2013-07-24

Government Pensions Vanish

Only one month ago I wrote in 90% Haircuts For Detroit; Municipal and State Workers Are Rich Minority
Pension benefits are vaporized! Teachers, firefighters, police, and municipal workers take heed: you pensions will be nuked. You are the rich minority when it comes to municipal finances.

Retired government workers have zero political power. Current residents and voters have political power. When it comes to a decision between bondholders, pensioners and current residents, the politicians are going to side with residents. It didn't take long for Detroit to do exactly as I expected.

Detroit not a one-off: Whitney
Detroit finally filed for bankruptcy on July 18 after years of a slow decline in its population and its once famous auto manufacturing industry. But the legal battle hasn't finished yet. The outcome could inflict more pain on Detroit's already-beleaguered residents, businesses, creditors, investors and city workers, whose pension plans may now be invalidated.

Three lawsuits were filed by city workers, retirees and pension funds earlier this month on worries that an anticipated bankruptcy petition by Detroit would lead to cuts in retirement benefits, with a federal judge on Wednesday expected to rule on whether U.S. law trumps Michigan's constitutional protections.

These promised pensions and other benefits for public employees, which have strong legal protection, need to be questioned, according to Whitney.

"The bill for promises past is now so large for some cities and towns that it is crowding out money for the most basic of services - in the case of Detroit, it could not even afford to run its traffic lights," she said.

"Will [lawmakers] side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk."


In the case of Detroit, elected officials, for the first time in a very long time, are siding with residents, Whitney said. This is a new precedent that boils down to the straightforward reality of the survival and sustainability of a town or city, she said.

"After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough," she said in theFinancial Times.
There will be no sympathy for the unions or government workers because they helped cause the bankruptcy by fighting for ever more lavish benefits. They assumed they were getting guaranteed money due to legal protections, but they abused those protections and now they will reap what they have sown. And as goes Detroit, so goes the nation. If Detroit can say tough luck to retirees on underfunded pensions, then every city in America, and later Illinois and California to state workers, will do the same.

Update: Detroit wins a legal victory that allows bankruptcy to move forward. It is a loss for the public sector unions who sought to block a bankruptcy filing. Detroit Chapter 9 Bankruptcy Objections Denied
The current plan (for now rejected by creditors) means a 90% loss for muni-worker retirees, 81% loss for unsecured creditors, and a 75% loss for secured creditors.
As I said, pensions will vanish. The public sector is about to get its comeuppance after 30 years of milking the public, a public that itself lost its pensions 30 years ago when the economy restructured. One can say that restructuring was the result of poor government policy, but in terms of reality, it doesn't matter why it happened. What matters is that the private economy got lean and mean, in order to compete globally, and saw benefits trimmed. Public sector unions, believing themselves sheltered from general economic trends and protected by special law, abused their position and ended up killing the goose that laid the golden egg.

And now with negative social mood, these pensioners will find no sympathetic ear from the public, particularly since in places like Detroit, the choice will be to pay police and firefighters today or to pay retired police and firefighters. Everyone knows who will win that battle.

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