Hartford, Conn., joins Chicago and other blue cities that have overextended their budgets and may face drastic measures.
Bloomberg sums up Hartford's situation in a story headlined "In America's Richest State, the Capital Flirts with Bankruptcy:"
Like many other local governments across the country, Hartford — city of Mark Twain and the young John Pierpont Morgan — has been grappling with budget problems for years. On the same day that Illinois lawmakers finally scraped together a long-overdue budget, Hartford hired the law firm Greenberg Taurig, LLP to evaluate its options, which include bankruptcy. It would be the first prominent U.S. municipality to seek protection from its creditors since Detroit did so in 2013.
Why is Hartford rich but broke? Those who want to look away from the problem and find exonerating causes will say that the hedge fund industry is in trouble. But it is really over-promising on pension funds for government employees. The American Interest explains:
As the [Bloomberg] article notes, Connecticut is in trouble in part because the hedge fund industry, one of its major sources of economic activity, has contracted in recent years, cutting into the state’s tax revenue even as it has to pay growing pension bills. This is a higher-end version of the problem that forced Detroit into bankruptcy: As the manufacturing industry faded, the Motor City could no longer afford defined-benefit pensions that depended on a constantly growing economic base.
Both cities would have been better off with 401(k)-style pension plans, whereby workers saved for their own retirement and the city wasn’t stuck paying a guaranteed income to thousands of retirees even as its economic base shrank. Defined-benefit pensions made sense when we expected companies and industries to stick around for long periods of time; but at a time of economic transition, they can bankrupt local governments in the blink of an eye.
More broadly, Hartford’s struggles highlight the severity of the crisis of public finance for states and localities across the United States. The fact that states like California, Illinois and Connecticut—home to dynamic economies and enormous reserves of wealth—are struggling mightily to fund their pension obligations even in the midst of a long bull market suggests that there are major structural problems below the surface. They are likely to be exposed in the next recession.
We believe that government sector employees should good pension plans. But these plans should be realistic and not represent an unsustainable burden for the locality or taxpayers (who'd like to save for their retirements, too).
Republican Wisconsin Governor Scott Walker addressed similar concerns when he took on the public unions, which bargain for unsustainable benefits, and faced and survived a recall effort. But in blue Hartford politicians are not likely to face up to what is really causing the problem.