Slowly but surely, reality is taking hold in the debate over the massive liabilities state and local governments have accumulated for their workers’ pensions and other benefits. For years, governments routinely inflated estimated pension-fund investment returns to make them seem better-funded than they are, but two years ago the Governmental Accounting Standards Board, an authoritative nonprofit organization, issued guidance intended to curb that tendency.
Last week the board promulgated additional rules that will encourage governments to account more transparently for the future costs of health care and other non-pension benefits. Moody’s Investors Service has estimated these unfunded liabilities at $530 billion. The GASB proposal would allow states and cities to finance these obligations on a pay-as-you-go basis, as they do at present; but at least taxpayers and potential bond investors would have a clearer sense of the risks. Clear information is necessary for sustainable funding.
Certainly the bankrupt city of Detroit could have benefited from more transparency as it racked up what turned out to be an unbearable pension and health-care burden for city employees. Now that it’s in crisis, the Motor City and its unions are considering a realistic pension plan for employees that could be a model for other municipal governments. Under the proposal, city workers would be entitled to a fixed amount in retirement. But they, not taxpayers, would be responsible for additional contributions in years when the pension fund fails to meet its investment targets. In short, it’s a hybrid of a traditional defined benefit plan and a 401(k)-style defined contribution plan; it provides workers the security of a fixed retirement income and protects taxpayers against pension-fund mismanagement.
To be sure, the Detroit proposal runs counter to the conventional policy and legal wisdom about pensions, which holds that public workers may never be required to accept a downward adjustment in their vested rights, no matter the financial straits of the city or state that employs them. (Private-sector workers enjoy no such presumption.) But this is precisely why the Detroit idea, yet another positive result of emergency manager Kevyn Orr’s stewardship, is welcome.
Distressed cities need the freedom to rewrite pensions when all other options have been exhausted. And the knowledge that they have that freedom could temper the quest for such unduly expensive benefits in the first place. Many cities have come to financial grief trying simultaneously to provide low taxes, robust public services and rich employee benefits that won’t come due until some other politicians are in charge. Political expediency says you can have it all; reality counsels otherwise.
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Editor’s note: This editorial originally appeared in the Washington Post.