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Pension Funds Are Root of Problems in Detroit . . . And Around the Country

Posted: July 27, 2013 at 5:30 am   /   by

New Report Suggests Pension Systems Themselves Be Allowed to Declare Bankruptcy

As the nation watches the struggle unfolding in Detroit over whether the debt-ridden city may enter into Chapter 9 bankruptcy, a new report released this week illuminates how pension systems are driving financial meltdowns in in cities and states across the country.

Across the country, public pension funds are facing insolvency, and most pension systems depend on taxpayers to fund them, despite shortfalls. Nearly half of Detroit’s $18.5 billion in debt comes from pension and post-retirement benefit liabilities.

In a report by Goldwater Institute director of policy development Nick Dranias and economist Byron Schlomach, the Institute recommends that state lawmakers around the country authorize pension funds themselves to enter into Chapter 9 bankruptcy.

According to the report, the mere existence of such legislation could encourage fiscally responsible practices surrounding pension systems. And if such practices fail to materialize, bankruptcy itself would allow for pension funds to be restructured in an orderly fashion.

Chapter 9 bankruptcy is traditionally reserved to municipalities and “instrumentalities of the state,” but the report argues that pension systems meet various criteria and therefore should be eligible.

“Too many games are being played with public pension systems at the expense of taxpayers,” said Dranias. “If state lawmakers don’t take a stand and end these abuses, we could see dozens and then hundreds of Detroits over the next several decades.”

The report also recommends that states explore the possibility that unsustainable pension payouts represent a violation of state constitutional gift clauses, which prohibit public money from being spent on private costs without a public benefit.

You can read the report here:

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Pension Funds Are Root of Problems in Detroit . . . And Around the Country