PERSPECTIVE-The recent ruling by a federal bankruptcy judge to allow Detroit to file under Chapter 9 was an important lesson in economics.
For way too long, public union pension plans have been shielded from modifications by state constitutions. The Detroit bankruptcy exposed that protection as nothing more than a thin veneer.
Unions have hidden behind these unsustainable constitutional protections as if money would never be an object.
It would not matter if all the laws of God and man were on their side, if there are insufficient funds to cover the net cash outflow, benefit cuts and/or increased employee contribution will be inevitable.
Plan participants have been kept in the dark and lied to by their leaders and politicians. Economic reality trumps guarantees in any line of work or service. To assume otherwise is the kind of stuff that creates bubbles. Think of the millions of Americans who lost their homes because they thought housing prices were somehow immune to downturns.
Here in the City of Los Angeles, public pension boards and union leaders have blind faith in the funding levels of their plans. While they whistle in the dark, the city is forced to contribute a growing share of the general fund to cover retiree benefits, a trend that is even more serious than it appears given higher streams of revenue flowing into the municipal treasury.
A point will be reached when the city will either have to cut services to dangerously low levels (layoffs would be a certainty) or insist on higher contributions from employees.
The only other option would be bankruptcy, but it can be avoided if the unions allowed gradual increases to employee contributions, thereby assuring the sustainability of their plans.
(Paul Hatfield is a CPA and serves as Treasurer for the Neighborhood Council Valley Village. He blogs at Village to Village, contributes to CityWatch and can be reached at: [email protected]) –cw
CityWatch
Vol 11 Issue 99
Pub: Dec 10, 2013