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Soundings

Steven Malanga
Bailouts for Cities?
Advocates for cash-strapped municipalities want Washington to clean up their mess.
Autumn 2013

Detroit’s July bankruptcy filing, prompted in part by its huge worker-retirement debts, has led to calls for a federal bailout of the beleaguered city—and also, by extension, of retirement debt in other fiscally squeezed municipalities. From the New York Times to blogs and union-issued position papers, bailout supporters argue that the citizens and workers of Detroit and other troubled places aren’t to blame for their retirement debts. Even if they were, the arguments go, the damage that insolvency will do to government services for average citizens and to the retirements of government workers demands federal intervention. “The 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them,” investor Steven Rattner wrote in the New York Times last summer.

But remember the long road that Detroit and other cities have traveled to financial distress. Politicians consistently made bad deals for constituents, while union leaders regularly sued for plusher benefits, thoughtless about how city governments could pay for them. And voters persisted in electing those governing in this irresponsible way.

Detroit’s emergency fiscal manager, Kevyn Orr, recently said that the city has been going broke “openly and notoriously” for over a decade, without confronting its problems. He’s right. Though the Motor City has faced fiscal challenges since its economic decline began in the late 1970s, things worsened considerably when financial markets plummeted in 2000, hitting the city budget hard. Detroit found itself with one of the nation’s lowest municipal bond ratings; a Moody’s analyst told the Detroit News that the city’s budget was “very, very challenged.” Yet the very next year, Detroit voters elected as mayor an inexperienced 31-year-old state legislator, Kwame Kilpatrick, who gave no sign that he had a plan to deal with the city’s fiscal crisis. Kilpatrick would employ a series of transparent financial gimmicks to paper over Detroit’s budget woes, including borrowing millions for the city’s pension fund, just as municipal retirement debts were getting onerous. In 2005, the city’s auditor warned that if the gimmicks continued, “insolvency is certain.”

Despite the fiscal crisis and media reports that Kilpatrick was charging hundreds of thousands of dollars in personal expenses to the city, Detroit voters reelected him in November 2005. For three more years, the financial machinations went on, until Kilpatrick had to resign amid investigations into his improprieties in office. After prosecutors argued that he had turned city hall into “Kilpatrick Incorporated,” a jury convicted him earlier this year on fraud and racketeering charges.

Though Chicago is more economically robust than Detroit, its budget is also under severe stress, thanks to a pension system that’s in even worse shape than the Motor City’s. One of Chicago’s pension funds has just 25 percent of the assets needed to pay its retirement promises; another has just 31 percent. Fixing the system under current law would require an untenable doubling of property taxes, city officials estimate. That makes Chicago another likely candidate for a federal rescue.

Local budget watchdogs have warned about this looming catastrophe for years. Back in late 2000, for instance, the Civic Federation of Chicago reported that the city’s pension funding was so flawed that “the city may have a difficult time meeting the unfunded liabilities.” Meantime, city officials and unions negotiated richer and richer contracts, driving the cost of employing the typical Chicago government worker to about $95,000 per year, counting pay and benefits. As the city retirement system’s finances deteriorated, officials cooked up a series of short-term financial tricks to relieve fiscal stress, including 2010 legislation that let Chicago schools reduce by two-thirds the money they contributed to pensions. That helped push the schools’ pension fund close to collapse, noted a recent New York Times article. But city officials didn’t use this temporary respite to reform their budget. Last year, they settled a teachers’ strike with a new contract that fattened pay by a whopping 16 percent over four years.

Pension costs threaten Los Angeles, too. Last year, L.A.’s chief administrative officer, Miguel Santana, reported that the city—America’s second-largest—risked bankruptcy if it didn’t control exploding employee expenditures, including a projected near-doubling of pension contributions, to $1.2 billion annually, in 2015, up from $639 million in 2008. Santana’s report, following a similar warning from former mayor Richard Riordan in a 2010 Wall Street Journal op-ed, might have served as a call to reform for city voters, who had the chance to elect a new mayor this year. Instead, only 17 percent of eligible citizens showed up for the crucial first round of voting. The two candidates who emerged for a run-off, city council members Eric Garcetti and Wendy Greuel, were municipal union favorites. The eventual winner, Garcetti (endorsed by the teachers’ union), even assured workers during the campaign that no significant compensation givebacks were necessary. “We shouldn’t make the mistake in these moments of racing to the bottom” on compensation, Garcetti told the Los Angeles Times in March.

Politicians and unions have been emboldened in resisting reform because they expect that the federal government won’t let big cities or their major pension systems fail. Late last year, Detroit city council member JoAnn Watson invoked the memory of Mayor Coleman Young’s pilgrimage to visit Jimmy Carter after Carter won the presidency. Young “came home with some bacon,” Watson said, and she called on President Obama to deliver similar largesse. Cities are already set to benefit from one federal bailout: the Affordable Care Act, better known as Obama- care. Chicago and Detroit have announced that they will send retirees to seek health insurance on state insurance exchanges, which federal taxpayers will subsidize. Other cities with strained budgets will almost certainly follow suit.

Bailout advocates argue that some American cities have such massive retirement debts that they could never repay them without Washington’s help. Riordan, for instance, has proposed federal guarantees of state and local pension debts in return for reforms that would improve the accountability of retirement systems. But what these nearly insolvent governments really need are voters angry enough—and worried enough—to bring an end to the special interests’ tight grip on the public purse.

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