A front page article in yesterday’s Wall Street Journal, “An Ohio Prescription for the GOP: Lower Taxes, More Aid for Poor”, describes how Ohio’s Republican Governor, John Kasich, a former congressional spending hawk, has expanded Medicaid coverage in Ohio and steered millions more dollars into local food banks. Mr. Kasich says, “When you die and go to heaven, St Peter is probably not going to ask you much about what you did about keeping government small. But he is going to ask you what you did for the poor.”
There are good reasons why we should shift programs and responsibilities from the federal government back to states and localities. At the federal level there is little fiscal restraint and therefore little incentive for making sure that governmental programs operate efficiently and effectively. Study after study by the Government Accounting Office, as well as by private think tanks, demonstrate enormous waste and duplication in virtually all areas of federal government. This long lasting fiscal irresponsibility at the federal level has now led to a massive national debt which will have a perverse effect on our nation’s prosperity for many years to come.
At the same time, all state and local governments are required to balance their budgets. This means that they have to pay attention to the costs of all programs and set spending priorities. They have to make sure that all functions of government are effective and be prepared to cut back or eliminate any program which is performing poorly. States such as Illinois and California, and cities such as Detroit, Chicago and Philadelphia, which have huge operating deficits year after year, will eventually be forced to declare bankruptcy (such as Detroit has just done) in order to reorganize their finances and make a fresh start.
It has long been a practical axiom that government should be as close as possible to the people. But now it is a fiscal necessity as well to shift as much as possible from federal control back to state and local control.
The New York Times reported yesterday that “Chicago Sees Pension Crisis Drawing Near”. “A crushing problem lurks behind the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. … The pension fund for retired Chicago teachers stands at risk of collapse.”
William Daley, former chief of staff for President Obama and now a Democratic candidate for governor of Illinois says that “Anyone who thinks that this is just a problem on paper, those are the same people who looked at Detroit 20 years ago and said, ‘Don’t worry about it, we can handle it.’” Chicago Mayor, Rahm Emanuel, another former chief of staff for President Obama, says that “What the system needs is a hard, cold, dose of honesty. I understand the anger. I totally respect it. You have every right to be angry because there were contracts voted on. People agreed to something. But things get updated all the time.”
Just as Chicago and Illinois need a cold dose of honesty about the public pension crisis in that city and state, so does our entire country need a cold dose of honesty about our national fiscal crisis. Shall we wait 20 years or until this problem explodes in our faces (or our children’s faces), or shall we start to deal with it now, while we can still proceed in a rational manner?
Our current public debt (on which we pay interest) is now $12 trillion. With artificially low interest rates, we are paying “only” $250 billion annually in interest on this debt. When interest rates resume their historical average of 5%, our annual interest rate will jump to $600 billion. Where will we find an additional $350 billion per year for interest payments alone? Will we take it from entitlements, from social services for the poor, from our defense budget? Or will we just increase our deficit even more to pay for it? It will have to come from somewhere!
Wake up, America! Learn from the municipal pension crisis. Now is the time to get things straightened out. Further procrastination will have dire consequences.
The former Obama administration auto czar, Steven Rattner, wrote in yesterday’s New York Times that “We Have to Step in And Save Detroit” from bankruptcy. Detroit has $18 billion in liabilities, half of which are for municipal employee pension plans and retiree health benefits. Mr. Rattner says that “It isn’t fair to cut pensions. The workers didn’t cause this mess.”
Many state and local governments are indeed in terrible financial condition because of the cost of public employee pensions. There have already been several municipal bankruptcies around the country and there will be many more. The state of Illinois is in particularly bad financial shape, for the same reasons as Detroit, and will almost certainly have to declare bankruptcy in the near future.
The basic problem is that state and municipal governments often have so-called “defined benefit” pension plans for their employees rather than the “defined contribution”, or 401(k), retirement plans used by private business. Defined benefit plans guarantee a certain level of pension payment, based on the employee’s salary, regardless of the investment returns of the contributions to the fund. Defined contribution plans, on the contrary, only pay out in benefits what has actually been accumulated in investment earnings. For a defined benefit plan the employer (i.e. the government and therefore the taxpayers) is at risk for any shortfall in funding. For a defined contribution plan, the individual employee is at risk for underperforming investment of the fund. The only viable solution to this massive problem is for state and local government to shift as rapidly as possible from defined benefit to defined contribution retirement plans.
For the federal government to jump in and bail out one particular struggling municipality would create a moral hazard. Every other state and local government with the same problem, numbering in the hundreds or thousands, would want equal treatment. The federal government can’t afford such an expense because of its own perilous financial condition. Furthermore, federal aid would just delay the fundamental changes in fiscal policy which must be made at the state and local level.
It is a very bad idea for the federal government to bail out Detroit!