Well, returning briefly to my series on municipal bankruptcies – you really can’t write regularly about pensions in this day and age without addressing, even if unwillingly, that topic – the NY Times has a very interesting article on Stockton, California’s effort to leave bankruptcy, by basically shorting bondholders while leaving the ever rising pension costs that was one of the key drivers of its insolvency untouched. You can hear in the article the skepticism as to whether, having not dealt with that problem, the city can remain solvent for any amount of time, rather than end up back in bankruptcy court again after failing to tame its pension exposures.

The impact of pension promises and debt on municipal finances cannot be understated, particularly after events in Detroit. At the same time, the problems they pose cannot be easily solved, either, because municipal leaders are faced with a highly unpalatable choice with regard to that issue: they can either raise taxes significantly (or substantially cut services, which in the long term is at least as politically dangerous to the political future of the elected officials involved, yet possibly even worse long term for the city than increased taxes) or they can, as one Stockton official put it, look people in the eyes and tell them they are having their benefits cut. Stockton appears to have avoided the latter, for the most part, by seeking a relatively minimal increase in the sales tax, but, as noted above, one wonders whether that will be enough.

At the end of the day, I hate to say it, but the only humane solution to the pension problems in places like Detroit and Stockton is likely to be some version of a bailout in the form of a derisking program, with the pensions turned into private annuities and cities taken out of the pension business once and for all. Its either that or a decision to cut benefits and leave retirees and current workers to bear that cost alone. None of the solutions are good, but the evidence says this is a long run problem that isn’t going away.