It’s an enduring and unfortunate legacy of the Great Recession: For many cities across the country, employee pension and retirement health insurance programs are operating on shaky financial ground.
While Denver, Washington, D.C., and a dozen other cities emerged from the worst of the recession with sterling ratings for their retirement and health insurance programs, scores of other major cities are saddled with huge disparities between what they owe and what they've set aside to meet their long term obligations.
A new survey by the Pew Charitable Trusts of the financial wherewithal of 61 municipal pension and retirement benefits since the economic crisis of four years ago reveals a $217 billion gap between the long term costs of benefits promised to city workers and funding set aside to meet those obligations.
“While states have a much larger shortfall, cities face the same daunting challenges posed by unfunded liabilities for their public sector retirement benefits,” the report states.
Indeed, market-valued unfunded public pension liabilities make up more than half of all state debt, accounting for $2.8 trillion of the total. That festering financial crisis was born of years of skipped payments, borrowed funds, and inaccurate discount rate assumptions.
At the municipal level, similar tactics by cash-strapped officials to skirt investment requirements are threatening the long-term retirement plans for hundreds of thousands of policemen, firefighters and other municipal workers. Some of these workers do not participate in Social Security and rely solely on government pensions in retirement, according to the Pew report.
Moreover, many city governments are dipping into the same pot of money used for education, public safety, libraries and other services to cover unfunded pension cost – but this is a big gamble. Widespread public pension shortfalls down the road could force cities to reduce municipal services, close hospitals, cut school programs or raise taxes to close the gap in their retirement programs, some experts warn.
For every success story the Pew survey documented – including 20 cities that have set aside between 80 and 100 percent of the funding required for the pension programs – there are two stories of municipalities that have fallen far behind their financial commitments.
Cities including Atlanta, Boston, Philadelphia, Wilmington, and Jacksonville, Fla., have employee pension programs funded at roughly a 60-percent level. Portland, Oregon, has funded roughly half its pension program, Providence, R.I., just 42 percent and Charleston, W. Va. – at the bottom of the heap – is at a 24-percent funding level.
Overall, the 61 cities collectively are covering 74 percent of a total $385 billion pension obligation – a shortfall of $99 billion. While that is far from ideal, the condition of those cities’ retirement health care programs and other benefits is far worse. Funding has been set aside to cover a mere 6 percent of the $126.2 billion long term obligations.
Los Angeles leads all other cities in its commitment to city worker retiree health benefits, with 55 percent of its program pre funded as of fiscal 2009. The City of Angels started setting aside money for the program in 1987, and has been praised by bond rating agencies for its fiscal soundness. Others with relatively solid records include Louisville, Ky., Sioux Falls, S.D. and San Antonio, Tex.
While 27 cities in all have set aside some assets to offset part of their health insurance obligations, 38 cities have set nothing aside, and operate on a pay as you go method. Those include Atlanta, Austin, Burlington, Vt., Kansas City, Mo, Las Vegas, Milwaukee, Minneapolis, Tucson and Salt Lake City, according to the study.
The Great Recession had a significant impact on local pension plans across the country. Overall, the aggregate funding level of the 61 cities studied declined five percentage points – from 79 percent in fiscal year 2007 to 74 percent in fiscal year 2009. Half of the cities saw drops of eight percentage points or more. But the downturn was not the decisive factor that separated cities with the best-funded pension systems from those with poorly funded ones, the study found.
Most of the cities that exited the recession with the most profound pension problems were already in trouble when they entered it. In 2007, pension systems in 27 of the 61 cities were below 80 percent funded, a level many experts cite as inadequate.17 By 2009, 37 of the cities had fallen below that mark, ranging from 24 percent in Charleston to 79 percent in San Jose, California.
Whether a city was fiscally disciplined made a big difference in how it fared. Cities with pension plans that kept up with their payments – consistently making the “annual recommended contribution” calculated by their actuaries – weathered the financial downturn better than their counterparts, the study found.
Brianna Ehley of The Fiscal Times contributed reporting.