My mother had a similar situation with employer (AT&T) making so many cutbacks that it led to less benefits and major class action suits against the company which they (AT&T) lost, but in the end both employer and employee ended up with less. She still got her retirement they tried to take away, but pennies on the dollar even though she and thousands of others "won" in court.
Well, what to do with $41 million in debt for 1 square mile resort village? Fire even more people, raise taxes again, or both?
Ok, as both someone with a strong interest in economics and in particular economic/fiscal policy, and as an employee of a municipal bond manager (where pension risk is rightfully so getting a tremendous amount of attention), I feel like there's a lot I can say here.
First, let's put that into perspective - $41 million seems like (and let's be honest, is) a tremendous amount of money. It also comes out to $25,625 a head, for 1,600 people, which isn't anything to shake a stick at, but at the same time is more of a "real number" than $41mm. It's also not really an insanely high per-capita public sector pension liability.
Now, "debt" is actually a very generic term. What are we talking about here, an actuarily-estimated pension shortfall? Or just outstanding city bonds? I started typing a much longer, more detailed response but in the interest of brevity let's just say that it's unusual for a city to issue bonds that AREN'T backed by a dedicated stream of revenue related to the project for which the bonds were issued. A transportation bond is usually backed by tolls or a gas tax or something, a water and sewer bond is backed by contractually-specified water payments, etc. So, while in our personal finances "debt" is considered a bad thing, in corporate or municipal finance it's usually a way of moving revenue recognition forward in time to provide financing for a project. This is why Apple is an excellent, well-run, and well-respected company, and the fact they're "in debt" to the tune of about $31 billion dollars doesn't scare anyone.
So, that's the good - debt isn't always a bad thing.
The bad is that there's a reason that corporations have broadly abandoned defined-benefit pensions; they leave the corporation bearing all of the investment (the chance the markets may lose money) and longevity (the chance a retiree may live longer than expected) risks. The problem here is these are all risks of things that will happen a LONG time in the future. The private sector has almost entirely moved from defined-benefit plans ("pensions") to defined-contribution plans (401ks and their like) where what an employee saves in their lifetime. If those savings run out, well, it's not your former employer's problem, and even in my life I've seen 401k matches fall drastically - a couple companies ago, I started with a 1-1 match up to the first 6%, which was pretty average at the time, and had it cut down to a 50-cents-on-the-dollar 6% match. My last employer previous to this one, we got a 3% match.
These plans are popular with employees because we're being told we can "take control" of our retirement planning (ignoring the fact that the vast majority of Americans don't know a thing about retirement planning, over and above the fact it's something you need to save for), and individualism plays well in America. It's popular with companies because 3% of an employee's salary a year is a current, not future, liability, and it's a lot cheaper than funding a % of final salary pension. So, we're in a situation where all of the retirement risk has been shuffled from the company to the individual.
That's a very bad thing. In principle there's nothing WRONG with it, but in practice, 1) very few Americans are saving at even CLOSE to the rate they need to in order to afford the sort of retirement income that used to come with a pension, and 2) most 401ks badly underperform the market and professionally-managed pension plans because most Americans have literally no clue how to manage their own money, and because the average 401k plan is probably going to pay higher expenses than the average pension simply because the former pretty much has to invest in mutual funds (which tend to have fairly high fees) while the later does not, and because your average, oh, IBM employee doesn't really have the analytical toolkit to make investment allocation decisons - not that he or she's not smart
enough to, it's just that they have never had to learn how. The other problem is one of choice - people simply choose to contribute too little or not at all, figuring they can "make it up later."
I'm going on a little bit of a tangent here, but where I'm eventually going is this - we as a society may need to come to grips with the fact that the middle class retirement dream of working until you were 60 and then retiring and living comfortably for the rest of your life may have been an aberration and an anomaly, rather than something sustainable. Detroit and the auto industry probably did more to create that dream than anything else, and GM and Chrysler needed to be taken into government receivership because of its crippling pension obligations in an economic downturn, Ford merely succeeded in not going bankrupt, and the City of Detroit itself is currently going through bankruptcy proceedings largely because it simply can't afford to pay its future pension obligations, either. So far, the pensions are mostly
intact, but one thing that hasn't gotten much media attention is that while the pensions came through mostly uscathed, the equally-large health benefit obligations were gutted for pensioners.
So, I guess what I'm saying here is we have to consider the fact that the whole paradigm may have been broken - that it isn't that city workers are "underpaid" relative to their private sector peers, but that if anything once you start looking at the future liabilities of the private sector employees vs the future liabilities of the public sector, the public sector's guaranteed pension income as it stands now is actually the much, much more generous deal, and theirs is probably going to have to come down, because stories like yours are less uncommon than you'd think - Detroit is the headline news example, but Illinois is also having some well publicized pension problems and recently New Jersey has been getting attention as well.
At the same time, it's a tough situation - cutting Detroit's pensions, when many/most of the remaining residents in a city whose population has fallen by three quarters in the last 50 years, is akin to gutting the economic base of the city. And one thing that public employees don't get is Social Security - they don't pay into it, they don't take out from it - so there's definitely a cap on how far you can cut. But, if a private company goes under, then anyone expecting a pension from them is going to come away with little to nothing, and this limits how far you can raise pension benefits. In the government, increasing benefits is a pretty cheap (today - less so 20 years down the road) way to earn support, and we simply haven't seen any major municipal bankrupties until just now. It's something that's going to need to be watched, but I think part of the discussion here needs to be too that for the majority of America, a "comfortable weekly salary and adequate retirement plan where you can retire with almost all of what you made monthly" is a complete pipe dream.
Idunno... Just thinking out loud/venting on my lunch break.