Two seismic developments from the nation’s heartland this week may expand the ability of Massachusetts and its cities and towns to address a looming crisis totaling $83 billion in unfunded pension and retiree health-care obligations.
Federal Judge Steven Rhodes ruled Tuesday that public employee pensions will not be protected as the financially struggling City of Detroit initiates a Chapter 9 bankruptcy. The ruling raised the prospect that emergency City Manager Kevyn Orr (right) may seek to reduce the pensions of 23,000 retirees in an effort to address an unfunded pension liability of $3.5 billion.
Several hours later, Illinois lawmakers approved an historic overhaul of the state's government-worker pension system that would raise the retirement age for many state workers and scale back the size of - and even skip - some annual cost-of-living increases. In return, the state would put a few hundred dollars into most workers' pockets by slightly reducing the amount of money they have to chip in from their paychecks.
Unions representing public employees plan to challenge both developments in court.
All this matters to Massachusetts because Bay State taxpayers are currently saddled with $37 billion in unfunded pension liabilities and $46 billion in unfunded health-care benefits. A report issued in October by the Massachusetts Taxpayers Foundation concludes that Massachusetts and its cities and towns have set aside just 43 percent of the money they need to pay benefits already promised to current employees and retirees.
“The troubling reality is that unfunded pension liabilities have grown over the past decade despite the enormous sums that state and municipal governments have contributed to their pension funds,” the report states.
Employers concerned about the financial stability of the communities in which they operate have become increasingly alarmed at the largely hidden problem building underneath public retirement systems. The fear is that escalating pension funding requirements will eventually impede the ability of cities and towns to provide the key services – education, public safety, roads and bridges – needed to maintain economic growth.
Analysts believe the Detroit decision and Illinois vote are unlikely to touch off a rush of bankruptcy filings by municipalities, but will undoubtedly give cities and states newfound leverage in negotiating pension benefits outside of court proceedings. At the very least, it’s a rare opportunity to address an issue that few people want to talk about in a commonwealth where nearly one-third of all state, municipal and other retirement boards are less than 60 percent funded.
City Manager Orr in Detroit provides a sobering warning about the alternative: “There’s not enough money to address the situation no matter what we do.”