Much has been said about why Detroit lies in critical condition, but one serious wound has been festering for decades: the unsustainable pension and health benefits that were secured for city employees by self-serving union bosses and their political collaborators.
These irresponsible promises constitute $11 billion of the once-great Motor City’s $20 billion in debt.
It’s a timely lesson in government guarantees gone wrong, yet it seems that few onlookers are taking notes. States and cities across the country face similar challenges and, should they choose to do nothing, may meet a fate like Detroit’s.
My home state of Pennsylvania provides an example of how pension problems develop and how lawmakers allow them to fester. The unfunded total in the state’s pension funds for teachers and state workers is a whopping $47 billion — and that’s assuming a 7.5 percent return on investment. More realistic estimates easily double this already staggering sum.
Who is responsible for running up this tab on the taxpayer dime? The culprits are the government-sector union bosses who demanded lavish benefits and the elected officials who gave them exactly what they wanted.
With a stock market riding high from the 1990s, a Republican governor and a Republican legislature increased pension benefits for teachers and state employees by 25 percent in May 2001 — including a retroactive increase. They also gave themselves a 50 percent bump in their pension benefit. Then, in 2002, government workers who’d already retired also received a pension increase.
The stock-market losses of 2003 barely gave legislators pause. Instead of instituting cost-saving reforms, the legislature delayed contributions into pension plans, increasing the long-term unfunded liability dramatically. Another bill delaying pension contributions passed in 2010, after the Great Recession, to much fanfare from leaders of government unions. Retirement benefits unavailable in the private sector were protected, and the costs were kicked down the road to future generations.
During this process, the union leaders who benefited from the legislative overreach went to great pains to keep their cash cow alive. In 2011, for instance, the state’s teachers’ union, which had 192,000 members at the time, spent $4.2 million of union dues on lobbying to thwart any reforms — a 60 percent increase in lobbying spending in a year after the union raised its annual dues.
And they got what they paid for: no reform. Pennsylvania has yet to responsibly address its mounting unfunded liabilities.
The $47 billion bill is already coming due. Over the next four years alone, just the increase in Pennsylvania’s pension costs will equal 32,000 teacher salaries — that’s nearly a third of all the public-school teachers in the state. Simply sticking to the status quo means the state’s families will face nearly $1,000 in additional taxes every year to close the funding gap.
To staunch the bleeding, Pennsylvania’s governor, Republican Tom Corbett, proposed a 401(k)-style reform for new state workers and teachers. But union leaders have wasted no time — and spared no expense — denouncing this proposal. So far, they have been successful in keeping reforms at bay, even as the pensions plunge deeper into the red.
Without reform, the broken system remains: Politicians grant government unions bountiful benefits in good times and avoid paying for them when the going gets rough. In the end, the state’s taxpayers get stuck paying the bill.
Many other cities and states are in a similar financial position — or, shockingly, in even worse shape. New York faces pension debts of $133 billion, while Illinois clocks in at $167 billion. Perhaps unsurprisingly, California faces the worst scenario, with $370 billion in unfunded pension liabilities.
As recently as last year, states faced a combined $2.5 trillion in unfunded liabilities. Add in the country’s cities, and the total spikes to $4.6 trillion — or nearly $60,000 per family of four.
These chasms in public funding dug by union leaders and supine politicians won’t fill themselves, even though some (such as the AFL-CIO in Detroit and Governor Quinn in Illinois) have asked for a federal bailout.
We know that those who ignore history are doomed to repeat it. Whether Pennsylvania and other states take Detroit’s lesson to heart and enact meaningful pension reform remains to be seen.
— Matthew Brouillette is the president and CEO of the Commonwealth Foundation, Pennsylvania’s free-market think tank.