The 61 largest U.S. cities in 2009 were in the hole by about $118 billion to retirees’ health insurance obligations. The Pew charitable Trusts reported this:
As the Great Recession ended, 61 key cities across America—the most populous one in each state plus all others with more than 500,000 people—emerged with a gap of more than $217 billion between what they had promised their workers in pensions and retiree health care and what they had saved to pay that bill. While states have a much larger shortfall, cities face the same daunting challenges posed by unfunded liabilities for their public sector retirement benefits. . . .
In fact, unfunded liabilities for retiree health care loom even larger than for pensions. As of fiscal year 2009, the cities in this report had promised at least $118 billion more than they had in hand to cover health care benefits for current and future retirees. Cities had set aside enough money to cover 6 percent of their promises, compared with slightly more than 5 percent in states.
They now think they have a way out: default on these obligations and force retirees into ObamaCare. This gets the obligations off their backs and onto the backs of the federal government. This is what Detroit is doing. Other cities’ officials are impressed.
But Detroit is declaring bankruptcy. How can the other cities get out from under without declaring bankruptcy? They made the promises to former employees. How can they just dump the retirees into the state-run, federally financed health insurance exchanges that do not yet exist? Have they decided to default on health care only? How is this legal? The New York Times reports:
Authors of the health care law expected at least some shifting of retirees into the new insurance exchanges, said Timothy S. Jost, a law professor at Washington and Lee University who closely follows the law. “But if a lot of them do, especially big state and local programs,” he said, “that’s going to be a huge cost for the United States government, and it’s mandatory spending.”
The article never raises the question of “partial” bankruptcy. It ends with this:
“I’m applauding Detroit,” said Dan Miller, the controller in Harrisburg, Pa., who added that in the future a similar plan might interest his city, where a state-appointed receiver is seeking to restructure hundreds of millions of dollars of debt. “I’m hoping that Obamacare turns out to be a great solution, and I would love for our city to have the opportunity to do that.”
Is he hinting that Harrisburg is contemplating bankruptcy? Investors in the city’s bonds hope not. But this is how it sounds.
I think we can expect more city bankruptcies. It is surely the easy way out for local officials. The money spent on paying bond holders and retirees is wasted, politically speaking. It buys no votes. Voters don’t care about bond holders and retirees. They care about themselves. They want more city benefits. They also want lower taxes. They can get this. The city can declare bankruptcy.
Most bond salesmen say that Detroit is unique. But why is it unique? Moody’s just lowered Chicago’s credit rating three notches in one shot.
The Times reports:
The Chicago plan, announced in May, would phase some of the city’s 11,800 retirees and their family members not eligible for Medicare out of city coverage by 2017. While some may seek insurance through new employers or through their spouses’ workplaces, others will probably be shifted to the insurance exchanges. Much of the plan for the next few years is in flux, but the changes are expected to contribute to a larger effort to save Chicago $155 million to $175 million a year in retiree health care costs by 2017.
“With the implementation of the Affordable Care Act, our retirees will have more options to meet their health care needs,” said Sarah Hamilton, a spokeswoman for Mayor Rahm Emanuel, adding that most of the city’s retirees over 65 were already covered by Medicare. “We will ensure that they have all the information needed to navigate the options available going forward, while saving vital taxpayer dollars.”
But what about all those promises to city retirees? “Tough luck, suckers! You are expendable.”