Detroit bites the dust and the one question that no one will bring up, is; “Where is the money coming from to pay the city’s promised retirement benefits?” 10 cents on the dollar won't cut it. This bankruptcy is the biggest so far; $20 billion give or take 4 billion. About 12 billion is for retirement benefits. The city looks like a bombed out war zone. The real estate tax base is gone. Many other cities nationwide are in similar financial peril and on the verge of insolvency.
Here is what happened in Prichard Alabama in 2009 with their bankruptcy. The retirement checks stopped when the money ran out. Click on this LINK for the full story. Note that the court demanded that they start contributing 16 million to the retirement fund and they had no money to do so. Where the judge thought they would pull the money from, is beyond me.
Several issues are at play here. How do you sue a city that is broke and collect real money rather than a judgment? The state is not obligated to pay city debts. And you can’t sue the state anyway. What happens to the people who were collecting retirement and health care benefits? The Stockton bankruptcy from a year ago is still in limbo this year. California law, states that the city’s retirement funds are exempt from the Federal bankruptcy court proceedings. Notice that CalPERS has a vested interest in this ruling, they’re holding a sizable portion of city's retirement funds. The Federal bankruptcy court wants all of the city's assets on the table. Can State laws rewrite the Federal Bankruptcy Code? Federal law should override State law. It could be a moot point by the time it gets out of the courts; we’ll all be dead by then.
The Pension Benefits Guaranty Corporation (PBGC) was created by Congress as a backup retiree plan for failed private pension plans. Unfortunately for the city of Detroit, the key word is "private," "public" won't qualify. This little unknown government entity is already on the hook for 26 billion dollars more than they have in collected premiums. The listing below displays the present top 10 of failed pension plans now on government life support.
After the American Airlines bankruptcy goes final, there could be another 10 billion added to the PBGC's unfunded obligations. And of course General Motors pension liabilities could add another 25 billion to that total. Employee retirement benefits were really what GM’s initial bankruptcy was all about—and that 25 billion hasn’t gone anywhere, it’s still there (sshh--that’s a secret).
Basically what we are coming down to is hundreds of retirement funds are underfunded by large amounts. Many of these plans were doomed to failure. Cities choose to grant increased retirement benefits instead of wage increases. It looked great on the books and didn’t show up in the city budget like a wage increase would. And this is coming back to haunt them. The laws are in place to protect the retiree. “By God, they have to give me my pension, I earned it!” The only trouble is, passing a law guaranteeing benefits, in no way creates the funds for the check to be written. No money in the city coffers makes any court award meaningless.
Surfing Google for answers, I ran across a plethora of government abstracts dealing with the PBGC. I don’t pretend to have understood half the government double talk, but it is obvious from all of the interaction, the Congress and the Department of Labor are well aware of what is going on. This is a high traffic issue with little mention in the press.
In the future, it could be very upsetting to be a retired GM employee and find out that they were now covered by PBGC. They’d think; “Well I still have my Social Security to add to my GM retirement” ---- In all likelihood, the PBGC might deduct their Social Security benefits from their proposed GM pension benefits. Government programs promise you more, by giving you less.
The interesting thing to note about the future failure of government retirement plans, there is no news coverage. They haven’t happened, so there is nothing to report. Where will the money come from, to pay these debts off? Will the Pension Benefit Guarantee Fund be expanded to include government retirees? The Fanny and Freddie bailout fiasco comes to mind. I guess what’s good for GM, is good for America. I seem to have heard that before -- somewhere.
Let the bankruptcy festival begin. Government employees were promised “Surf and Turf,” and it looks like they’ll be lucky to settle for chipped beef and gravy on toast-- better known as “SOS” in military circles. I was dumbfounded to learn that a fireman I indirectly know, is retiring at age 50 on 100K a year. Reality is right around the corner here –somewhere— The joke when I went to high school was, If you can't find a real job you can always work for the government. That has changed quite a bit in the last 40 years. We'll have to wait and see how this plays out in the courts, the winner could end up being the biggest loser.