Pensions, retiree health costs and municipal debt

By Cate Long
May 2, 2013

Bloomberg Link recently hosted a panel on the costs of healthcare for public retirees, pensions and public debt. Panel members included Richard Ravitch, who helped manage the New York City fiscal crisis in the 1970s when the bond market stopped lending to the city, and Ed Rendell, former governor of Pennsylvania. These men are two of muniland’s strongest war horses who have fought big governance battles. Bloomberg provided background for the discussion:

These so-called OPEB promises made by the 15 biggest cities alone total $115 billion, with an average burden of $2,300 for every man, woman and child, according to data compiled by Bloomberg. How will local governments manage to make good on their pledges without becoming insolvent? Will we see governments reduce benefits and raise their cost for current workers, as has been the case in several cities and states?

You can see the best of the panel in this replay from C-Span in minutes 15:40 through 26:60. It is truly the best discussion of this issue I have ever seen. OPEBs (other post-employment benefits) are liabilities of states and cities that must be paid in addition to unfunded pensions and municipal debt. Ravitch had some biting advice for Wall Street on pushing municipal debt that confiscates future revenues:

Ravitch and Rendell talked about the labyrinth that must be navigated to make legal changes in OPEB and pension benefits. Rendell said that statutory changes (benefits created through legislation) can be changed “in a month,” while benefits enshrined in state constitutions would take years to amend. Inevitably, these changes are challenged in court.

One of muniland’s more helpful reference pieces is the Pension Litigation Summary, created by the right-leaning Arnold Foundation. Here is the short version of why making changes to public employee benefits is difficult.

The most significant legal claim raised against pension reform legislation is that it violates the Contracts Clause of the U.S. Constitution or a state’s constitutional parallel (including additional provisions specifically protecting pension rights).

In both the U.S. and state constitutions, such a clause provides that the government may not pass laws that abrogate contractual responsibilities. The argument of pension reform opponents is that a pension promise to a state employee is essentially a contract, and that legislation that diminishes pension benefits alters the terms of the state’s contractual obligation to provide the agreed-upon remuneration to the employee.

And to make it even more complex, courts in different jurisdictions have arrived at different conclusions based on local variations in the law. From the Pension Litigation Summary again:

Courts have expressed a wide range of views on pension reform issues, at times arriving at diametrically opposite conclusions. For example, reductions of cost-of-living adjustments were upheld in Colorado, Minnesota, New Jersey, and South Dakota state courts, whereas the same adjustments were struck down in Arizona. Many other significant pension reforms, such as those in Rhode Island or the City of San Jose, California, are currently being litigated. To date, there is little to no definitive guidance or uniformity of interpretation on these matters, either at a state or federal level.

Much of muniland is trying to balance fairness to employees, retirees, taxpayers and bondholders. There are no easy answers. It’s important to hear the stories of those who have wrestled with these issues.

In the end, bankruptcy can possibly erase many liabilities for over-indebted cities. Though the debate continues about whether bankruptcy cuts off a public entity from borrowing again:

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I was a public employee for over 14 years in Illinios both as a city police office and a Deputy Sheriff. I developed a diabetes problem which ended up as a pancreatic transplant. My last job was as a Deputy in RI County, Illinois. The Sheriff at the time was mad at me personally, because I allowed one of his aponents to put a political sign in our yard. Well to sum this up, my doctors advised me that I should take a desk job because a blow to my abdomen could cause the loss of the transplant. Well I formally asked the Sheriff for such a job, and his reply was that I was disloyal to him and there are no desk jobs available, so I was subsequently terminated. I went to the FOP union, and I was told that since this was not a contractual situation there was nothing they would do for me. So screw the unions and politics that is based on ass kissing. PERIOD

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