Stepping Up With a Plan to Save American Cities

FOR decades, cities and states that needed more cash for their workers’ pensions have turned to local taxpayers, the municipal bond market or even the workers themselves. Now those options appear to be drying up.

That leaves mayors and governors with a troublesome issue. The law says they have to keep their pension plans intact, but the cost is growing every year, and they are running out of ways to raise the money. Taxpayers fight any kind of increase now, and the bond markets have grown chilly since Detroit declared bankruptcy.

One municipal bankruptcy expert has been devising a structure that may help cities find their way out of the jam. James E. Spiotto, a partner with Chapman & Cutler in Chicago, has loosely modeled his idea on the special-purpose entities that helped tide New York City through its fiscal crisis of 1975. He calls his version the Public Pension Funding Authority, and he has been pitching it to federal regulators, credit analysts, bond dealers, academics and lawmakers â€" anyone worried that without some kind of fix, more cities will go the way of Detroit.

“Which is the death spiral,” Mr. Spiotto said, citing the self-feeding cycle of unbalanced budgets, cuts in policing and other essential services, tax increases and an exodus of frustrated homeowners and businesses. Each round of departures leaves a smaller and poorer population behind, struggling to cover the city’s mounting costs. At the end of the spiral is a bleak scene like the one playing out in Detroit, where the city is destitute but its workers and retirees still have a constitutional right to be paid in full for work performed years ago.

“You can’t just say, ‘Workers, you lose,’ or, ‘Citizens, you lose,’ ” Mr. Spiotto said. “The citizens and the workers and the retirees are all in this together.”

Ideally, the Public Pension Funding Authority would halt death spirals and save distressed American cities. It would not be able to make money appear out of nowhere, of course, but it would offer independent, quasi-judicial powers to sort out the facts of each case, then help severely troubled communities restructure their debts.

The authority could determine, for example, whether a city had exhausted its ability to raise taxes, or whether ballooning pension obligations were preventing a city from providing essential services. It could decide whether bigger contributions from a city or its workers could save a tottering pension fund, or whether the plan was simply unsustainable. The authority’s decisions would be binding.

Mr. Spiotto said it would be possible, in theory, to establish such an authority at the federal level. But he thought it would be better to have the states create their own versions through legislation. That’s how New York City wound up in the hands of the Municipal Assistance Corporation and the Emergency Financial Control Board in 1975. Once an authority was up and running, Mr. Spiotto said, distressed cities could approach it for help voluntarily. But it would also have powers to step in when a city â€" or a town, county, school district or other local government â€" reached predetermined thresholds. It could intervene if a municipal pension fund fell below a certain level of funding, for example, or if a local government was so overwhelmed that it could no longer provide for the safety and well-being of its people.

Some policy makers say the idea has promise, but the unions that represent public workers are extremely skeptical, seeing it as a way around laws that forbid any reduction of public pensions.

Daniel Biss, a state senator in Illinois who has been serving on a joint House-Senate pension committee in Springfield, said he was “certainly intrigued” by the idea, but added that no one had drafted or introduced a bill yet. “There’s a genuine dispute about how bad the problem is,” said Mr. Biss, a Democrat from Evanston who taught mathematics at the University of Chicago before his election to the Senate. He said he thought that the state’s pension morass was “horrific” but that others disagreed with him, citing rosier projections.

To avoid getting mired in the endless, polarizing debate about pension numbers, Mr. Spiotto would have his authority do something simpler: determine how much of a benefit a city could afford in the current year.

In many places, the money available for pensions after budgeting for essential services, maintenance and debt service would be less than the yearly cost of the existing pension plan. In such cases, the authority would work with local officials on redesigning the plan within the city’s means. It would be bitter medicine, to be sure.

“When you raise this with municipal leaders, their response is, ‘Hold on! What happened to democracy?’ ” Mr. Biss said.

In Illinois, and many other states, he said, the power to fix public pensions rested solely with the state legislature. Mayors, like Rahm Emanuel of Chicago, can talk themselves blue about pension woes but accomplish nothing; reform can come only from the state.

Mr. Biss said that when he discussed the idea of an authority with local leaders, they thought it sounded like one more way for the state to limit their powers. “They’d like a free hand to deal with it,” he said. “They’d like to have a minimum external mandate, and a maximum of external support.”

Mr. Spiotto acknowledged that local officials were wary of the idea and labor leaders were opposed to it. “They think they can just raise taxes,” Mr. Spiotto said. “I understand where they’re coming from.”

He said that when a city had begun to decline, raising taxes locally could hasten the spiral, exposing retirees to even bigger potential losses. Halting the death spiral would be better for everyone.

If retirees had to give up part of their benefits, it would be with the guarantee that what was left was rock-solid â€" no more risk of a disorderly collapse later on. For active municipal workers, the authority would require any cuts to be distributed across the entire local work force, rather than imposing all the pain on the young, as is now the usual practice. That could reduce turnover and improve the level of public services.

And for residents, more money would be made available to repair crumbling streets, improve public schools and bolster police and fire services. Local taxpayers would be able to see where their tax money was going and, if they liked what they saw, lose interest in moving away. With luck, the local tax base would stop shrinking.

The authority would “hardwire” the funding of the new benefit plan, Mr. Spiotto said. It would have the power to intercept city tax money and make sure it was used to fund the benefits. Under certain circumstances, the authority might issue bonds to fund the plan, or it might transfer a city’s failing pension fund into a bigger, stronger state network. If necessary, the authority could even send a municipality into federal bankruptcy court, using its own findings of fact as the basis of a prepackaged debt-adjustment plan.

“People are looking at this,” Mr. Spiotto said. “It could work very well for Michigan, and for a number of states. You’ve got to have buy-in by the local municipalities.”

Getting buy-in is a slow process. It took a full decade to enact the federal law that requires companies to fund their pensions, starting in December 1963 with the closing of a Studebaker plant in South Bend, Ind. The car company’s pension plan was not funded and workers and retirees lost their benefits, delivering a serious blow to the company town and highlighting the need for reform. Early versions of the federal pension law covered state and city pensions, too, but those provisions were dropped amid opposition by governors citing sovereignty and separation-of-powers issues.

Detroit’s bankruptcy may revive interest, though. The city is calling for harsh losses for retirees and bondholders. If the court approves them, America may have another Studebaker moment, where the pain is so bad that others vow not to let it happen again.

“Presently, we are playing the game of blink,” Mr. Spiotto said. “Everyone believes that the other side should give in and blink.”