the rich.  But they never say a word about these government workers who live a better life than they do.  Even though they are paying for that better life.  Through ever higher taxes.

So when your property taxes go up think about your retirement plans.  And though you may not have much be comforted in the fact that your government workers do.  Thanks to you.  So even though you may not be able to travel the world in your retirement you’ll know that somewhere a retired government worker is.  Because that’s only fair.  And being fair is important.  Fair share sacrifice.  That’s all they want.  As long as, of course, your share of sacrifice is greater than theirs.  The wealthy government class.

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