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Don't blame pensions for cities' woes: New study

Detroit's recent high-profile trip to bankruptcy court—allowing it to break decades of costly pension promises—has prompted other city officials to blame "legacy" retiree benefit costs for their dire financial conditions.

But pension costs have played only a minor role in the current financial plight of the dozens of U.S. cities that find themselves unable to make ends meet, according to a report Tuesday from the Center for Retirement Research. Most of the damage was done by the collapse in revenues from the Great Recession—and bad budget decisions by local officials, the Boston College researchers found.

Protestors rally in front of the U.S. Courthouse in Detroit, October 28, 2013.
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Protestors rally in front of the U.S. Courthouse in Detroit, October 28, 2013.

"When identifying the source of the problems, fiscal mismanagement leads the list," the study's authors found. "Economic problems, in large part a response to the financial crisis and ensuing recession, come in second."

The researchers compared 32 cities that have recently made headlines as they struggle with serious budget problems to a list of 149 other cities that are in relatively good financial shape.

They then analyzed the impact of three variables related to financial management (including annual budget deficits, levels of cash reserves and debt used to pay pensions); three tied to economic forces (unemployment, foreclosures and population decline) and two related to pension burdens (the share of local revenues needed to pay benefits and legal flexibility in changing pension plans).

(Read more: Detroit's next bankruptcy battle: Who foots the bill?)

"In many cases pension were a contributing factor, but they weren't the driving factor in the fiscal challenges these cities are facing," said Jean-Pierre Aubry, one of the co-authors of the study.

Chicago—one of the cities the study included in its list of those facing a budget squeeze—last week became the latest local government to make headlines with proposals to cut retiree benefits to try to balance the books. The Illinois Legislature recently approved cuts to state worker pensions as it tries to figure out how to make good on a $100 billion unfunded liability.

Part of the gap will be closed with higher contributions from local governments. But Chicago's latest budget doesn't set aside enough to cover the $590 million state-mandated increase in pension payments in 2015, according to Moody's Investors Service.

(Read more: America's cities on the edge)

Dozens of states and hundreds of cities have already made changes to their retiree benefit plans to try to offset rising health-care costs, increases in longevity and other forces weighing on pension plans. Those include shifting greater costs to workers, cutting cost-of-living increases and steering current employees toward individual retirement accounts similar to the 401(k) accounts offered to private-sector workers.

Those reforms will help trim future costs, but won't close current funding gaps for pension plans facing large unfunded liabilities.

To prevent future shortfalls, state and local officials need to implement tougher measures to ensure that enough money is set aside in good times to offset the financial strain of downturns in the economy and financial markets, said Aubry.

(Read more: Thinning blue line: Police cuts cripple cities)

"Unfortunately, making underfunded promises became a regular practice," he said.

By CNBC's John W. Schoen. Follow him on Twitter @johnwschoen.

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