So here is the obvious public policy question: why do we let cities and towns all across America do what is illegal for private companies to do? That the public sector has been irresponsible is patently obvious. In a study for the National Center for Policy Analysis, Andrew Rettenmaier and Courtney Collins discovered that when state and local retirement benefit programs are accounted for properly, they have a $3.1 trillion unfunded liability ? nearly three times the officially reported amount. Another estimate puts the total at $4.4 trillion for pensions alone.
As the unfunded liability for a city rises, it can fall into a death spiral. The city initially raises taxes to pay for its promises. In response, the private sector contracts as individuals and businesses move to less burdensome locales. The more people there are who leave, the higher the rates have to be. Meanwhile, the quality of the city services declines as more of the city's revenues are used to pay for retirement benefits instead. That in turn encourages an even greater exodus of the people and businesses that form the tax base. As the Wall Street Journal explained:
"For years Detroit has been gutting services and sucking taxpayers dry to finance retirement and debt obligations. Nearly 70% of parks have been closed since 2008, and four in 10 street lights don't work. The city has cut its police force by 40% in a decade. Response times are five times longer than the national average, and it has one of the highest violent crime rates in the country. Meanwhile, Detroit residents pay the highest property and income taxes in the state. Last year its business tax doubled. About 40% of revenues go toward retirement benefits and debt, much of which was issued in the last 10 years to finance pension contributions. Payments on $1.6 billion of pension-related certificates of participation consume nearly every dollar of property tax revenue."
The lesson for the rest of us should be clear. It really doesn't matter whether public employees are under-paid or over-paid. What matters is that city government pay for whatever they promise at the time the promise is made and do not try to shift those costs to future taxpayers.
Put differently, government at all levels (including the federal government) should have to play by the same rules that govern the private sector.