Detroit has company in the scramble to meet pension obligations

Thomas Donlan explains in his latest Barron’s editorial commentary that the bankrupt Motor City is not alone in facing the huge problem of unfunded pension liabilities for government workers.

In Illinois, which is the Detroit of the states, the paint that covers old problems received a new coat last week in a special session of the state legislature. It was a victory for the kind of bipartisanship that lays no blame and accepts no responsibility.

A sufficient number of Democrats agreed to turn their backs on public-employee unions, while a sufficient number of Republicans tacitly agreed that a temporary state income-tax increase will have to be made permanent. Both parties agreed to strengthen the near-insolvent pension plans that cover state workers, public school teachers outside of Chicago, state university employees, and many elected and appointed officials.

But the pension funds suffer from more weakness than the legislature intends to cure. The arithmetic simply doesn’t work on the most basic level. Illinois expects to make $374 billion in pension payments over the next 30 years (almost certainly a woeful underestimate). At the moment, pension assets are about $100 billion shy of what’s needed to fully fund that optimistic estimate.

The new bill promises to raise the age of retirement somewhat and reduce the beneficiaries’ cost-of-living increases. These are steps in the right direction, but neither provision will bring the state system near the norm in what’s left of the private pension system. Incredibly, the bill also takes a step in the wrong direction by reducing the workers’ contributions to their own retirement.

Another flight of fancy is the idea that the state will increase and accelerate its contributions to the pension trusts. To do that, it will need to put the entire legislature in a 12-step program, since deliberate underfunding is what sunk the plans in the first place.

Be clear that the legislature is not acting to help taxpayers. If the bipartisan majority succeeds in reducing the burden of pensions, the members intend to spend the money on education and social services. That’s where the votes are — votes they will need even more after alienating public-employee unions.