Pension Issues Loom Large Over Tuesday’s Elections
This Tuesday, citizens of many big cities across the country will hit the polls to vote in mayoral and City Council elections. From Detroit, to New York City, to Pittsburgh, pension issues will affect what box voters check on their ballots.
In Detroit, this Election Day
stands on a level of importance not seen before. After decades of deterioration, the city finally succumbed to bankruptcy in July with over $18 billion in debt. As James Hohman and Jack McHugh of the Mackinac Center wrote in August, “The common woe-is-us explanations for Detroit's pension failures—falling payrolls and tough markets—are just excuses.” For years, officials continuously made grossly unrealistic assumptions about Detroit’s economic growth prospects. When the initial assumptions failed to pan out, adjustments were never made.
The only changes made to the pension system increased debt. For instance, from 1985 to 2008, bureaucrats gave out pension bonuses that would be worth almost $2 billion dollars today, or 11 percent of Detroit’s current debt. The final straw was Mayor Kwame Kilpatrick’s pension restructuring that now represents 20 percent of the city’s debt.
On their ballots, Detroiters face a choice between Wayne County Sheriff Benny Napoleon and Mike Duggan, former CEO of the city’s largest employer and health system. A Detroit Free Press/EPIC-MRA poll released last week gave Duggan 50 percent of the vote, with Napoleon receiving just 25 percent and the rest undecided. Both candidates have pledged to fight any efforts to cut city pensions, though Duggan has said he is committed to altering the city’s $6 billion dollars in unfunded retiree health obligations.
Meanwhile, in New York City, Bill de Blasio is 40 points ahead of Joe Lhota in the polls. The winner will need to take care of the city’s mounting debt issue, which snowballed under Mayor Michael Bloomberg’s 12-year tenure. New York City’s total debt doubled under the Bloomberg administration, driven by pension expenses that increased by over 500 percent since he took office.
Ninety percent of New York City’s municipal workers contribute nothing to their health coverage. Even David Callahan, co-founder of the liberal organization Demos, advocates common-sense solutions such as asking these employees to pay into their health coverage in the same way that do most non-unionized workers: “Adopting a premium-sharing approach more in line with other employers could save over $2 billion a year by 2016,” Callahan wrote in a September blog post. This level of savings would cover the city’s $2 billion expected deficit in fiscal year 2015. The candidates would benefit from adopting this policy; a Zogby poll earlier this year found that 60 percent of New Yorkers believe “city workers should contribute to their health premiums at a typical private-sector rate.”
Although likely to be rejected by New Yorkers, Mr. Lhota appears to have the most experience with pension issues. While he was chairman of the Metropolitan Transportation Authority, he raised fares to cover pensions, despite the $700 million in annual savings found under his leadership. On the other hand, Mr. de Blasio’s pension plan suggests he only wants to change the way pension funds are invested. He hopes to spend public pension money within the city in a manner reminiscent of the 2009 federal stimulus, which was full of political favors.
In Pittsburgh, seven-year Mayor Luke Ravenstahl chose not to run for re-election, leaving current City Council member Bill Peduto the likely candidate to replace him.
In a unique situation, the City of Pittsburgh must have its budgets approved by the state-appointed Pittsburgh Intergovernmental Cooperation Authority (ICA). On October 25th, the ICA amended and approved the city’s newest budget. The city holds lofty assumptions about its pension investments, using an eight percent return assumption to calculate its annual contributions. In an unprecedented move, the ICA amended the budget to make it clear the city must make up the difference if the eight percent return fails to materialize.
According to the Pittsburgh Post-Gazette, the newest budget increases the scope of the mayor’s office, as proposed by Councilman Peduto. In spite of this clear money-grab for his incoming administration, Peduto deserves tepid praise for his public pension plan. While his plan is an improvement on the current state of affairs, it stops short of the necessary steps to right Pittsburgh’s fiscal ship long-term. Thankfully, Peduto’s plan is detailed and easy to find on his campaign website. More importantly, he acknowledges that the eight percent annual return assumption is unrealistic and should fall more in line with the ten-year average of six percent. The Peduto campaign is the only one mentioned that gives the issue of public pensions the gravitas it deserves. In the meantime, Mayor Ravenstahl, Peduto, and the rest of the Pittsburgh City Council still have time to bolster the city’s pension promises for the long haul before the final budget approval deadline of December 31st.
All three of these cities, and many more, can ease pension woes by switching into defined-contribution systems. Defined-contribution plans keep costs low to taxpayers while giving workers a share of income for retirement. Such plans give employees the freedom to change jobs without losing benefits. They also serve as a deterrent against pension spiking, in which public employees exploit the defined-benefit system and artificially inflate their salary in order to receive unearned, excessive retirement payments.
As of 2012, it is estimated the total amount of public pension unfunded liabilities in the United States is at least $730 billion. If voters nation-wide fail to choose leaders who are open to switching to defined-contribution pension plans, that number will grow and continue hampering the path to economic prosperity.