A Pension “Grand Bargain” for Distressed Cities?

Commentary

A Pension “Grand Bargain” for Distressed Cities?

In a recent paper, Howard Husock at the Manhattan Institute explores a novel approach to dealing with municipal financial distress caused by ballooning pension costs. The paper describes the philanthropic coalition that enabled Detroit to emerge from bankruptcy, and examines the possibility of applying this innovative model to four other cities facing similar fiscal problems.

After the largest municipal bankruptcy in history, Detroit was struggling to get back on its feet. The required pension contributions, which amounted to 8 percent of the 2014 budget, crowded out the city’s funding for core public services, forcing the city to consider selling many paintings in the city-owned Detroit Institute of Arts to meet its financial needs. Fortunately, a consortium of philanthropic foundations stepped in and pledged $366 million towards a “grand bargain”: a combination of philanthropic, corporate, and state donations to pay for the pension debt, in exchange for significant union concessions, including a 4.5 percent reduction in current-retiree pension payments, an end to annual cost of living adjustments, and a freeze on new employee entries into the existing pension plan.

The author sees an opportunity to apply the same grand-bargain model to four other cities: Buffalo, Chicago, Cleveland, and St. Louis. Similar to Detroit, those cities have strong philanthropic communities but are also facing financial problems, characterized by high pension costs, rising property taxes, and high levels of household poverty. The paper finds that a Detroit-style grand bargain would cost less than 2 percent of the assets of those cities’ leading foundations.

To read the full paper, go here.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Integrity Project.