Pension obligations are no different than borrowing obligations, according to public finance expert Richard Ravitch.
"The promise to pay interest is morally indistinguishable from the promise to pay someone who worked for you for 20 years. For years it was an enticement for somebody to devote his life to public service," Ravitch on Monday night told a group of 40 investors and wealth managers at Evercore Wealth Management's headquarters in New York.
"I don't see any moral distinction between that and paying interest to someone who lends you money. It's debt that should be paid."
Ravitch, 80, a partner in Ravitch, Rice & Co. and former New York State lieutenant governor and Metropolitan Transportation Authority chairman, is best known for advising Gov. Hugh Carey during New York City's emergence from its fiscal crisis in the mid-1970s. Ravitch is serving as an unpaid consultant in the Detroit bankruptcy case and also heads the State Budget Crisis Task Force, a national initiative, along with former Federal Reserve chairman Paul Volcker.
"He's a modern-day Cincinnatus who works for the common good without personal ambition," said Evercore director of municipal research Howard Cure, who moderated Ravitch's talk.
Ravitch, who in the spring published his memoir, "
"This whole field is fraught with legal uncertainty and risk at this moment," said Ravitch.
Pension fund recovery is at issue in Detroit's bankruptcy plan, which bond insurer Syncora Guarantee Inc. is fighting in court. Standard & Poor's, in revising its outlook on Illinois to negative in July, cited analyst worries over legal challenges to state pension overhaul.
New Jersey received its most recent downgrade Friday, from Fitch Ratings to A from A-plus, citing the effect of pension obligations on the state's unbalanced budget.
In Pennsylvania, which received general obligation downgrades from Fitch Ratings and Moody's Investors Service over the past two years over its $50 billion unfunded liability, state Auditor General Eugene DePasquale recently said pension distress could force Scranton, the state's sixth-largest city, into bankruptcy within five years.
"The rating agencies are beginning to look at stuff with far more care than they used to," Ravitch said. "They're doing far greater due diligence."
Ravitch spoke in general terms about Detroit.
"The city of Detroit is a mess," Ravitch said. "It's less than one-third the population of what it once was, half the street lights don't work, half the buses don't run properly and the starting pay for a police officer is $14,000."
By contrast, he said, New York bonds are safe investments, thanks to what he called the most significant reform that emerged from the city's dark days of 1975 — that the city budgets using generally accepted accounting principles, or GAAP, which stipulates that recurring revenues match recurring expenses.
"I really believe that," he said. "We will debate taxes but we will not have a problem most cities face with increasing severity."
As lieutenant governor under David Paterson in 2011, Ravitch pressed the state to adopt GAAP budgeting. Instead, the state implemented "pension smoothing" as part of its budget that year, which let municipalities stretch out their pension obligations.
Ravitch dismissed it as borrowing wrapped in gimmickry.
Ravitch worries about what he considers an "embarrassingly large" disconnect between the federal budget process and what's happening at the state and local levels.
"It's the reason I'm making an effort — to try desperately to get the political system to understand the consequences of that disconnect," he said.
He also implored the federal government to preserve the tax exemption for municipal bonds.
"It would be an utter disaster if they eliminated that exemption," Ravitch said. "It would raise the cost of borrowing."
