On Monday, the New York Times’ DealBook profiled James Spiotto, a longtime municipal banking expert and a partner at Chicago’s Chapman and Cutler LLP. Spiotto is advocating an idea that, he says, can help save U.S. cities from “melting down” by addressing the money owed to pensioners before circumstances reach the bankruptcy crisis stage, which we have witnessed in California’s Stockton, Rhode Island’s Central Falls and, of course, Detroit.
Spiotto is calling on mayors, municipalities, creditors and labor leaders to consider the possibility of what he calls a “Public Pension Funding Authority,” aimed at shifting the debate from disagreements over numbers to one about decision-making and priorities. In a phone interview, Spiotto dug into the mechanics of how his idea might actually work on the ground.
Next City: What’s the elevator pitch for the Public Pension Funding Authority?
James Spiotto: The model is setting up an authority, which isn’t new to municipal or state finance, that would be staffed by independent, objective professionals who would, if the municipality is interested, make a determination of what is sustainable and affordable. That means projecting out a reasonable path of where revenue is going, and what the costs are of providing central governmental services at an acceptable level. Then you look at the difference, and from there you get to how much money you can really afford to pay pensions.
The issue is that increased legacy costs crowd out central government services and an acceptable level of infrastructure improvements. And they’re necessary to encourage citizens and businesses to stay and grow. It’s counterproductive not to fund those. If you don’t fund them, you end up with what I refer to as the “death spiral.” If citizens leave, you have less revenue. So you cut expenses, which means you cut services, and then more people leave, and then you have less revenue.
NC: One of the points of disagreement we’re seeing in Detroit is over whether Gov. Rick Snyder, and the emergency manager he brought in, had their minds set on bankruptcy all along. How do you avoid the assumption that this new authority will simply be a tool for cutting pensions?
Spiotto: You’re addressing the problem by saying, “What can be paid will be paid.” If you were to say [instead], “Okay, fine, we’ll pay whatever you want,” you wind up with the Detroit model. You erode over a period of time and actually provide less to workers, citizens and retirees. The best way of bringing people together is to recognize, “We’re going to pay everything we can without sacrificing the future.” If you don’t have a future, you don’t need workers. If you don’t have a future, you don’t have any money to pay retirees.
Where the situation gets awful is when you throw it into a forum for litigation or judicial determination. You create a dynamic where people are looking for, “This is what I want. This is what I need.” And they sometimes feel that they need to over assert that — asking for more than 100 percent of what’s there. The whole purpose of this is to determine the fundamental mission and purpose of the municipality: To provide central governmental services and infrastructure at an acceptable level so that we can help create jobs, and thereby stimulate increased revenues. As we grow, we can use more and more money to pay these obligations.
A lot of pension funds and workers in the unions will say, “If we have enough time, if we get actual funding each year and if we’re not skipping funding to balance the budget, we can get through this. We can work our way out.” And so what this does is give them dedicated source of what is sustainable and affordable, rather than having people deciding, “This year we can’t make the payment, because we need to use the money elsewhere.”
NC: Is this forward-looking, then, for new and current workers?
Spiotto: It’s forward-looking, but it’s also projecting out your revenues to see how much headroom you have to pay for pensions. You look at it on a periodic basis, because what you pay might actually go up if you succeed. But if you don’t succeed, you may have to adjust it downward. What you have to pay has to be realistic as to what you can afford to pay in a sustainable, affordable way.
NC: But isn’t that a political killer? Just putting on the table the possibility of reducing already obligated pensions?
Spiotto: Well, it’s a reality. The reality is, if you just keep on paying, that’s how Detroit got where they were. That’s why you want to address this in a good way. It isn’t not paying. It’s paying what is sustainable and affordable. Quite candidly, the pension funds have the same obligation. They have to look forward and see how much is going to be there. If they’re not, they’re not taking care of the youngest worker. This is being fair to everyone: Fair to the municipality, fair to the taxpayers, fair to the workers and the retirees.
NC: In Detroit there is the sense that not everyone is working from the same set of books. Does the plan tackle that sort of transparency?
Spiotto: Well, it’s about having people who are professionals — either because of their past efforts in working in government or in government finance, with appropriate pedigrees and degrees to determine what is sustainable and affordable — determining what is the range of reality, as opposed to the argument being, “Well, you just have to raise taxes,” or, “We disagree with your discount rate or we disagree with what you claim we will earn on our investments.” You get nowhere until people wear out and ultimately get to what is sustainable and affordable.
NC: At that point the authority takes those determination to labor leaders and politicians…
Spiotto: Right. And the municipality, they can follow it [or not]. What they’ve done is taken the debate over the numbers and made it a non-debate. They’re getting the best advice possible. The whole notion of politics, in the bad sense, you take that out. That’s why whenever there’s been a huge crisis, you see some sort of commission established of people with the skill and ability to address it in a fair and appropriate way.
NC: There was a fascinating article in the New York Times this week about the contract negotiations Mayor-Elect Bill de Blasio is facing. The discussion is predicated on the city’s $2 billion deficit, but the head of the teachers’ union is framing it around the city’s “banner year with a major surplus.” It’s a difficult negotiation to have when you’re working with what seems to be two different sets of facts.
Spiotto: Right. You need someone to say, “Okay, here’s the reality.” There may be various opinions but, to get something done in the practical world, “Here’s the reality.”
This is another way of approaching it, and it’s there to be constructive. It isn’t there to give the workers less. It’s actually there to give them more, because in the long term they’re going to get more this way. It’s to avoid the meltdown that happens in bankruptcies. When you look at all the costs and expenses and delays and difficulties on all sides — not just for the city, but for all the different creditor groups — every one of those dollars could have gone into either essential governmental services, infrastructure, to pay workers or to pay pensions.
There shouldn’t be a “we” and a “they” between a municipality and its workers, because the future of the city — the future of any recovery plan — is with the workers. Who else is going to implement it? Therefore, you’ve got to bring people together, so that “we/they” is counterproductive. Sometimes we have to return to our adult state.
Nancy Scola is a Washington, DC-based journalist whose work tends to focus on the intersections of technology, politics, and public policy. Shortly after returning from Havana she started as a tech reporter at POLITICO.