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Friday
Jul132012

« Municipal Bankruptcies and the Elephant in the Room »

In business and in life, you can’t live today on tomorrow’s income. 

San Bernardino’s municipal bankruptcy, on the heels of others across California, will not be the last unless cities address the elephant in the room: the pension bubble.

For decades, local politicians agreed to fund generous pension benefits for public sector employees when they retired in exchange for smaller pay raises. It was attractive for the simple reason that the payouts would happen on someone else’s watch.

Some cities agreed to a retirement age as young as 50 years old. Others used formulas that allowed employees to earn more in retirement than they did when they were working. Across California, we’re seeing pension liabilities cripple a city’s finances. Now the chickens have come home to roost.

The next shoe to drop will be school districts, which are facing similar pension liabilities. That means that even less money will flow into our classrooms where our teachers and students need it most.  States across the country are facing similar fiscal challenges.

In “The Art of Being Unreasonable,” I write that in every deal or project you pursue, you have to have skin in the game. It gives your partners confidence in your commitment and it keeps you focused.

Cities need to make sure that public sector employees have more skin in the game—that they’re involved in their retirement planning, healthcare, and in preserving the longevity of the cities they serve so well in their working years.

They need to do three things:

  1. Raise the retirement age to at least 67 or ideally 70. I realize, though, that this can’t be done politically. (Now you know why I’m not a politician.)
  2. Move from defined benefit to defined contribution plans—essentially, a 401(k), like 85 percent of private sector employees. That encourages employees to be an active participant in their retirement planning and investing, and allows employers to accurately predict costs.
  3. Health benefits should include an employee co-pay for non-catastrophic medical treatment. If healthcare doesn’t cost a retiree anything, they just assume the insurance company will pay for their care.  You need a buyer and seller meeting in the marketplace to provide cost-effective, quality products and services. 

Businesses or households that live on credit eventually go bankrupt or out of business when the bills come due. Our cities, states and school districts can’t balance their budget on the backs of our children.

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