The political risk of defined benefit pensions

The Economist writes about the “plan of adjustment” filed by Detroit as part of its bankruptcy proceedings:

In order to shed much of its $18 billion debt, Detroit proposes giving unsecured bondholders, including holders of general-obligation debt, 20 cents on each dollar. Pensions will be cut, too. General pensioners will receive only 66% of their monthly pension (74% if they agree quickly). Pensioners in the police and fire departments have been offered 90%, but swift approval will net them 96%. The fact that some groups are doing far better than others sets the stage for some to approve the deal. This, in theory, allows the judge to impose the deal on other creditors—a “cram down”, as it is called. In fact, if either class of pensioners rejects the deal, even a cram down cannot force it through. . . .

The goings-on in Detroit are being watched closely elsewhere, particularly in California, where several mid-sized cities have declared bankruptcy in recent years. They too face growing pension costs and dwindling revenues. Yet Vallejo and Stockton shied away from cutting their obligations to the state’s giant public-pension fund, even as they slashed spending on other things.

In Vallejo the result is, once again, a growing fiscal deficit and the unbearable prospect of a second bankruptcy, three years after it emerged from the first. Moody’s, a rating agency, warned recently that pension costs in Stockton and San Bernardino would become “increasingly burdensome” if the cities failed to tackle them while in bankruptcy. Detroit’s case may give San Bernardino the courage to cut its future pension liabilities. But unions in Detroit are already appealing against the decision to include pensions in the city’s bankruptcy deal.

And in Walter Russell Mead’s blog, the story of San Jose, California:

Nestled in the heart of ultra-wealthy Silicon Valley, California’s third-largest city is burning. What a Washington Post report calls “gold-plated pensions” for public workers are devastating San Jose, creating public eyesores like shuttered libraries, deserted recreational centers, and streets desperately in need of repair.

The post illustrates how concerns about pensions aren’t merely an issue of taxpayers v. public employees:

And we still can’t even call public employees the clear victors in this ugly contest. In San Jose, the number of current public employees has been cut by almost thirty percent. In other words, public employee union members are paying dues to secure benefits that could eventually force cities to fire them.

Public pensions have been considered sacrosanct, but as the examples of Detroit and some California cities show, public employees are exposed to political risk (as opposed to the market risk of defined contribution plans). They may not be as safe as they used to be.