American cities are bloated with unfunded pension liabilities

January 16, 2013

There have been hundreds of articles written about how a number of U.S. states have unfunded pension liabilities. These massive shortfalls have been researched by numerous groups, and although they differ on the size of the shortfalls, they all agree that pension liabilities are creating a troublesome drag on many state budgets. The Pew Center on the States is one of the first groups to dig down and analyze the condition of city pension funds and the promises made for retiree health benefits. Their new study, A Widening Gap in Cities, reports a mixed picture.

Cities such as Milwaukee, Wi. and Washington D.C. are prepared to meet their financial commitments to retirees (see above). Others, such as Chicago and Portland, Or. have seriously neglected their pension funds. Almost universally, cities have failed to pre-fund the commitments they have made for retiree health care. In total, cities have pre-funded only 6 percent of their healthcare promises, leaving a shortfall of $118 billion, according to Pew. In contrast, cities have funded 74 percent of pension liabilities, leaving an unpaid balance of $99 billion. In fact, 22 cities face larger unpaid bills for retiree health care than for pensions (page 16).

There are many approaches to increasing the funding for pension and retiree benefits. Pew discusses some of these approaches (page 22):

Though budget cuts are generally cities’ first response, some have turned to tax increases to plug pension holes, often in conjunction with reforms. For example, in the past several years, officials in Omaha; Little Rock; and Springfield, Missouri, overcame opposition to win support of tax increases to fortify their public pension funds. In 2009, Philadelphia’s pension funds were just 62 percent funded. The Pennsylvania General Assembly approved a five-year one-cent increase in Philadelphia’s sales tax to help the city weather revenue drops in the recession, with the funds designated for local pensions. The state also allowed Philadelphia to reduce its pension payments in 2010 and 2011, but it required the city to make up the missed payments with interest by fiscal year 2014.

I wrote last week about the more drastic approaches to pension reform that many cities and states have been taking. The choices are to litigate, negotiate or go bankrupt. Understandably public workers groups are pushing back on the need to reform pension and retiree benefits. The National Public Pension Coalition, a coalition of organizations representing teachers, nurses, police, firefighters, and other public sector employees, responded to the Pew study:

The unprecedented number of pension-slashing policies in the states comes as politicians, who receive world-class benefits themselves, have teamed up with Wall Street to scapegoat America’s working people in hopes of filling budget shortfalls and expanding income from fees and expenses.

The bottom line is our politicians repeatedly broke promises by failing to contribute the required amounts to workers’ pension plans, and then raided those funds for other purposes.

I personally think that most of the blame lies with the politicians and the unions who pushed for benefits and failed to monitor the funding for them. It’s going to take decades to get the weakest systems on solid footing. The more information that is available to the public, the better the chance of recovering these plans. Pew’s study on city pension plans is a good start.

Chart source: A Widening Gap in Cities

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