April 17, 2014

Rescuing Detroit From Its Own Folly

A possible $100 million bailout of the Motor City could set a dangerous precedent.

“It is not the business of government … to preserve the fool from the consequences of his own folly,” said Henry George, a 19th century American writer and politician. Unfortunately, that advice is rarely heeded today.

The Detroit Free Press reports that the federal government is considering providing $100 million to ease the pain of Detroit’s ongoing city pension reforms. The money technically would not be provided directly to the city’s pension program, instead going to Michigan’s state fund for “blight remediation,” which would allow the state to provide the same amount to Detroit. But the practical result is the same – the U.S. taxpayer getting stuck with part of the bill for Detroit’s decades of foolish, unsupportable pension promises. In our current environment where billions and even trillions are common reference points, $100 million may seem like small potatoes. But the precedent set by such a bailout would be far-reaching and potentially devastating to the nation’s already shaky financial health.

Why? Because Detroit is just one example of a major city with unsupportable public-employee pension obligations – in fact it’s only number 10 on the list of the worst offenders. The top 10, in order of pension debt per capita: Chicago, New York, Boston, Philadelphia, Columbus, Los Angeles, San Jose, San Diego, Denver and Detroit. Considering that public employees are among the most loyal and vocal of Democrat constituencies, the risk of political favoritism is obvious.

As if that’s not alarming enough, consider that looming larger behind these cities are states with the same pension debt problems, led by California’s estimated $170 billion sea of red ink (and that is the LA Times’ “best case” estimate – the worst case is more than $500 billion). Note, that is not California’s total debt; just its un-funded pension obligations. Barack Obama’s home state of Illinois is next with more than $100 billion in un-funded pension debt. If the federal government begins handing out money to save major cities from their pension debts, you can bet the states will come begging soon after. And the worst pension shortfalls at the state level are concentrated, unsurprisingly, in blue states like California. As Mark Alexander wrote last year, it’s no coincidence that Detroit is in the shape it’s in.

Regardless of the politics of the cities or states in question, there is the larger question of why the ordinary taxpayer should have to bail out a public employee pension system. Why does a farmer in Idaho or a construction worker in Oklahoma have to fork over money to support a retired city worker in Detroit or Los Angeles? The great majority of Americans are private sector workers whose taxes have always supported the salaries of public employees in their state. Are they now to be forced to pay for the foolish retirement plans promised to state and local public employees?

Yet there is still some room for optimism in the public pension debt problem. In December the Illinois legislature passed a bill that would implement major reforms to the pension system, and did so in the face of enormous resistance from public-employee unions. Other states have also been forced into making difficult pension choices in recent years. But the temptation of seeking federal money to pay for local or state pension debt will always exist so long as the federal government is willing to provide it. Which makes Detroit an important test case in whether the government – meaning the taxpayers – have to rescue the fools from the consequences of their folly.

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