Fox News baselessly suggested that other U.S. cities may follow Detroit's lead in filing for bankruptcy, citing an outlandish estimate of total state and local unfunded pension liabilities, even though other estimates put the figure at a much lower amount.
On July 18, the city of Detroit filed for Chapter 9 bankruptcy protection, officially becoming the largest city in the United States to do so. According to USA Today, "The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities."
On the July 23 edition of America's Newsroom, co-host Bill Hemmer interviewed frequent guest Art Laffer on Detroit's bankruptcy, noting "other cities that could be heading down the same path."
Hemmer and Laffer claimed throughout the segment that unfunded pension liabilities could force other municipalities to file for bankruptcy, with Hemmer going so far as to call pension programs a "Ponzi scheme."
During the segment, Fox aired a graphic that claimed in 2012, total state and local unfunded pension liabilities amounted to more than $4 trillion.
The $4 trillion figure used by Fox ostensibly stems from a January 2012 report by Sen. Orrin Hatch (R-UT), ranking member of the Senate Finance Committee. Hatch claimed in a statement that "public pension debt stands at an alarming $4.4 trillion with outstanding state and local municipal debt at nearly $3 trillion. The public pension crisis plaguing our nation demands a real solution." Hatch attributed the $4.4 trillion figure to a blog post by Josh Rauh, a professor of finance at Stanford University.
Economist Dean Baker has repeatedly pointed out that Rauh's analyses are based on a number of questionable assumptions, particularly that state's assets will achieve annual real rates of return of only 2 percent. In a paper titled "Pension Liabilities: Fear Tactics and Serious Policy," the Center for Economic and Policy Research's David Rosnick and Baker explain Rauh's results:
The publicity given to the recent spate of papers showing large unfunded liabilities for public pensions must be understood in this context. These papers purport to show unfunded liabilities for these pension funds in the range of $3-4 trillion as opposed to the roughly $1 trillion in unfunded liability reported using the accounting of the funds themselves. The basis for the difference is that these papers discount pension fund liabilities using either the interest rate on corporate bonds or the "risk-free rate of return" on Treasury bonds. These interest rates are considerably below the 7.5-8.0 percent return assumed by pension fund managers, which leads to a much higher calculation of future liabilities.
According to Baker, the "risk-free rate of return" used by Rauh is artificially low, and assuming "real returns of 7 percent are very reasonable."
Indeed, Fox seems to have picked the largest number it could find -- one that is about four times larger than all other estimates.
A May 2011 Congressional Budget Office report estimated unfunded state and local pension liabilities at $0.7 trillion. A June 2012 report by The Pew Center on The States estimated unfunded liabilities at $1.38 trillion. And a July 2013 report from Boston College's Center for Retirement Research found that in 2012, total unfunded state and local pension liabilities totaled $1 trillion.
Furthermore, economist Jared Bernstein noted that Detroit is a unique circumstance, and extrapolating the situation to other U.S. cities is "analytically incorrect." And while Fox fearmongers over state and local pensions, Baker noted that "most states are facing shortfalls that appear easily manageable," and have gained better standing in recent years.
Fox, of course, has used every opportunity to raise the alarm over Detroit's unfortunate economic circumstances and push myths about public pensions.