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OpinionColumnistsWilliam F. B. O'Reilly

O'Reilly: Detroit screams to New York public employees: Rethink 401(k)s

Representatives of Detroit's active and retired public workers

Representatives of Detroit's active and retired public workers look at papers before a meeting in Detroit. (July 10, 2013) Credit: AP


What a disaster.

It was once the fourth largest city in America -- now it's 18th.

It was the Arsenal of Democracy; the scourge of Nazi Germany. Now it's kaput.

About the only thing Detroit is good for today is to serve as a warning to states and municipalities: Don't. Do. This.

"This" meaning effectively handing over the government decision-making process to public employee union bosses; voting for magnanimous-sounding politicians who make financial promises that can't be kept; kicking the can down the road until even the imaginary asphalt runs out and the people are left holding a mass of rusted tin -- in Detroit's case, $33 in long-term debt for every dollar of net assets.

Detroit's warning applies not only to cities. It applies to rank-and-file public employee union members everywhere as well. Especially them. Their Detroit brethren are the ones about to take haircuts on the retirement benefits they were promised by government and union leaders. The only question still to be answered is how much will be shorn.

Nonunion members in Detroit have an easy way out of this mess -- move. All they have to do is get beyond the city's borders to shed their share of the debt obligation. Public employee retirees will pay the price for this accumulated mess whether they're in downtown Motown or in the Uptown Lofts of Miami. They can't get away from it, and their life plans are now in serious jeopardy as a result.

Every year -- including here in New York -- fiscal experts warn that unfunded state and municipal pension liabilities in this country, which are estimated to total between $730 billion on the low end and $4.4 trillion on the high end, will end in disaster. Well in Detroit, they now have.

Experts warn states, like New York, to stop using accounting gimmicks, such as grossly inflated return estimates on pension fund investments and manipulations of the discount rate, to make the books appear sound. Gimmicks Detroit used.

New York experts, who include former Democratic Lieutenant Governor Richard Ravitch, former Republican gubernatorial candidate John Faso, Manhattan Institute Scholar E.J. McMahon, and former Republican state comptroller candidate Harry Wilson -- who led the restructuring of General Motors for the Obama Administration -- all warn that the state's defined benefit plans are on an unsustainable path and may one day go bust. Just like in Detroit.

But talks about switching to 401(k) defined contribution plans, even for future state employees, are a perennial non-starter. New York's powerful union bosses kill any legislation that would switch public employees over to defined contribution plans, like the ones most private sector workers have today.

But here's the thing: Union members have always believed that pensions and health care benefits are rock-solid safe under state constitutions. Detroit will almost certainly prove they are not. The money is simply not there.

Those expecting a federal bailout for the pensioners will likely be disappointed, too. Because if the federal government bails out Detroit's collapsed pension system, it has to bail out every municipality in America from its unfunded pension obligations, and that's unlikely in the extreme.

What's happened to Detroit is not the fault of public union employees. It's the fault of the politicians who bought their votes with false promises, and the people who kept them in office year after year. It's also the fault, of course, of market events beyond Detroit's control.

But no one will pay a price higher than Detroit's retirees, who are probably wishing now that they had 401(k)s.

William F. B. O'Reilly is a Newsday columnist and a Republican political consultant.