Friday, July 19, 2013

Detroit Bankruptcy A Result of Political Pandering

Daniel Fisher, at Forbes, notes:

Cities like Detroit — and states like Illinois, California and Connecticut — got into fiscal trouble because their political leaders spent too much and promised too much to public-sector employees in the form of future pension benefits. That’s a fundamental problem with elective politics, of course: It’s easier for today’s politicians to make promises they can’t keep than deliver financial reality to their constituents. In that sense, pension underfunding is one of the main tools politicians use to get around state laws requiring balanced budgets.

“Bankruptcy doesn’t fix that problem,” Skeel said, but it might make politicians think twice about making pension promises they can’t keep, especially since many of them participate in the same plans, with higher projected payouts than typical employees. (One senior Texas legislator stood to earn 660% of his state salary in retirement, Skeel’s article notes.)

“One problem with unsustainable pensions is we really didn’t have both sides at the bargaining table,” since politicians were the beneficiaries of both pensions and the votes of government employees. “The bankruptcy option forces the parties, particularly the recipients of these pensions, to recognize they may not be sustainable in a reorganization.”

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