A new local pension calculus

By Cate Long
October 28, 2013

The team at The Center for State and Local Government Excellence has set a new standard in how local pension burdens should be reported in financial documents like CAFRs. The center’s new approach for measuring a municipality’s pension burden is to aggregate the direct cost of locally-administered pension plans (both city and taxpayers’ share of costs) and contributions to state teacher and non-teacher plans on behalf of dependent school districts. The aggregated cost is compared to a community’s revenues to understand how much must support pensions.

A lot of previous pension analysis looked at pension plans’ funding levels. This study looks at the cost to taxpayers to support the pension promises they have made.

CSLGE says that its approach “measures the direct cost on the city’s finances.” It’s a vital number, but it has not been used to report the full debt burden on taxpayers. For example, when a community has municipal, school, library and sewer debt, one can understand an individual taxpayer’s debt responsibility by adding these figures.

As it becomes clearer that pension obligations and other post employment benefits (OPEBs) weigh on a community’s balance sheet next to debt obligations, it is necessary to seek the full weight on taxpayers.

After establishing a methodology to aggregate revenues and costs from various levels of government, CSLGE analyzed 173 cities and found pension burdens ranging from 2.7 percent for the lowest quintile of cities to 12.3 percent for the top fifth. Among major cities, it found Chicago, New York and Philadelphia have very high pension costs. Overall pension costs for cities is 7.9 percent when aggregated, rather than the 5.6 percent that is estimated by the U.S. Census. This is an important difference. It suggests that some communities will find pension costs crowding out other social needs.

If communities can see a full picture of their future liabilities, they may be able to restrain current spending and hiring. Investors will want to look at this information to understand future cash flows. The Government Accounting Standards Board should also take a look at this study to add the data to financial reports.

Measuring pension costs in more than one way will help communities balance the commitments they make to employees with the future resources they have to fulfill them.

Further:

Center for State and Local Government Excellence: Gauging the Burden of Public Pensions on Cities

Watch a Reuters Insider panel on pension issues with Chris Mier of Loop Capital, James Spiotto of Chapman and myself here.

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