Feds Should Not Bail Out Cities and States

| by Heritage Foundation

By Conn Carroll

Hamtramck, Michigan, is running out of money. City Manager William Cooper tells The New York Times: “We can make it until March 1—maybe.” And Hamtramck is not alone. According to the Times, 15 municipalities have pursued bankruptcy in the past two years. And if the economy does not improve revenues, many other local governments will be in the same boat.

Many of these cities, like Hamtramck, have already cut spending on parks, senior centers, and road maintenance. But there is one area they can’t cut: salaries, benefits, and pensions of government workers. According to the Times, 60 percent of Hamtramck’s general fund goes to paying 75 current police officers and firefighters and about 240 worker and spouse pensions. “They kind of have the Cadillac plan,” Cooper tells the Times, “and we’d kind of like the Chevy.”

Reforming how police and fire workers are paid is an uphill climb politically, but polling shows that once voters are educated, they are open to change. A recent poll by the Florida League of Cities on Police and Fire Benefits found that, initially, most respondents did believe police and fire benefits were “about right” or “too low.” But when told that police officers and firefighters can retire after 20 years of service and receive 80 percent of their salaries for the rest of their lives, 66 percent of respondents strongly opposed this policy. And when asked if they knew that the retirement pay for an average police officer was over $70,000 per year, 71 percent said that was too high.

The cumulative result of these pensions and benefit promises is staggering. A recent study by Robert Novy-Marx of the University of Rochester and Joshua Rauh of Northwestern University found that major pension plans for city workers have a combined estimated under-funding of $574 billion. Heritage Foundation scholar David John details: “For instance, Chicago has only about $22 billion in pension assets to pay for $66 billion in pension promises to its city workers, while New York City has $93 billion available to pay $215 billion in city pension promises, and Boston has only $3.5 billion available to pay $11 billion in promises. That means that every household in Chicago has a liability of about $42,000 just to pay pensions to city workers, while each household in New York City owes $39,000, and each in Boston owes about $31,000.”

The problem is even worse at the state level. An earlier Novy-Marx and Rauh study of the 116 major pension plans sponsored by the 50 states found these plans had assets of about $1.8 trillion to pay pension promises of between $3.6 trillion and $5.2 trillion. This leaves a gap of between $1.8 trillion and $3.4 trillion. Unsustainable public employee compensation is a major reason why large states like California, Illinois, and New York are teetering on the brink of insolvency.

Cities like Hamtramck may eventually be able to escape their government union contracts through bankruptcy. But that road is very difficult. About half the states have laws that allow for municipal bankruptcy filings. But many set limits, including Michigan, which appears ready to force Hamtramck to borrow money from an emergency loan board before it can file for bankruptcy. But what happens when the states run out of money bailing out their local governments? States currently do not have the ability to file for bankruptcy. So what will they do?

California already came to Washington asking for an $8 billion bailout last year. The spendthrift 111th Congress said no. At a bare minimum the 112th Congress should hold the line and refuse to bailout any state government. Instead, Congress should consider a way for states to file for bankruptcy or its fiscal equivalent. While such a law would raise some serious federalism issues, as long as states are allowed to enter into bankruptcy voluntary, it could be constitutionally acceptable. But David John warns:

“Such a process should not be part of a deal under which states can also receive a federal bailout. State and local governments made the mess of their finances, and they should have to clean them up. Congress should provide a mechanism to make the process more direct, giving the states the flexibility to address their fiscal problems consistent with federalism and the principles of limited constitutional government.”