City of Detroit
On July 18, Detroit’s $18.5 billion bankruptcy became the largest U.S. bankruptcy ever. (OK, maybe not “ever”–but at least, “so far”.)
The Detroit Free Press (“Detroit: Snapshot of a City in Trouble”) described the bankruptcy as marred by “legal wrangling . . . that will involve more than 100,000 creditors, which include the Police and Fire Retirement System and the General Retirement System and its 20,000 retirees.”
Detroit’s emergency financial manager Kenneth Orr offered government retirees some temporary relief, promising:
“We have made a decision that for the balance of this year, the next six months, we’re not touching pension or health care. So all pensioners, all employees you should understand: It’s status quo for the next six months.”
Yay! The former Detroit government employees will continue to receive their pensions for the next six months!!!!
But, after that, no more promises.
How’d you like to be retired, dependent on your pension to support you for the rest of you life, and learn that your pension payments were only guaranteed “for the next six months”? How different is six guaranteed months of pensions from a doctor’s “guarantee” to a terminally-ill patient that he’s got six months to live? Would either “guarantee” be cause for celebration or alarm?
“Orr has not yet specified the cuts to pensions he will seek through the bankruptcy process. He has proposed freezing pensions and moving workers to a 401(k)-style plan to help alleviate the pension systems’ unfunded liabilities of $3.5 billion [almost 20% of the City’s total debt]. He also wants to move retirees to Medicare or health care exchanges being set up through the Affordable Care Act.”
Thus, part of Detroit’s bankruptcy plan is to dump city retirees’ health care costs on the feds.
Michigan Governor Rick Snyder said Detroit had reached “the end of the line”; that the city was “done in” by 60 years of “residential and business flight to the suburbs, loss of its manufacturing base, chronic overspending and mismanagement and corrupt leadership, all reaching a climax as the economic meltdown and the national housing crisis hit.”
In essence, the people of Detroit have seen their lives ruined by 60 years of big and bad government. That’s why Detroit—which, in A.D. 1950, was America’s 5th largest city with a population of 1.8 million—is today America’s 18th largest city with a population of 700,000. In the same time that America’s population more than doubled from 150 million to 310 million, a big, bad, corrupt and greedy government helped drive over 1 million productive people (55%) out of Detroit.
• In “Virtually Unreported: Detroit’s Bankruptcy Came With Sky-High Tax Rates, Not ‘Small Government,’” Newsbusters agreed.
“[Although] MSNBC’s Melissa Harris Perry claimed that Detroit’s bankruptcy is a result of ‘when government is small enough to drown in your bathtub,’ . . . The truth is that Detroit has had quite a large government, . . . frightening rates of violent and nonviolent crime, incredibly awful schools, and a race-based culture that the press once praised. What is far less appreciated is what Detroit did to chase citizens and businesses out of the city in the form of sky-high taxes. In 2012, Detroit’s income tax was the highest in Michigan by far . . . . The following graph illustrates how Detroit’s property tax rates compare to the average of the 50 largest other cities in the U.S.:”
The chart suggests that, generally speaking, Detroit’s recent tax rates have been two or three times higher than the national average.
Under the leftist political and financial model of “big government,” people and businesses are expected to accept all tax increases gracefully, just follow orders, pay them, and go on with life and business as usual. But, the reality is that the people don’t accept high taxes but instead try to leave the taxing jurisdiction or simply refuse to pay those taxes.
The city government’s incompetence, corruption and mindless greed chased Detroit’s most productive private-sector members (on which the government predates or at least depends) out of the city.
Result? Detroit caved under the weight of big government—including the weight of pensions for government retirees who used to gloat over how “sweet” it was to work for the government.
Now, government retirees who once expected a lifetime of generous pensions have just six months of pension security. After that, they might receive as little as ten cents for every pension dollar due.
I guarantee that Detroit’s government pensioners won’t be gloating this time next year.
City of Chicago
According to the Chicago Sun-Times (“City of Chicago’s cash cushion plummets, debt triples, arrests drop, water use rises”), Chicago isn’t as bad off as Detroit is, but it’s not be so far behind, either.
“Last week, Moody’s Investors ordered an unprecedented triple-drop in the city’s bond rating, citing Chicago’s ‘very large and growing’ pension liabilities, ‘significant’ debt service payments, ‘unrelenting public safety demands’ and historic reluctance to raise local taxes . . . .
“Mayor Rahm Emanuel closed the books on 2012 with $33.4 million in unallocated cash on hand—down from $167 million the year before—while adding to the mountain of debt piled on Chicago taxpayers . . . . Experts recommend a cash cushion of at least $200 million for a budget the size of Chicago’s, according to the Civic Federation.
“Budget Director Alex Holt blamed the $133.6 million drop on ‘honest’ budgeting . . . .”
Omigosh! So it’s come to that, has it? Chicago’s city government is so nearly insolvent that they’ve finally been forced to resort of “honest budgeting”?!! Richard Daley and Al Capone must be rolling in their graves.
“Let’s be straightforward about what we’ve got to spend . . . . This is about matching revenues with expenses. You don’t want to over-tax people.”
Heaven forfend! Government never wants to overtax today’s voters ‘cuz that might make the voters mad enough to throw some of the crooks out of public office. However, government will go merrily borrow so much money as to leave an endless, unpayable debts for today’s children. But borrowing isn’t the same as overtaxing our children because . . . um . . . uh . . . . well actually . . . when you stop to think about it . . . leaving all those debts to future generations is overtaxing them, isn’t it?
“The new round of borrowing brings Chicago’s total long-term debt to nearly $29 billion. That’s $10,780 for every one of the city’s nearly 2.69 million residents. . . . Last year, now-retiring City Comptroller Amer Ahmad argued that the city’s debt load was not ‘troubling’ because, ‘We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations.’”
In other words, a year ago, the city government’s attitude was Why sweat the bills so long as the credit card still works? Chicago (like Detroit and the federal gov-co) expected that it could simply borrow, borrow, borrow and spend, spend, spend its way back to prosperity and economic stability.
However, today, (when City Comptroller Ahmad is going to “retire”—perhaps like a rat leaving a sinking ship) Chicago’s “fiscal position” is clearly not “getting better”. In fact, since Moody’s imposed a “triple-drop in Chicago’s bond [credit] rating,” Chicago’s access to easy credit is bye-bye.
Now what? A politician without access to credit is merely a windbag. A government without access to easy credit will be despised.
A year from now, Chicago’s “fiscal position” should be worse. At some point in the foreseeable future, the Chicago’s “fiscal position” may collapse just like Detroit’s.
It’s important to understand that it’s not “Chicago” that’s going broke—it’s the government of Chicago that’s going broke. The public confuses the city government’s debt with the people’s debt. Government, of course, wants that confusion. Government wants people to believe that its debts are their debts.
But as the people of Chicago (like those of Detroit) begin to sense that confusion, some will resist paying the city’s debts and thereby going into personal poverty and bankruptcy. Others, forced into a declining standard of living by government mismanagement will simply be unable to keep paying more taxes to support bigger and bigger government.
The result is that Chicago’s government is increasingly unable to raise taxes to pay the governments existing debt or to pay for additional debt. If government raises taxes, it’ll antagonize the city’s voters. More antagonism will lead to more tax resistance.
As government’s ability to raise taxes or borrow falls, government will be caught between the rock and the hard place. The rock is the fact that government doesn’t produce anything and therefore can’t work itself out of debt; it must rely on its residents to somehow pay its debts. The hard place is the fact that the most prosperous residents have fled, the remaining residents are too impoverished to pay government’s debts. Therefore, government can’t raise taxes or borrow enough more money to support its extravagant promises.
Result? Promises must be broken. And where will those promises be cut first? Government pensions.
If government cuts the costs of services currently provided to the people, the people might riot.
If government cuts the wages paid to current government employees, those employees may strike.
But if government cuts pensions paid to former government employees, who will strike? Who will riot? Many city retirees don’t even live in Chicago anymore; they’re down in Florida or perhaps even Costa Rica and they can’t get to Chicago for a mass protest. Many of the former government workers are too elderly to riot or protest.
And who, other than former government employees will have any sympathy for retirees who lose their pensions?
The private sector won’t care because, if they do, their concern will only cause them to pay higher taxes to support the retirees. (In fact, many private-sector people would take some secret pleasure in knowing that the former government workers—who enjoyed fat pensions and early retirements—have to take it in the neck.)
Current government employees won’t stand up for former government workers because, if the former workers don’t take pension cuts, current government workers will have to take a pay cut. Can’t have that.
Thus, there’ll be little public sympathy for former government employees who suffer pension cuts and small probability of significant public protests.
Therefore, when it comes to cutting government costs, cutting government pensions is simply the best and most logical fiscal and political choice.
This isn’t news. This reasoning is exactly why the City of Chicago has failed (actually, refused) to adequately fund city employee pension funds for years.
This refusal/inability to fund city employee pension plans is why Moody’s recent report noted that Chicago’s “total fund balance at the close of 2012 was $231.3 million and that Chicago has just $625 million in ‘leased asset reserves.’ Had the city fully funded its $1.5 billion ‘actuarially required contribution’ to its four under-funded city employee pension funds in 2012 alone, ‘these two reserves would have been entirely depleted.’”
In other words, if Chicago had fully funded city pensions for just one year, the city government might’ve been bankrupt.
Well, what can’t be paid won’t be paid. The “clouty” wheels get the grease—and former city employees don’t have much clout (except with Bill Clinton who “feels their pain”).
The logic is inescapable. The easiest and most politically-acceptable way to cut Detroit and Chicago government costs is to cut former government employees’ pensions.
State of Illinois
The Associated Press (“Comptroller says she can’t pay Illinois lawmakers”) reports that,
“Illinois Governor Pat Quinn cut $13.8 million for legislators’ paychecks from a budget bill earlier this month, saying it wouldn’t be restored until lawmakers addressed the state’s $97 billion pension shortfall. He also suspended his own pay.”
Think about that.
Illinois pension problems are so severe, that Governor Quinn has suspended the pay for state legislators—and even for himself.
I’m reminded of a scene in the A.D. 1974 Mel Brooks comedy Blazing Saddles where Cleavon Little (a black man) is surrounded by an angry mob of whites, pulls his six-shooter, points it at his own head and hollers, “One more step—and the nigger gets it!” The whites backed off.
Today’s “pension follies” are becoming similarly absurd. If state legislators don’t “do something,” the Governor won’t pay himself. (Thus, “One more step—and the Governor gets it.”)
But what does Governor Quinn expect the state legislators to do? They can’t raise taxes. They can’t cut state services. They can’t borrow more money. They’re not the Federal Reserve. They can’t print money out of thin air. Therefore, they’re screwed.
“Illinois Comptroller Judy Baar Topinka said she has no choice but to withhold lawmakers’ paychecks, citing a precedent-setting court case that bars her from paying state employees without a budget appropriation or court order.
“She said, a ‘serious precedent is being created,’ that was, ‘no way to run government. Threats, blackmail and inertia may be good theater, but it makes us look ridiculous . . . . It’s time for leaders to lead.’”
She’s right about the “ridiculous”. But even Comptroller Topinka seems ridiculous when she says “It’s time for the leaders to lead.”
Really? Lead where? The “leaders” in the legislature can’t raise taxes, cut services or borrow more money. So where can they lead?
I’ll tell you where they’ll lead—or at least be forced to go: back to honesty. I know that’s an uncharted and terrifying territory seldom visited by politicians—but they’ll soon have no choice but to face the truth. Politicians have made idiotic promises (pension plans) that can’t be kept. Government employees have accepted idiotic promises (pension plans) that can’t be kept. The day has arrived when the “can’t be kept” part can’t be avoided.
Guess what, kids? Contrary to daddy’s former promises, you won’t be getting a pony for Christmas.
“Illinois’ unfunded pension liability is the worst in the nation because lawmakers either skipped or shorted payments to the state’s five retirement systems for decades. Inaction on solving the pension problem has led to repeated credit rating downgrades . . . .”
Note that the pension promises have been ignored for decades. That means state legislators haven’t recently decided to screw over state retirees. The policy of screwing state retiree pension plans has been ongoing for decades.
What chance is there that a policy established for decades will be suddenly reversed? Not much. Government retirees are the designated sacrificial lambs.
More, the Illinois pension problem may become very interesting because, if it’s true that:
1) Illinois has the worst pension system in the nation;
2) The people of lllinois want their legislators to “do something”;
3) The legislators won’t be paid until they “do something”;
4) We will soon see if there’s anything that can be “done” to remedy the situation—or if the pension plan promises are simply irredeemable and worthless.
If Illinois legislators are forced to admit that there’s nothing they can do, the entire Illinois pension system may collapse. Those who’ve trusted their wealth to the Illinois pension plans will lose their assets. The national economy might be adversely affected.
More, we can wonder what effect an admitted collapse of the Illinois pension system might have on pension systems across the country. How many other American pensioners will see evidence that “What can’t be paid, won’t be paid,” panic, and try to escape from whatever pension plan they’re in with however much money that they can grab?
I’ll bet that Illinois Governor Pat Quinn will soon back down from his vow to withhold legislator pay until the legislators “do something”.
I’ll bet that if Governor Quinn doesn’t back down, either State judge will order him to back down, or the federal government will somehow shore up the Illinois pension plans.
But I’m also going to bet that no matter what happens, it’ll soon be common knowledge that the Illinois state pension system is about as bankrupt as the City of Detroit and as insolvent as the City of Chicago. Once that happens, people in other States will begin to realize how fragile their pension systems may be.
If so, it’s possible that the Illinois (and Chicago and Detroit) pension debacle might precipitate a “pension panic” that spreads to other parts of the USA.
The wheels are beginning to come off the government pension systems.
But even if the Detroit/Chicago/Illinois pension debacles aren’t contagious, it’s only a question of time before another pension debacle in another state or major city precipitates a “pension panic”.