Maybe other cities are destined for bankruptcy, just like Detroit. Or maybe not: Maybe Detroit is an outlier, and the situation in other cities can't compare, as columnist Paul Krugman argues on this page.
Time will tell. Meanwhile, here's a more constructive piece of real-world advice -- a recommendation for a national policy that could help other cities avoid Detroit's fate.
The recommendation is for Washington to create a federal entity that would insure the pension benefits of public-sector workers. And before you respond with the word "bailout," give the argument some thought.
As many readers know, private-sector workers have part (though not all) of their pensions insured by the Pension Benefit Guaranty Corp., a federal program that was set up as part of the Employee Retirement Income Security Act of 1974.
"ERISA reflects a reality of retirement: Pensions are supposed to be super-safe investments, and they are too central to their holders' retirement to simply allow them to be discharged in bankruptcy," writes Josh Barro of Business Insider.
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"But since federal insurance might encourage irresponsible behavior by pension sponsors, it comes with rules: Companies must make prompt payments to ensure pensions are adequately funded, and they must pay fees to cover the cost of PBGC payouts."
And as a result, "ERISA has made corporate pensions more secure but also more rare," Barro writes.
That's because ERISA's rules demand higher payments, more realistic growth targets and other expensive practices. The security comes at a price, in other words: the price of realistic accounting that better measures a pension's risks.
And as a result, "once they were forced to pay upfront and invest responsibly, many corporations chose not to offer pensions at all," Barro continues.
"The share of private employees covered by pension funds has fallen by half since 1980."
Basically, that's the outcome Barro is looking for when he suggests creating an ERISA-like program for public-sector pensions.
Right now, of course, the taxpayers are those pensions' backstop; and in many states, governments have responded by pumping benefits to generous and unsustainable levels.
"Today's Wild West-style system where states and localities make up their own rules is not serving anybody's interests reliably," Barro writes.
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"An ERISA-like system for the public sector, where pensions are insured and governments must fund adequately and account honestly, would result in pensions that are more transparent, more reliable and less generous."
It also would result in fewer defined-benefit pensions as governments recoil against the strictures the same way that corporations do. And as for what should replace the defined-benefit pensions that now are disappearing after playing such a vital role in retirement security, that's a question for society -- not just states, school districts and municipalities -- as a whole.
"The situation in Detroit is a tragedy, for the city's residents, its workers and its bondholders," Barro suggests.
"That's what bankruptcy is for: sorting out the mess when everything goes to hell. A new ERISA-like law wouldn't prevent cities like Detroit from falling into the fiscal abyss, but it would prevent them from borrowing from their retirees along the way and would ensure retirees don't end up destitute as a result." That's a reasonably good outcome in today's world.
Copyright 2013, Grand Forks Herald.
