The Motor City Mess—A Harbinger of Things to Come?

The Economist thinks so, and has dedicated a good deal of space to the question in the newest issue (here  and here). A few quotes:

Other states and cities should pay heed, not because they might end up like Detroit next year, but because the city is a flashing warning light on America’s fiscal dashboard. Though some of its woes are unique, a crucial one is not. Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care. Detroit shows what can happen when leaders put off reforming the public sector for too long.

The Economist sites an interesting statistic: the total pension gap for the states is $2.7 trillion (or 17 percent GDP).  In Connecticut, my adopted home state, the pension shortfall is 190 percent of annual tax revenues (Illinois is even worse, at 241 percent). Of course, this does not include the pension gap in the cities and, more importantly, the health-care benefits for state and municipal retirees.

There are some obvious fixes going forward (e.g., substituting defined-contribution pensions for existing defined-benefit pensions). But this does nothing to address the current unfunded liabilities that are largely the product of politics (e.g., to win the allegiance of public sector workers, promise glorious benefits at some time in the future when someone else will have to foot the bill). As recent events have revealed, efforts to force reform can carry high political costs.

When one considers the huge unfunded liabilities at the federal level, the additional problems in the states and municipalities may prove even more difficult to address. It is hard to imagine the federal government providing much in the way of assistance when it is being forced to draw increasingly on general revenues to cover its own obligations.

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