Paul Jacob

Also last week, WLWT in Cincinnati told Southwest Ohio viewers that “Moody’s Investor Services has downgraded the bond rating for Cincinnati under a new formula that takes into account cities’ pension responsibilities.”

In an editorial earlier this year, the Cincinnati Enquirer warned readers, “The city of Cincinnati, as of the end of 2011, owed $728 million more in pension costs than it has paid for. That’s more than twice as much as the city takes in each year in income taxes.”

Having a bond rating reduced isn’t quite bankruptcy, admittedly, but Mike Shedlock with SitkaPacific Capital Management is certainly not alone in concluding: “There is absolutely no way Chicago, Oakland, Baltimore, Philadelphia, LA, Houston, and numerous other cities can meet pension obligations without a major restructuring of promises.”

The easiest way to restructure may be through bankruptcy. So expect more of them.

And in your town? Your state?

Research by Professors Robert Novy-Marx at the University of Rochester and Joshua Rauh at the Stanford Graduate School of Business looked at the pension commitments state and local governments had already made and then calculated how much your taxes would have to go up to pay for those unfunded promises. The professors found that, “on average, a tax increase of $1,385 per U.S. household per year would be required, starting immediately and growing with the size of the public sector.”

And, then, continuing to pay that annual sum for the next 30 years.

That’s only the average, though. “New York taxpayers would need to contribute more than $2,250 per household per year over the next 30 years,” according to the research. “In Oregon, the amount is $2,140; in Ohio, it is $2,051; in New Jersey, $2,000.”

The point is not simply to lament the size of the hole being dug through this ubiquitous system of promising benefits, while refusing to actually pay for them. The point is to (1) recognize there is a hole, a really big one, and (2) to stop digging.

For until we get a handle on this problem, the size of the financial pit will continue to grow and get more dangerous.

We can blame the politically powerful public employee unions for pushing for unsustainable benefits. But what worker doesn’t want higher pay and better benefits?

On the other hand, we can blame our elected officials for agreeing to benefit packages they weren’t honestly willing to pay for. But then, we elected those officials.

The solution is obvious: Don’t allow our governments to make promises they cannot keep. While the law requires that those workers who have earned pension benefits receive those benefits, no law says we have to continue an unsustainable system that could lead to bankruptcy.

Move new government workers to the same retirement system used by most American workers: a defined-contribution 401k-style program. Let cities and workers negotiate over how generous an employer match to such retirement savings should be made, just as they bargain over salary and other conditions of employment. But whatever contribution is promised by a city or state government must be legally required to be paid in full every pay period.

With the credit-worthiness of our politicians, let’s stick with pay-as-you-go.

After all, Detroit isn’t a model city to emulate — no matter how you pronounce it.     [further reading]

Paul Jacob

Paul Jacob is President of Citizens in Charge Foundation and Citizens in Charge. His daily Common Sense commentary appears on the Web and via e-mail.