While Vallejo is an extreme example, many cities face similar problems, and are careening toward a similar fate. And to make things worse, the salaries and benefits that states and cities must pay today are not the only obligations threatening to bankrupt them. While there is a limit — however high — to how much governments can spend at any time, there is no limit to what pro-union politicians can promise their public-employee-union supporters. As a result, many state and local governments face enormous liabilities in the form of severely underfunded public-employee pensions.
In early October, Northwestern University’s Kellogg School of Management showed that America’s 50 largest cities have combined pension underfunding of $574 billion. This is in addition to the liabilities already owed by the states, estimated at between $1 trillion and $3 trillion by various analysts (in our opinion, the former figure is too conservative). The taxpayers, of course, have to pay for it all. And when the bill comes due, the politicians who promised those lavish pensions are long out of office, and the pension promises are somebody else’s problem.
This cannot go on. We are now at a point similar to the one at which the U.K. found itself in the early 1980s. Fortunately, we can learn something from that example. When Margaret Thatcher went to battle with the public-sector unions, she pursued a two-pronged strategy: First she removed the unions’ privileges; then she undermined their power base by privatizing functions wherever possible, fragmenting the unions’ bargaining monopolies. If America is to shake off the burdens imposed by the public-sector-union behemoth, both of these remedies will need to be deployed, in that order.
— Iain Murray is vice president for strategy and F. Vincent Vernuccio is labor-policy counsel at the Competitive Enterprise Institute in Washington, D.C. CEI editorial director Ivan Osorio also contributed to this article, which originally appeared in the December 20, 2010, issue of National Review.