Detroit’s Bankruptcy: Pensions and Public Employment

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After losing more than half its population over the last 60 years, the city of Detroit filed for bankruptcy on Thursday. While many factors contributed to its multi-decade decline, the biggest holes in the city’s budget appear to be due to underfunded pensions and health care for its employees and retirees. The city is now in the position of having to decide the degree to which it must stiff its creditors and retirees.

The progressive “Blue model” of city governance promises a cohesive city government that offers good-paying jobs and lots of urban planning and social services, and the Motor City was no exception. But with the economic downturn, many of the bluest cities and states have shown the most red ink on their balance sheets. At the Spectator, Eileen Norcross details how public pension systems typically use nonsensical assumptions and accounting tricks to make them appear better-funded than they really are, leaving huge gaps that must be paid for by taxpayers.

The Wall Street Journal’s coverage mentions a 64-year-old retired police officer who’s facing an elimination of his annual cost-of-living adjustment. What struck me about his story was the math:

“The legal battles and policy debates have real consequences for retirees like Don Taylor, 64 years old, a Detroit police officer for 26 years. Retired in 1998 after making $36,000-$37,000 a year, he is now drawing a pension of roughly $2,300 a month…”

The salary and benefits make sense, but this officer retired around age 50 after working for only 26 years. This is not an uncommon retirement age for public safety workers, and other civil servants tend to retire below 60, too. Yes, police officers and firefighters have physically risky jobs, but does anyone believe that a healthy former cop can’t do anything productive after age 50?

I wrote a few weeks ago that the “government is not a goddamn jobs program.” In light of the Detroit bankruptcy, I wonder: maybe it could stand to be a little more like one. Here’s a thought experiment: what if all government jobs had effective term limits? Instead of sending tenured teachers off to retire at age 55 with flush pensions, we could agree that teaching (policing, firefighting, social work, etc.) should be, say, a 5-year commitment. Rather than allowing talented people to get bogged down and discouraged in the bureaucracy, they could do their time, build their skill set, and get out into the productive half of the economy. Certain government jobs would still require expertise and experience, but post office wouldn’t be on the verge of going belly up every year under its crushing retiree health care obligations if its workforce wasn’t made up of lifers.

There are certainly downsides to frequent employee turnover, but the upside of having fewer career bureaucrats might be worth some inefficiency. Generous pensions and health benefits for lifelong civil servants are putting the financial health of entire states at risk. If you thought TARP and the auto bailouts were bad, wait until we’re all on the hook for $3 trillion in unfunded pensions.

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