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.

Michael S. Greve is a professor at George Mason University School of Law. From 2000 to August, 2012, Professor Greve was the John G. Searle Scholar at the American Enterprise Institute, where he remains a visiting scholar. Before coming to AEI, Professor Greve cofounded and, from 1989 to 2000, directed the Center for Individual Rights, a public interest law firm. He holds a Ph.D. and M.A. in government from Cornell University, and completed his undergraduate studies at the University of Hamburg. Currently, Professor Greve also chairs the board of the Competitive Enterprise Institute and is a frequent contributor to the Liberty Law Blog. Professor Greve has written extensively on many aspects of the American legal system. His publications include numerous law review articles and books, including most recently The Upside-Down Constitution (Harvard University Press, 2012). He has also written The Demise of Environmentalism in American Law (1996); Real Federalism: Why It Matters, How It Could Happen (1999); and Harm-less Lawsuits? What's Wrong With Consumer Class Actions (2005). He is the coeditor, with Richard A. Epstein, of Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy (2004) and Federal Preemption: States' Powers, National Interests (2007); and, with Michael Zoeller, of Citizenship in America and Europe: Beyond the Nation-State? (2009).

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  1. gabe says

    So is this an example of “stealth” cooperative federalism?

    Couldn’t resist as i am stumbling my way through your Updside Down Constitution and I thought i would sneak in a plug for what appears to be shaping up as a great exposition on structural intent (to coin a phrase) in your book. So LLB readers, go out an buy it – it is well worth the read.

    take care

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