Tag Archives: Detroit

Will ACA Bail Out Unfunded Municipal Retiree Health Benefits?

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Detroit and Chicago have announced plans to offload their unfunded retiree health plans onto the Affordable Care Act exchanges. The Detroit announcement predated the July 18th filing for bankruptcy protection. These cities believe they will save tens if not hundreds of millions in expenditures annually if they are successful in their intentions.

 

 

For the 61 largest cities in the nation, Pew Research has found that retiree health obligations under current contract or policies are only 6 percent funded.  In Detroit that number is close to zero.

 

While the Affordable Care Act requires employers with 50 or more employees to offer health insurance to employees or pay a fine (presumably municipalities are covered, but it does not matter, they almost all provide insurance anyway), the Act does not cover retirees. So cities-and perhaps states-might look at what Detroit is planning and decide to follow suit. Many private companies and some governments stopped paying for retiree health care years ago.

 

There are two levels of the issue.  Retirees and employees who have worked under contracts promising the health benefits in their retirement presumably cannot willy-nilly be deprived of those benefits by a unilateral cancelation by the employer. Folks already retired would have little incentive to make large concessions since they cannot lose their jobs if they refuse.  Eliminating future retiree health benefits for current employees would require contract renegotiation.  Therefore, for these groups, it would appear bankruptcy of the city might be the only way to have the promised benefits nullified.  Health benefits for retirees and current employees who have no protection of a contract might be offloaded with or without filing bankruptcy.

 

For new employees who will be on labor contracts, the city could negotiate to eliminate retiree health benefits. And for non-contract employees it could simply adopt a no retiree health benefit policy. There are local Pennsylvania examples.  In the City of Pittsburgh, police and fire personnel hired after 2005 do not get retiree health care the way employees working in those departments and employed prior to 2005 do.  The Port Authority’s largest union (its 2008 contract called for the union and the Authority to “jointly issue a statement with regard to their support for national health care”) has language in its 2012 contract stating that employees hired on or after July 1, 2012 would be eligible for three years of retiree medical coverage, as opposed to previous stipulations that allowed coverage until Medicare eligibility if the employee had 25 years of service or had reached age 55 and had ten years of service.

 

Government employee pension benefits are sacrosanct in many states to the point of being constitutionally protected.  That is certainly the case in Pennsylvania and Michigan.  Whether Federal bankruptcy judges will use Federal law to set aside state constitutions in the pension issue remains to be seen. At the same time, health benefits for retirees could be more easily dealt with in bankruptcy.  But, for cities looking to dump retiree health benefits for employees and retirees working under contracts containing such provisions, get ready for lawsuits and labor unrest. Bankruptcy or threats of massive layoffs will almost certainly be needed to get meaningful results.

While the offloading of retiree health care onto the exchanges might be appealing to many hard pressed cities and towns, it might be more complicated than they think. On the other hand, if they have a strong enough case to file bankruptcy, retiree health costs might be the trigger to file.

 

In the larger picture, if cities are able to offload their retiree health promises to the Affordable Care Act, then US taxpayers will get a big share of the tab.  Watching 58 year olds enjoy retirement from Detroit or Chicago city jobs and get Federally-subsidized health care until they reach 65 might not sit well with 60 year olds in the private sector who have no retiree health care until eligible for Medicare and have to keep working and keep paying taxes to subsidize the Detroit retiree’s health benefits. Further, if this strategy turns into a flood of unexpected exchange participants, what happens to the projected expenditures?  Undoubtedly, they will be off. And what if a bunch of private sector companies follow suit?

 

If a few large municipalities such as Detroit and Chicago are successful in reducing their expenses substantially by pushing retirees into the exchanges, there will undoubtedly be a flood of other municipalities around the country rushing to do the same. Moreover, there could be a number of school districts that could benefit from dumping retiree health benefits.  In short, taxpayers might find themselves on the hook for funding much more health care than Affordable Care Act drafters imagined. 

 

This is another unforeseen consequence of a health care law with seemingly unlimited ramifications and complications.

Could Pittsburgh Be Following Detroit to Bankruptcy?

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While Pittsburgh has some similarities with the problems in Detroit (albeit nowhere near the same magnitude) and there is cause for concern about Pittsburgh’s financial wellbeing, there is little chance that on its present course the City will face bankruptcy. That is not to say that it can be allowed to return to the spendthrift, reckless behavior that had the City headed toward financial collapse and brought it to the point of being placed under two state financial overseeing groups-the ICA board and the Act 47 financial coordinator team-a decade ago.

 

 

There was period in 2009 when the legacy cost issue reared its head and prompted renewed speculation of a possible bankruptcy. See our Policy Brief Vol.9 no. 51 for a full discussion of that period and an explanation of some of the technicalities involved in a Pennsylvania municipality seeking to file for bankruptcy.

 

Without question Pittsburgh has made significant progress under state oversight and under legislative edict to lower spending, reduce debt levels, cut employment and address the City’s massively underfunded pensions.  Still, there is no denying that fairly large problems remain and there must be no backsliding that would aggravate them. Based on the Allegheny Institute’s work in constructing a benchmark city to compare Pittsburgh’s financial performance indicators, it is clear that the City government continues to spend more per capita, taxes more per capita, and has more employees per 1,000 residents than a composite of similarly sized and situated cities from across the country.

 

Moreover, Pittsburgh’s debt per resident remains very high compared to the typical, well run city despite having dropped significantly from the 2004-05 level when it exceeded $2,000 per citizen.  Then too, even though the pension funding level has been raised above 50 percent, as required by the state to avoid having the state takeover management of the pension plans, it is still far below the 80 percent level where it needs to be and its rate of return calculation assumption for the investment portfolio is by all accounts too generous. By pledging parking tax revenues for decades to shore up the pensions, the City averted a takeover and a period of dangerously low funding of the pensions.  

 

Finally, it must be noted that Pittsburgh’s public schools are, by and large, a major obstacle to population growth in the City. This is especially true for the 30 to 50 age group, the age group having families and raising school age children.  The last census showed continued decline in that group while the college and the 20 to 25 age groups expanded. The desire to be attractive to young people has paid off but the City cannot thrive when parents in high percentages abandon the City because of poor schools.

 

In certain respects Pittsburgh appears to have some of the problems Detroit faces. However, Pittsburgh has a number of factors going for it that Detroit does not have.  First, the City of Pittsburgh has a much smaller population than Detroit and has far less deep seated and widespread social problems including markedly lower crime rates. Pittsburgh has a large, strong, and recession resistant employment base in medicine, post-secondary education, government and the financial sector.  Pittsburgh weathered the 2008-10 recession well because of its favorable industry structure and the fact that the absence of a construction boom in the years prior to the recession reduced the need for a major correction.

 

Pittsburgh is also very fortunate in having a disproportionately large charitable foundation community that supports education, welfare, and cultural activities in the City. And for a city its size it has an unsurpassed aggregation of top quality museums, performing arts, music, cultural amenities and major league sports.

 

The City’s small population compared to its home County and the metropolitan region means it derives enormous benefits from its hub status in terms of commuters, visitors, attendees at cultural and sports events.  An excellent symbiotic relationship exists between the City and the region.   

 

In short, with continued oversight from the ICA board and Act 47, and a commitment by the City’s government to avoid the fiscal and management mistakes of the past, the City will be able to stay far away from the need to file bankruptcy.  Quite unlike the situation in Detroit which was allowed by the state to descend into a hopeless morass.

 

Nonetheless, there are danger signs posted in the City that it cannot afford to ignore-and the oversight teams should not permit it to ignore. A growing, dynamic Pittsburgh will require a major overhaul of the k-12 education system.  The current failed system is depriving far too many young people of a decent chance at a good, productive and satisfying life.  And until that system is substantially reformed, parents of child rearing age and children will become increasingly hard to find in Pittsburgh. In the long term, that is probably the biggest negative in the outlook and cannot be left unaddressed much longer.

 

The other cautionary warning is that the Pittsburgh government must move away from the heavily statist mentality with regard to business and the economy that has for so long dominated its decision and policy making processes. And it must begin to reduce the number of employees per 1,000 residents and bring itself into alignment with other well managed and prospering cities in this key measure of management and financial efficiency.

Detroit’s Bankruptcy Could Hold Unforeseen Dangers

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The announcement of Detroit’s bankruptcy filing was not unexpected.  After all, the city has been running huge deficits for years, has built up almost $20 billion in unfunded pension liabilities and debt, has abysmally poor public services including inadequate policing, has been hemorrhaging population and has high crime rates.  In financial terms the city has been bankrupt for years. And it has benefitted from major federal assistance in the form of a bailout of GM that preserved jobs, pensions and health benefits for union employees.

 

 

Normally, when a deeply financially stressed private entity goes through bankruptcy it can be positive if it results in a restructuring that preserves the entity, saves jobs, etc. Of course in really bad cases, the only option could be liquidation and the end of the organization.  For large municipalities, liquidation is not an option, so any restructuring must be effective if bankruptcy is to accomplish meaningful financial improvements.

 

Indeed, if the bankruptcy judge makes good rulings, a municipality could be given a new lease on its financial life. To do that the rulings must firmly address the underlying causes of the problem. That means dealing with extravagant and excessively generous legacy labor costs. It means forcing the municipality to shed programs it cannot afford, to outsource where private vendors can perform the function cheaper. And the rulings must ensure that taxpayers and businesses are not burdened to the point they are driven to abandon the community. 

 

But it is also true that government bankruptcy presents potential outcomes that vary widely from the typical private sector bankruptcy.

 

Assuming the Federal courts proceed with the Detroit bankruptcy there will be some real pain dealt to creditors. If it proceeds is a necessary qualification at this point because a Michigan state appellate judge has ruled the bankruptcy is unconstitutional under Michigan’s constitution.  In all likelihood, Federal bankruptcy laws will supersede the state constitution and the Detroit bankruptcy will proceed as municipal bankruptcies have done in other states.  When it does, there will be major hits for bond holders and other creditors, unpaid vendors and so forth.

 

Beyond the effects on Detroit, some analysts have expressed concerns that the Detroit filing could be a harbinger of other municipal bankruptcies. Some have mentioned the possibility that municipal bond rates will rise as lenders demand higher yields in the face of greater risks. That will bear watching as the terms of a settlement unfold.

 

Besides the likelihood of more bankruptcy filings by municipalities across the country, there are two possible great dangers surrounding the Detroit bankruptcy and its resolution.  First, is the danger that massively unfunded pensions are not seriously addressed leaving the city heavily burdened going forward after the settlement. And if pension funding is not addressed, other creditors could be forced to take even harsher cuts in payouts than would otherwise have been the case.  Then too, if pensions are not addressed, there is a strong likelihood taxpayers will see tax hikes or citizens and businesses will see further reductions in service. This is an all too real possibility in light of the settlements in California that did not deal with pension problems.

 

The second big danger is that the federal government will step in with financial assistance.  Bear in mind that with the federal government’s huge deficits, $17 trillion in debt along with tens of trillions in unfunded liabilities, vast and growing numbers of people on public assistance and a precarious economy that could succumb to the effects of Obamacare or some international shock, the ability of the federal government to fund municipal governments is severely constrained.  But even worse than the Fed’s lack of financial wherewithal to undertake more spending is the damage that will result if the federal government decides to start aiding municipalities.

 

There are a large number of cities and towns across the country in serious financial straits. A few in California have already opted to declare bankruptcy.  And Pennsylvania has its share of cities under state financial oversight, including Philadelphia, Pittsburgh and Harrisburg. Once the precedent is set for the federal government to bail out bankrupt municipalities or those threatening to file bankruptcy papers, there will be a flood of aid seekers. And how can they be turned away?

 

The federal government’s ubiquitous reach into almost every nook and cranny of U.S. society would finally have the leverage it needs to effectively vacate the vestiges of federalism still remaining. If the government in Detroit can turn to Uncle Sam for the money they need to continue their profligate kowtowing to the unions, why would they care about what Lansing thinks?  If the federal government  provides funds, those funds will come with strings as to how the money is spent, what taxes can be levied and what rates to set, social services that must be provided, educational policies that must be adopted, environmental regulations that must be followed, ad nausea.  

 

Is this too pessimistic? A casual review of the ever expanding reach and role the federal government has arrogated to itself argues it is not unreasonable.  Take education for example. The constitution makes no provision for the Congress to pass laws or the president to issue directives concerning education. Yet we have a massive department doing just that. Health care?  The commerce clause says people cannot be forced to buy a product, but a wayward, contorted ruling by a Chief Justice keeps the takeover of U.S. health care in place. The federal government does not enforce immigration laws or protect the borders but when a state tries to protect its citizens, the Court denies the state any such right.

 

The long run effect of the federal government bailing out bankrupt cities such as Detroit and the flood that will inevitably follow is to put local governments completely in the hands of the public sector unions forever along with the elected officials who will be handpicked and elected by them. The very same public unions and their friendly elected officials who have given them all the expensive and now unaffordable compensation, and favorable work rules, etc., have been the major driving force behind the financial calamity many municipalities have become. But for those looking for an ever expanding federal government, this is an opportunity not to be missed.

 

Any effort by the federal government to prevent the consequences of Detroit’s bad behavior from falling on the city will simply ensure more and worse behavior in the future.  Experience should be a teacher here and Congress should never agree to allow municipal bankruptcy bailouts.

Philly Tax Problems

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Hard on the heels of a report that half of Detroit property owners are not paying property taxes comes the story out of Philadelphia that delinquencies in that city are depressing home values and costing the government hundreds of millions in lost revenue. A Philadelphia Inquirer investigation found that home values are being depressed by over 20 percent because of the failure of 15 percent of properties to pay real estate taxes. Overall, this has lowered the total assessed value by nearly $10 billion in the City.

What’s worse, 59 percent of the unpaid tax bills are accounted for by landlords, speculators and investors who do not live on site. In Detroit the motivation not to pay taxes is driven in part by the failure of the City to provide adequate, if any, services to property owners. Of course, Philadelphia is generally in somewhat better shape financially than Detroit but unchecked, the rising trend of unpaid taxes will lead to chaos as those who pay higher and higher taxes on declining property values join the ranks of those who refuse to pay taxes.

Philadelphia needs to get a tight rein on its spending. The school system which is funded in part by City taxes already has to borrow money to pay its bills-never a good sign. Philadelphia benefits from being able to tax commuters, something it alone in Pennsylvania is allowed to do. But that is a two edged sword in that it has undoubtedly driven many jobs out of the City.

Philadelphia has a ring of protection in the form of wealthy surrounding counties that help support its economy. However, profligacy and poor financial management and a desire to make suburbanites pay for its inabilities to manage its affairs prudently will inevitably lead to a severe crisis. Look at Detroit, Oakland and other cities for proof of what happens when lack of discipline and political correctness take over the government.

Pittsburgh, Detroit, and the Vacant Property Connection

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This past January Pittsburgh was visited by officials from the Flint, Michigan based Center for Land Reform (it was one of 15 cities chosen) about how to deal with blight and abandoned properties; a month later the Mayor created a Land Recycling Task Force that would have two years to write a plan for abandoned properties.

This is interesting in that the Wall Street Journal reported that Flint’s much larger neighbor Detroit-it is not known if it was one of the 15 cities selected by the Center-is already taking action. It is planning to demolish some 3,000 buildings by September of this year as a way to adjust to its shrinking population. The Michigan city has over 90k vacant houses and lots according to one non-profit that tracks data for Detroit.

With 912k people, Detroit has 98 vacant units per 1,000 people. Pittsburgh is very close with 93 (29k vacant units and 310k people); Philly has 68, Cleveland 115, and St. Louis 107. As a percentage of total housing units, Pittsburgh has close to 1 out of every 5 classified as vacant.

Due to the possible problems that arise from vacant housing Detroit plans to demolish some 3,000 units by the end of September. Pittsburgh knocked down 566 in 2008 (about a fifth of what Detroit plans to do) by both City and private parties and the Act 47 team recommended that the City look to the best practices "for managing vacant structures and absentee landlords".