Letter: Lessons from Detroit bankruptcy that Southborough should heed

by beth on July 22, 2013

[Ed note: My Southborough accepts signed letters to the editor submitted by Southborough residents. Letters may be emailed to mysouthborough@gmail.com.]

To the Editor:

Detroit’s Lessons for Southborough

At first blush, there is little reason to think that there are useful lessons that our prosperous small New England town can take from the Detroit bankruptcy. However, if you dig deeper I believe there are some lessons and cautions that all residents, town employees and officials can take heed of.

Municipal Bankruptcy is Real – Central Falls, RI., Harrisburg, Pa., Vallejo, Ca. , Jefferson County, Al., Orange County, Ca., Stockton, Ca., San Bernadino, Ca. and others all filed for “Chapter 9”. There were 12 filings in 2012, 13 in 2011, and 4 so far in 2013. Local governments can fail and there are communities in Massachusetts on the watch list.

“Legacy Costs” Drive Bankruptcy – Debt and unfunded Retirement Obilgations are the 2 biggest items in this category. An ugly “death spiral” happens when the current tax base is not able support “Legacy Costs” and current services like Police, Fire, Schools. Southborough has both. We currently are carrying a very heavy debt burden (among the highest in the state) and we have very substantial unfunded pension and retirement obligations. I attended a Selectmen’s meeting where our unfunded pension obligations were estimated at 10’s of millions of dollars.

Moral Hazard – Moral Hazard exists when benefits accrue to a decision maker or investor but the downside risks or costs are born by someone else. It is very easy for both sides of a negotiation to agree to generous retirement benefits when both sides know that they will not have to raise the funds for them in the next budget. In effect we receive the benefits of labor peace with a generous retirement benefits knowing that we will not have to pay for them but rather the property owners in the town in 10 or 20 years will be stuck with the bill.

Growth Matters – One of the easiest ways to keep our “Legacy Costs” at a level where we can honor our obligations to our employees and creditors is to make sure we have an expanding tax base, particularly in the commercial and industrial area. A common theme to nearly all municipal bankruptcies is a stagnant or declining tax base. In our community housing is a net cash users and commercial and industrial property fills the gap. This sector needs to grow to fund our promises. If it shrinks we will be in real financial trouble. We need to make sure that our town is business friendly and at least as important that the Commonwealth is as well.

Debt Will Cost More – Even with our good credit rating, our debt will be more expensive in the future. There are going to be more municipal failures in the coming year. Municipal debt is going to be perceived as riskier in the future than it has been in the past.

Employees Need to Pay Attention – Our town employees have the most to lose (along with our creditors). There is an easy comfort in thinking “I was promised these benefits”. If you believe that ask the retirees at GM and Chrysler and Delphi. The painful fact is that town employees often have longer tenures with the town than the taxpayers of our suburban bedroom community. Those that made the promises may be long gone and those that are charged with paying for them may prefer more police and fire services than paying retirement benefits. Unions have been reluctant to switch from defined benefit to defined contribution plans (similar to a 401k) but the big advantage of these plans is that the employee owns them outright as opposed to holding an IOU from the Town.

Public Officials Need to Pay Attention – Our elected officials and the Town Admin and Superintendent need to be far more circumspect about the retirement benefits offered to our employees. Today it is possible for some Town Employees to retire as early as age 55. This is fiscal insanity where an employee can work for the town for 20-30 years and then expect to collect a paycheck and health insurance for another 20-30 years. I am not knocking our employees but I am saying that this is not a sustainable system. It is also not politically sustainable in a world where I qualify for social security at age 66 ½ and those younger than me will be even older before they retire. One of the keys to keeping our promises to our employees is to keep the costs of those promises affordable and proportionate to the services provided and our ability to pay for them.

We are fortunate to live in a wealthy community with a sold commercial and industrial tax base. However, we need to take heed of the municipal bankruptcies to learn the lessons of poor economic policy. With careful stewardship we can leave our community in solid financial shape for the next generation of residents who will be called on to cash some of the checks we are writing.

Al Hamilton

Pine Hill Road

 

{ 9 comments }

1 Rob July 22, 2013 at 3:21 PM

Al, your dedication to the town is truly unmatched. I hope you continue to take a bigger role in town affairs.

2 Judy Christensen July 22, 2013 at 7:56 PM

Al, you wrote an extremely thoughtful letter, and I think all your points are worth discussing.

3 bob a July 23, 2013 at 6:44 AM

Al,

Does the town have real numbers compiled by an actuary regarding the pension liability. To not have the numbers would seem to be negligent as well as not funding the promised benefits.

The town should move immediately to fund the promised benefits and end all defined benefits plans. Our town employees are great people but can we afford to pay them more than comparable private sector employment total wages…

4 Al Hamilton July 23, 2013 at 8:40 AM

Bob

Yes, the BOS and finanical team have the numbers. I attended the meeting where they were discussed. The estimates will vary depending on a lot of assumptions but the numbers are in the 10′s of millions I do not recall off the top of my head the exact range.

We face a real challenge in funding those obligations. Today, we have a sort of pay as you go system. We fund a significant part of our obligation to our retirees out of current revenue. Those obligations will not go away if we also decide to put aside monies to fully fund the retirement obligations of current employees. This means that for some period of time (10′s of years) we would have to double fund our retirement obligations.

If we want to fully fund retirement obligations during an employees tenure then we only have 2 choices. Find the required money by cutting services or significantly raising taxes. This Hobsons choice could be mitigated by increasing the length of service and retirement age but that is a different challenge.

Like it or not, the town cannot unilaterally eliminate our defined benefit retirement obligations. These are contractual obligations made with our employee unions. Those unions are very powerful in this state and, quite frankly, the deck is stacked against us if we end up in binding arbitration.

5 withheld July 23, 2013 at 9:14 AM

Bob a. , I agree whole heartedly with both comments. The people are for the most part real good folks. But, it is a town job. Correct? THanks.

6 Jared July 23, 2013 at 8:32 PM

The Town of Southboro and the Schools have a policy that in the event of the death of a retiree, the retiree’s spouse will receive the full pension amount until their death.

Even the Federal government does not offer this costly benefit to the deceased retiree’s spouse. Keep in mind that many town retiree’s receive 80% of their salary in retirement. Also, ote that a retiremet at 80% of salary far xceeds whatthe Fereral government gives its workers. Civil service retirment benefits were eliminated for all new hires starting in 1984 and federal workers are required to pay into social secuity and pay into a 401K plan.

Perhaps it is time for the selectmen and scholl committee to rein in this costly benefit by excluding all new hirs from this benefit. Follow the lead of the Federal government which allows a retiree to elect to reduce their pension by 10% in return for the surviving spouse to receive something like 33% of the pension.

7 bob a July 24, 2013 at 6:52 AM

Thank you Al,

It appears to me if the town signs a contract with an employee union and does not fund that contract responsibly, we are doing a disservice to the residents. Are we to expect that at a certain point in time, that we will be unable to meet our obligations without massive tax increases or cuts in services? If this is the case, potential residents of any community should look at this liability prior to purchasing real estate. If I know that my taxes may double or triple to pay for retirees defined benefit plans, my house value should drop……. time for communities to have a reality check…

8 bob a July 24, 2013 at 6:59 AM
9 Carl Guyer July 24, 2013 at 11:25 AM

This letter clearly points out potential problems if we do not actively manage available financial resources and adapt our tax policies to changing demographics. If you read the attached report (see link below) you will see that Southborough has demographic resources that can be used to help address the issues outlined in this letter. With two out of three cities and towns in Massachusetts faced with similar demographics implementing the recommended changes in this report, it is certainly worth considering.

Link to report : http://goo.gl/d0FErL

Previous post:

Next post: