(City Journal) -- As the city of Detroit’s financial condition deteriorated, its employee-pension funds made hundreds of millions of dollars in bonus payments to retirees. Those extra checks swelled the city’s retirement debt and played a role in the Motor City’s eventual bankruptcy. Yet Detroit’s struggles haven’t stopped the retirement systems of other cities and states—including some with severely underfunded pensions—from continuing to dole out bonuses.
The Philadelphia school system, with less than half the assets it needs to meet its future obligations, is set to hand out $62 million in bonuses, sometimes referred to as 13th checks, to its retirees this year. The payments are authorized by 2007 legislation that grants the extra checks when the pension system exceeds its investment projections, regardless of the system’s debt. Rising retirement costs—up from $55 million in 2011 to $154 million last year—have aggravated a financial crisis in the city’s schools. Despite a state-approved $60 million boost in cigarette taxes last year to bolster their finances, Philly schools project an $80 million deficit next year, partly because of another $34 million spike in pension costs. Still, the Philadelphia city council has refused to rescind the 2007 bonus law, arguing that the extra retiree payments this year will be only a small component of the system’s $5 billion in debt. Mayor Michael Nutter, by contrast, has called the payments irresponsible and tried to stop them.