Detroit sets precedent for radical cuts in ‘inviolate’ CA pensions

June 17, 2013

By Chris Reed

Bankruptcy - exitIn the sci-fi satire “Robocop,” we were treated to a glimpse of a future Detroit in which mechanized police ran amok. As my colleague John Seiler noted the other day, in modern-day Detroit, we’re being treated to a glimpse of a future California in which promised-but-unaffordable retirement benefits for public employees aren’t paid. They’re scaled back in bankruptcy court or by “czars” named to oversee the restructuring of the finances of insolvent cities.

This is from a Bloomberg News story outlining Emergency Manager Kevyn Orr’s 128-page plan to deal with the city’s default on its debt:

Active and retired workers would see their pensions reduced under the plan, and the city wants to replace its retiree health-care plan with one relying on federal insurance exchanges under Obama’s Patient Protection and Affordable Care Act or Medicare with city supplements, according to the report.”

Post-retirement benefits to consume 65% of budget without changes

Here’s more from Bloomberg about why these benefits have to be Orr’s focus — because they’re about half Detroit’s unsecured debt, and even more than that if you count pension obligation bonds:

“According to Orr’s proposal, the $11.5 billion in unsecured claims include $5.7 billion in post-retirement benefits, $1.43 billion in pension-obligation certificates and $530 million in general-obligation bonds.”

The Detroit Free Press explains what that translates into:

“The emergency management team said legacy retirement costs are cutting deeply into city services.

“The report to creditors noted that total legacy expenditures are nearly 43% of total revenues in 2013, according to the preliminary forecast. That would grow to nearly 65% by 2017 without any action.”

A state law that California sure could use

As has much of the coverage of insolvent governments, the Bloomberg story notes the claim of public employee unions that pensions are inviolate contracts — although federal bankruptcy courts, thankfully, don’t always agree. But Orr has a tool in his work kit that makes him particularly cocky — one that is badly needed in California. The Free Press says a 2012 state law gives him authority to unilaterally reduce spending and services, and to impose new terms for employee contracts, both wages and benefits.

Why am I confident that Detroit-style radical cuts in benefits are coming to California?

Because, to paraphrase Instapundit, what can’t continue indefinitely doesn’t. There is no way that voters and thus politicians will tolerate a local government status quo in which more than one-third of the budget goes to pay for the benefits of retired employees.

Lots of cities are on track for just such spending in coming years, and the backlash will be huge. All the Maviglian whining and spin about evil hedge funds, the Koch brothers and pension envy can’t make this coming revolt go away.

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