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Paychecks or Promises? Lessons from the Death Spiral of Detroit

Listed author(s):
  • Ohanian, Lee E.

    (Federal Reserve Bank of Minneapolis)

  • Holmes, Thomas J.

    (Federal Reserve Bank of Minneapolis)

Pay-with-promises compensation plans accumulate liability for future employee benefits, such as retiree health insurance. A simple economic model demonstrates that such plans can exacerbate fiscal crises faced by cities that experience external economic shocks, such as the departure of a major employer. City leaders often raise taxes and/or reduce public services to pay off legacy employee debts, and such steps encourage residents to move out, reducing the tax base and raising fiscal stress. Pay-as-you-go compensation plans are more prudent; they settle liabilities to employees paycheck by paycheck.

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File URL: https://www.minneapolisfed.org/~/media/files/pubs/eppapers/14-4/epp_14-4.pdf
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Paper provided by Federal Reserve Bank of Minneapolis in its series Economic Policy Paper with number 14-4.

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Length: 8 pages
Date of creation: 25 Sep 2014
Handle: RePEc:fip:fedmep:14-4
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