Cutting Public Pensions: A Matter of Fairness

They say it’s a matter of fairness. And it is. But the larger issue is ‘fairness to whom?’

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Of course it’s unfair to cut the pension benefits of retired public employees who had the misfortune to work for state, county or municipal governments now on the verge of bankruptcy.

But is it fair to ask the residents of those states, counties or municipalities to go without basic services or pay ever-higher taxes in order to fulfill past promises made to those retirees?

A federal bankruptcy judge in Detroit and a majority of the Illinois state legislature have sided with the residents, respectively issuing a ruling and enacting pension reform laws that will very likely cut the benefits of some retirees, despite the past promises -- and apparently even constitutional guarantees.

U.S. Bankruptcy Judge Steven Rhodes, whose Dec. 3 ruling declared Detroit insolvent and set the stage for the largest municipal bankruptcy case in U.S. history, pointed to evaporating city services as justification for his decision.

“The city no longer has the resources to provide its citizens with basic police, fire and emergency services,” the judge said.

To back up his assertion, Rhodes provided some startling statistics: as of April 2013, nearly half of   Detroit’s street lights were broken; in 2012, the average police response time was 30 minutes; in 2013, 58 minutes. The national average response time is 11 minutes.

23,500 Detroit Pensioners and 700,000 City Residents

An estimated 23,500 Detroit pensioners stand to see their benefits cut by Rhodes’ decision, according to lawsuits filed on behalf of the retirees. The ruling will also impact Detroit’s 9,000 current public employees.

Compare those numbers to the 700,000 people who still reside with Detroit’s crumbling city limits.

In Illinois, nearly 200,000 state pensioners will be impacted by reform measures passed last week that will scale back their cost of living adjustments (COLAs). In addition, the state’s 70,000 current public employees are being asked to work as many as five more years before receiving their retirement benefits.

Read more on the Mounting American Pension Crisis here.

Compare those numbers to Illinois’ population of nearly 13 million people, the taxpaying portion of which would eventually be asked to somehow fill the $100 billion hole dug by unfunded pension liabilities.

Again, we return to the issue of fairness.

The average retired Detroit police officer receives an annual pension of about $30,000, hardly a princely sum. But that same retiree probably (typically) began receiving his pension benefits before he hit 50, far younger than the average retirement age for private sector workers. And with COLAs that $30,000 will probably continue to grow for the next 30 years.

Presumably, most public employees who retire before the age of 50 find work elsewhere to supplement their incomes for the next couple of decades.

A Wave of Municipal Bankruptcies

In short, it may not be easy -- or fair -- but many public pensioners are going to have to face the fact that their benefits are going to be cut. The alternative is to continue paying out retirement benefits at their current rates and risk a nationwide wave of municipal bankruptcies.

Public employee unions are livid with the recent developments in Detroit and Illinois, suggesting that democracy is somehow at stake if these pensions are cut because the retirement contracts are apparently guaranteed by each state’s constitution.

That battle will have to be worked out in the courts.

But while we’re talking about threats to democracy let’s not forget the anvil of political cynicism on which far too many public employee contracts have been forged.

Politicians seeking votes court public employee unions and their members. Once the votes are delivered the politicians return the favor through often wildly-generous perks to public employee contracts.

Nowhere is this dynamic more vivid than at the municipal level, where a town council or mayoral election can be swung by a few hundred votes or less. This is how mind-boggling perks such as lump sum payouts for unused sick days and vacation time came to be.

A common practice until recently in states such as New Jersey, these payouts allowed municipal employees to convert unused sick days and vacation time into lump sum cash payments. Workers who rolled those payouts over each year walked away with huge lump sums when they retired.

Flagrant Abuses

When the police chief of Bradley Beach, N.J., a sleepy Jersey Shore town, retired in 2006 he famously walked away with nearly $200,000 for unused sick leave in addition to his regular pension and health benefits. And that amount paled in comparison to the $567,000 similar payout made to Atlantic City’s retiring fire chief in 2004.

Flagrant abuses like these have colored the national debate over public employee pensions, turning broad sentiment against the retired Detroit cop and the retired Illinois school teacher. And that’s not fair.

Meanwhile, millions of American homeowners, strapped for cash in recent years by sharp declines in home values, widespread layoffs and stagnant wages, are being asked to pay ever-higher property taxes for fewer services as broke municipalities struggle to cover long-ago promised pension benefits.

That’s not fair either.

What do you think?

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