Fake news is so old.

How else did, “I am prepared to veto any bill that has as its purpose a federal bailout of New York City to prevent a default,” become, “DROP DEAD” way back in October, 1975? Oh, those hellbent headline writers. Whatever will they think of next? Besides, the Daily News headline worked wonders, if infuriating die hard New Yorkers was the objective.

Fake News Police State
ChristopherPluta / Pixabay

The insult so unhinged one William Martin Joel that he soon found himself saying goodbye to Hollywood and headed back to his native New York by way of a Greyhound bus on the Hudson River Line. Had the songwriter and singer we’ve all come to know and love as Billy Joel not been on that bus, he’d have never been inspired to pen the classic New York State of Mind, an anthem to the City only Sinatra himself can claim to have bested in his time.

So thank you, President Ford for refusing to treat the “insidious disease.” At least that’s how he characterized New York’s profligate spending ways. Without the media’s dramatization of Ford’s ire, the world would have been robbed of some of the most poetic lyrics ever written. And, by the way, a feasible blueprint for the years to come as some budget-strapped cities run their tills dry.

In the unique case of New York City in the late 1970s, federal assistance accompanied fiscal reforms. The details of the détente should thus be de rigueur study materials for the judicial and legislative arms of so many at-risk municipalities nationwide.

At the risk of feigning any pretense of legal expertise, municipal bankruptcies come down to the limitations of the federal government’s power to provide relief to ‘units of states,’ whether they be cities, counties, taxing authorities, municipal utilities or school districts.

Though a variety of other state-led interventions have been successfully deployed, many of us are most familiar with voluntary Chapter 9 bankruptcy filings, permitted by half the states and employing the powers of the judiciary in conjunction with creditor workouts. Jefferson County, Alabama and Stockton, California may ring mental bells. But it is 2013’s record $18 billion Detroit, Michigan Ch. 9 filing that reset precedent on how engaged the bankruptcy courts can be.

Suffice it to say, default via the court system is a lengthy process and most lucrative for the lawyers retained. In relative terms, New York City’s effective default occurred in a New York Minute. After the banks cut off New York City in the spring of 1975, the State created an emergency financial control board and a borrowing entity to provide immediate relief to the city. Rather than “default,” the city declared a “moratorium” on $1.6 billion in obligations, a hotly debated designation. A thorny rose it nevertheless was.

In December 1975, with the financial management wrested out of the city’s control, Congress passed and Ford signed into law legislation allowing the Treasury to extend loans to the city to keep it up and running. Future New York state and city revenues were promised to repay the loans and spending reforms that had been intractable were implemented by force.

Looking back at the 40th anniversary of the extraordinary federal-led intervention, American Enterprise Institute’s Alex Pollock applauded Ford’s staunch stance: “That’s what happens when you run out of money and the music stops. Intensely needed reforms of the city’s spending and financial controls actually did follow.”

Why raise the specter of federal assistance if it’s patently apparent other means can be deployed in today’s modern municipal era? The crush of retiring Baby Boomers will keep Uncle Sam up at night for years as he struggles to keep federal entitlements solvent. Why even consider federal involvement in municipal pensions that are at least backed by some semblance of assets? The answer comes down to demographics.

Forty years ago, Baby Boomer were entering their prime earning years. Opportunity in the land of America was expanding at a rapid clip. The level of education was rising among those entering the workforce vis-à-vis their older counterparts at the same time women were growing the overall workforce (just under half of women worked then; today it’s 70 percent). In the simplest terms, the size of the pie was growing.

Today, roughly 10,000 Boomers exit the workforce every day, which should present an opportunity in and of itself for Millennials to backfill the depleting workforce. Census data tell a different story. In 2016, median personal income for workers aged 24 to 34 was $35,000. In modern dollar terms, that same age cohort was earning $37,000 in 1975.

It’s difficult to square lower earnings with the educational makeup of the labor force. In 1975, 23 percent of young workers had earned a bachelor’s degree. Forty years on, 37 percent have achieved the same. Shouldn’t that improvement have lifted per capita earnings?

It comes down to comparative advantage. Back then, it was easy enough for a younger, better-educated worker to displace an older, less-educated and therefore less-qualified older worker. Today’s workforce is largely educated and intent on working longer; it’s stickier and less tractable. At the same time, the double governors of technological innovation and globalization have reduced the aggregate demand for warm bodies.

At the risk of getting buried in the weeds, there are more workers exiting the workforce than there are those joining it. Those making way for the exits are otherwise known as ‘retirees.’ It is at this critical juncture that municipal finance re-enters the picture.

As has been written on these pages, over the past few years, public pensions have been reducing the stated returns they anticipate their portfolios generating on investments. These reduced expectations necessarily trigger the need for higher contributions on the part of state and local governments.

That’s exactly what took place last year. The Census’ 2016 Annual Survey of Public Pensions found that state and local government contributions rose by 6.5 percent to $191.6 billion from 2015’s $179.7 billion. By contrast, earnings on investments, which include both realized and unrealized gains, tumbled 67.9 percent to $49.9 billion from $155.5 billion in 2015.

Meanwhile, the number of pensioners collecting checks marched upwards to 10.3 million people, up 3.3 percent over 2015. The benefits they received last year rose even more, by 5.4 percent to $282.9 billion from $268.5 billion in 2015. And finally, total pension assets fell 1.6 percent to $3.7 trillion from $3.8 trillion the prior year.

In the event you sense you’ve been felled by death by numbers, back out to the big picture. Paid benefits exceeded contributions to the tune of $40 billion in 2016 against the relentless backdrop of an increasing number of Boomers retiring (in 2014, there were 9.9 million receiving benefits).

Microcosm this demographic dynamic to the extreme example of Chicago. In 2015, the latest year for which we have full data, some $999 million was paid out to 29,296 recipients. That compares to the $90 million in investment income generated by the two employee pension funds that year. Back out the timeline a decade – in 2006, these two pensions held a combined $8.5 billion in assets. Since then the two funds have generated $3.1 billion in investment

1, 2  - View Full Page