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Cities Short Billions for Public Pensions: Pew

Wednesday, 16 Jan 2013 | 9:31 AM ET
David Gould | Photographer's Choice | Getty Images

States are not alone in racking up massive public pension bills: Cities need hundreds of billions of dollars to make good on their promises of retirement healthcare and income to workers.

The Pew Center on the States surveyed 61 cities -- the most populous ones in each of the 50 states, along with those of populations greater than 500,000 -- and found a gap of $217 billion for all retiree promises in fiscal 2009. For pensions alone, they were short $99 billion.

"Many cities are facing severe fiscal challenges in their retirement obligations," said David Draine, senior researcher at Pew. "Fulfilling the retirement obligations cities have already made can have a significant impact on cities' budgets. Some cities have been forced to move toward either cutting spending on services or increasing taxes."

Altogether, 74 percent of the cities were able to cover pension obligations, compared with 78 percent for states.

Pew found that 37 cities had pensions with funding levels below 80 percent, the demarcation that many use to determine a system is "underfunded."

Charleston, W.V., was 24 percent funded, the lowest level of all the cities. Omaha, Neb., Portland, Ore., and Providence, R.I. were all at 50 percent or below.

On the flip side, Milwaukee and Washington, D.C., both ran surpluses and Cheyenne, Wyo., Indianapolis, San Francisco and Wichita, Kan., were above 90 percent.

The pension in Los Angeles was 89 percent funded, higher than in other metropolitan monoliths New York, 70 percent funded, and Chicago's 52 percent.

In a previous report, Pew found that states are short $757 billion for pensions and most of the political attention has focused on how states will address the massive holes. Illinois has the lowest funded pension system in the country.

The largest pensions, representing 90 percent of public retirement systems, have marched back to health since their holdings reached a low of $2.1 trillion in 2008, according to the U.S. Census. A rising stock market helped push their assets to $2.8 trillion in the third quarter of 2012.

Still, political leaders and taxpayers worry that states will lack the billions of dollars they need for retiring members of the "Baby Boom" generation. Because most states consider pensions a fixed promise bound by contractual law, they could have to pull dollars from other areas to cover the costs.

Cities face the same dilemma, but with an added wrinkle: they can file for bankruptcy. For the last few years, pension problems have pushed many towns in Rhode Island to the brink of going broke.

"Not only are taxpayers in these towns dealing with fiscal challenges, but retirees found their pension checks reduced," said Draine.

The financial crisis exacerbated cities' retirement system problems, given that investments provide the lion's share of public pension revenues. But the true source of cities' struggles comes from their not contributing enough money to the funds or not structuring the systems well enough to pay for all the promises made to workers, Pew found.

"Most of the cities that exited the recession with the most profound pension problems were already in trouble when they entered it," according to the report. It found in fiscal 2007 that pension systems in 27 of the 61 cities were already below 80 percent funded.

That means that data from years after fiscal 2009, which ended for most places in the middle of 2009, will likely show the problem persists. When Pew looked at fiscal 2010, it found the gap widened for the 40 cities where complete data was available.

Still, the National Conference on Public Employee Retirement Systems, which advocates for public pensions, said the report was outdated and looked at a unusual period of time, after a large stock market collapse.

The report "may provide a valuable history lesson, but it cannot yield a realistic representation of the status of municipal pension plans today," NCPERS Executive Director Hank Kim said in a statement. He added that in a recent survey his group found "local pension funds are continuing their strong recovery from the negative impacts caused by the Great Recession."

Cities use a variety of pension systems. Some participate in their states' funds, while others are wholly independent. Not all public employees can collect Social Security, making their pensions their primary support in retirement.

"Across the 61 cities, plans managed by cities for their own employees had on average 66 percent of the money needed in the long run, compared with an average of 79 percent for state-administered and statewide plans that covered city workers and others," Pew found.

Cities also have only recently begun putting aside money for health care. The promises to provide health coverage in retirement are relatively new and cities' systems for funding them are not as advanced as those for pensions.

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