Bail Out the Cities

The Manhattan Institute’s Stephen D. Eide has a fine Report on the extent to which state and local obligations for public employee pensions and so-called “OPEB” payments (overwhelmingly, health care) are “crowding out” public salaries and employment. The picture is bracing. Public salaries have barely budged over the past decade or more, and state and local governments have by and large failed to re-hire the hundreds of thousands of employees they shed after the 2008-2009 crisis. To a large extent, escalating pension and OPEB costs cut into the services that municipalities and especially large cities can afford to provide. The picture would be bleaker still if cities actually made the pension payments they’re supposed to make (which they don’t.) Detroit, needless to say, is the poster child: by 2017, barring adjustments in receivership or bankruptcy, the city is on track to spend two-thirds of its budget on post-employment benefits.

Among the Report’s recommendations is the following:

Governments should consider using the Affordable Care Act to eliminate retiree health care. The federally mandated state-based exchanges are the essential mechanism by which the Affordable Care Act, or Obamacare, intends to provide universal coverage to the previously uninsured. Detroit and Chicago have already announced plans to transfer their retirees to the exchanges, through which they may purchase subsidized care. In principle, governments that pursue this option will be increasing the burden on federal taxpayers, but it should be emphasized that the burden of funding OPEB now rests with state and local taxpayers. Moreover, the federal subsidies are means-tested: retired couples subsisting on more than $62,000 a year will not qualify for a subsidy. Though the exchanges were criticized by some as a “bailout” following the Detroit and Chicago announcements, it is likely that transferring the OPEB burden from state and local governments to the federal government will result in a net gain for the taxpayer.

Uh-oh. A statute designed to insure the previously uninsured (of whom there are a lot more now than before the statute kicked in) is now supposed to serve as a program for the already-insured. This was in fact the ACA plan all along, at least so far as state and city governments are concerned. And it is a bailout under another name.

To get a sense of the order of magnitude: we’re talking about millions of former and current employees and roughly $1 trillion in outstanding OPEB obligations, all of it unfunded.

Will or would cities pass the savings from an OPEB transfer on to local citizens, in the form of enhanced services? Not a chance: they’ll protect their pensions and delay reform. That suggests an efficiency-enhancing idea: let’s cut out the middlemen and send the checks directly to the SEIU and the NEA.