The next big financial crisis for cities
It's no secret that public employee pensions are a big part of the continuing public finance crisis, but much of the attention has been on state government obligations. There are 220 state plans, some of which are state-administered plans
that cover local government workers, yet almost 3,200 pension plans administered by local governments. Together these plans cover 14.7 million current workers, 8.2 million
current beneficiaries, and 4.8 million people eligible for future benefits but
not yet receiving them.
Generous pension plans are wreaking havoc on municipal budgets, already reeling from post-2008 economic downturns and decreases in scarce tax revenue. In the working paper The State of Local Government Pensions: A Preliminary Inquiry, authored by Tracy Gordon and Ilana Fischer at the Brookings Institution and Heather M. Rose at the University of California, Davis, the unfunded liability is estimated to be $574 billion. That's not a number any healthy city government can handle, much less those already drastically cutting back services or teetering on bankruptcy. Accordingly, many municipalities are taking steps to head off an implosion, according to the paper:
-- San Francisco Mayor Ed Lee worked with unions, the Chamber of Commerce, and city employees to draft a ballot initiative to reduce retirement benefits for current and future workers. The measure is estimated to save $1.3 billion over ten years, not enough to fill the $7 billion dollars in unfunded liabilities in San Francisco
-- Honolulu is confronting “spiking” and “double dipping” -- boosting pensions in the final year of employment -- to combat employees pensions rising above $100,000,. against a backdrop of $8 billion in unfunded liabilities.
-- Atlanta loosened limits on public pensions getting involved in alternative investments, such as private equity, hedge funds, and real estate
-- Detroit reduced the rate of benefits accrual, eliminated cost-of-living increases, and established a defined contribution plan for new hires.
-- Chicago implemented a plan to save police and fire funds from insolvency, even as municipal and general laborers’ funds will be depleted in 20 years without intervention
Cities in Illinois and Maryland moved to reduce teacher pernsions by hundreds of millions of dollars. Prichard, Alabama, a town of roughly 20,000, simply stopped sending pension checks in September 2009 and declared bankruptcy one month later.
The scary scenario is further detailed in a Land Lines article by Gordon and Richard F. Dye of the University of Illinois at Chicago, and in this essay in The Atlantic Cities as well.